Archive for August 2015


Skeptical of the China data skeptics

The problem with answering comments is that one has to swat down one conspiracy theory after.  One recurring theme is that the China GDP data is fake. People breathlessly report obscure data on electricity production or rail shipments. I don’t doubt that the Chinese data is flawed, but there’s no reason to assume it’s not broadly correct.  You need to look at the big picture, and with China I mean really big.

1.  The quarter-to-quarter data is strangely smooth (although that’s partly an artifact of their use of year over year, rather than quarterly data.)  But over the business cycle RGDP growth varies as much as in the US, indeed even more.

2.  People forget that until recently China had 10% trend growth, so when it goes from 14% to 7%, that’s a big slowdown.  People also forget that some sectors of the Chinese economy are probably growing smoothly.  Health care, college education, subways rides (which are constrained by capacity), etc.  So if the overall RGDP growth rate slows from 14% to 7%, and some sectors are growing smoothly at 10%, then the cyclical sectors are slowing extremely rapidly.  And the cyclical sectors are also the commodity intensive sectors.  You could easily see lots of industry data that seems inconsistent with a 7% RGDP growth rate, during a cyclical slowdown.

3.  People sometimes argue that the trend rate has not been 10% in recent decades, but more like 7% or 8%.  The problem with these conspiracy theories is that China’s just too big and open to world trade to cook the books in that way. That’s because over the period since 1980, that kind of cheating would lead to China’s RGDP being overstated by a factor of 2 or 3.  China would now be far poorer than claimed.  (Having said that, trend growth is slowing, and will probably be 5% to 6% over the next decade.)

4.  The World Bank has China’s RGDP/person in PPP terms at 72.7% of Mexico, which seems about right to me (I’ve visited many areas of both countries.) By comparison, India’s at 33% of Mexico.  Does anyone think China’s even close to India?  Yes, China has poor rural areas, probably more than Mexico.  But some rural areas (like the highly populated Yangtze delta) are much richer than you’d think.

5.  These theories would also require cheating on all the sectoral data.  But trade data is two sided, and other countries also report soaring Chinese exports since 1980.  Chinese consumers buy 20 million cars per year, vs. 1 million in Mexico. And yet the poorer China has only 11 or 12 times Mexico’s population. India, with almost as many people as China, has a market of less than 3 million cars/year. That’s just cars, but take any appliance you wish and China looks at least as rich as the data shows, at least in terms of purchasing power.

6.  Maybe the auto figures are also faked.  Maybe VW and GM and all the other western car companies making cars in China are in on the conspiracy.  Maybe the Australian mining firms that claim to sell a God-awful amount of iron ore to China are also faking the data, as are the auto parts suppliers.  Maybe China’s not the world’s biggest exporter, not the world’s biggest carbon emitter.

Screen Shot 2015-08-30 at 10.01.26 AM

7.  Or maybe China really is 72.7% as rich as Mexico. Look at Chinese wages.  They only passed the Philippines in 2000, and are now more than 4 times higher.  They passed Indonesia in 2003, and are now twice as high.  And those two countries have been growing at about 5%/year.  Indeed I find that graph hard to believe, given how much richer Malaysia is than China:

Screen Shot 2015-08-30 at 3.25.41 PM

(OK, the previous picture is Beijing, so here’s a pic from Guangxi, one of China’s poorest regions):

Screen Shot 2015-08-30 at 10.17.38 AMAnd the next picture is from China’s absolutely poorest province, Guizhou.

(The article I found this picture in says this province is becoming a center of “big data.”  Would that happen in Chiapas?):Screen Shot 2015-08-30 at 10.38.04 AM

Pop Monetary Economics

Paul Krugman has an excellent post demolishing the following claim by William Cohan, in the NYT:

The case for raising rates is straightforward: Like any commodity, the price of borrowing money “” interest rates “” should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.

BTW, Krugman’s post is the one to read (not mine) if you only look at one post on this topic.  He carefully walks through an explanation of what’s wrong with this paragraph, in a way that would be recognizable to any competent monetary economist. But in some ways it’s even worse than Krugman assumes.  Here’s Krugman:

The Fed sets interest rates, whether it wants to or not “” even a supposed hands-off policy has to involve choosing the level of the monetary base somehow, which means that it’s a monetary policy choice.

That’s also my view, but I suppose one could argue that from a different perspective if you set the money supply you are letting markets determine interest rates, whereas if you actually target interest rates, then you are “interfering” in the market.  Not exactly my view, but let’s go with it.  Let’s put the best spin on Mr. Cohan’s essay.

Now here’s the big irony.  For the past seven years the Fed hasn’t been targeting interest rates, they’ve been using base control to influence the economy, increasing the monetary base through QE programs.  They switched from interest rate control before 2008 to monetary base control after.  And now Cohan is calling for the Fed to raise interest rates.  That means he wants the Fed to go back to manipulating interest rates.

So the great irony here is that in the paragraph I quoted from above Cohan says:

Like any commodity, the price of borrowing money “” interest rates “” should be determined by supply and demand, not by manipulation by a market behemoth.

And yet in the essay he’s actually calling for the exact opposite; he wants the market behemoth (the Fed) to start manipulating interest rates, something it hasn’t been doing for the past 7 years.

Unlike quantum mechanics, monetary economics doesn’t seem too hard.  As a result the media produces a non-stop stream of stories on monetary policy that are utter nonsense.  And by “utter nonsense” I don’t mean stories that disagree with my particular market monetarist views (Cohan might be correct that the Fed should raise rates), but rather stories that are simply incoherent, that are completely detached from the field of monetary economics.

We don’t hire plumbers to teach quantum mechanics at MIT.  We don’t put plumbers on the Supreme Court.  But we do put Hawaiian community bankers on the Board of Governors.  It’s not just that our media and Congress and President don’t understand monetary economics, they don’t understand quantum mechanics either.  The real problem is that they don’t even understand that they don’t understand it.  So they have unqualified people write op eds, and sit on the Board of Governors.  People ask me what Trump or Sanders think about monetary policy.  They don’t even know what it is!  What they think doesn’t matter, even if they were to get elected.  Just as it doesn’t matter what their view is on the best trajectory for NASA’s next Saturn bypass.

BWT, I have no problem with Hawaiian community bankers having important policymaker roles at the Fed, but put them on the committee for banking regulation, not monetary policy.

The title of the NYT piece said the Fed needed to “Show Some Spine”.  Over at the Financial Times they want the Fed to “Show Steel.”  (I guess that makes Paul and me wimps.)  Here’s the argument at the FT:

Yet monetary policy cannot confine itself to reacting to the latest inflation data if it is to promote the wider goals of financial stability and sustainable economic growth. An over-reliance on extremely accommodative monetary policy may be one of the reasons why the world has not escaped from the clutches of a financial crisis that began more than eight years ago.

I suppose that’s why the eurozone economy took off after 2011, while the US failed to grow.  The ECB avoided our foolish QE policies, and “showed steel” by raising interest rates twice in the spring of 2011.  If only we had done the same.

Of course I’m being sarcastic, but that points to another problem with the Cohan piece. Rates are not low because of QE (as Cohan implied), indeed Europe didn’t do QE during 2009-13, and that’s why its rates are now lower than in the US, and will probably remain lower.

If this stuff is published in the NYT and FT, just imagine what money analysis is like in the average media outlet, say USA Today or Fox News.

HT:  Tom Brown, Stephen Kirchner

Nationalist–Socialist America

The German tight money policy of the early 1930s led to a surge in vote support for two groups, the nationalists and the socialists.  Today in America the nationalists and the socialists have all the momentum.  Consider:

1.  Dick Cheney might have been the worst Vice President in American history (at least Agnew didn’t do anything.)  Now add to the list his choice to be one heartbeat away from the presidency—Sarah Palin.  Palin is now gushing praise over Donald Trump, who campaigns on the same mix of statism and xenophobia that you see among the neo-fascist parties in Europe, with militarism thrown in.  For years I could take pride in the fact that America largely avoided that particular policy mix.  I don’t think even Pat Buchanan was a militarist.

Update:  Well that must be one of the most epic brain freezes in my 6 1/2 years of blogging, it was obviously McCain who chose Palin.  Cheney didn’t chose anyone, unless perhaps himself, when he headed Bush’s VP search committee.

2.  The heart of the Democratic Party is now with Bernie Sanders, whatever the polls show.  And let’s not have anyone accuse me of McCarthyism, he calls himself a “socialist.”  When asked, the head of the Democratic Party couldn’t think of a single difference between socialists and Democrats. And please don’t insult my intelligence by talking about Sweden.  Sweden is not a socialist country.  Venezuela is socialist.  When Sanders starts advocating free trade and investment, liberal immigration rules, privatization, zero inheritance tax, 100% nationwide school vouchers, a $0/hour minimum wage rate, then come back to me with your Sweden talk.  For now, he just wants the bad parts of Sweden.

The official Democratic platform now advocates a nationwide $15 minimum wage. Whatever you think of extreme Reagan era supply-side economics, the GOP never went that far off the rails on economic policy.  The GOP platform said consider the gold standard, not adopt the gold standard.  I suppose the Seattle case is debatable, but a nationwide $15 minimum wage law would literally destroy the economy in many low wage/low productivity parts of the country, such as Puerto Rico.  It would also create even more crime, a massive underground economy.

PS.  I hope it goes without saying that neither of these guys will win, but remember what happened to the policy platform of Eugene Debs

The first step is admitting you have a problem

That is, the first step toward NGDP targeting.  Marcus Nunes has a new post that quotes a Jon Hilsenrath story in the WSJ:

JACKSON HOLE, Wyo.””Central bankers aren’t sure they understand how inflation works anymore.

Inflation didn’t fall as much as many expected during the financial crisis, when the economy faltered and unemployment soared. It hasn’t bounced back as they predicted when the economy recovered and unemployment fell.

The conundrum challenges much of what central bankers thought they understood about the world, as well as their ability to do their job. How will they know when to raise or lower interest rates if they’re unsure what causes consumer prices to rise and fall?

“There is definitely less confidence, a lot less confidence” about how inflation works,James Bullard, President of the Federal Reserve Bank of St. Louis, said in an interview here Friday.

The mysterious path of inflation during the crisis and post-crisis era is the main topic at the Federal Reserve Bank of Kansas City’s annual economic symposium here, where Fed officials, academics and global central bankers gather every August to discuss economic issues.

Inflation dynamics are more than an academic issue. Fed officials are considering whether to raise short-term interest rates from near zero, where they have been since December 2008. The Fed’s main sticking point is that inflation has run below its 2% target for 39 straight months. Inflation is lower than central bank objectives throughout the developed world, despite exceptionally low interest rates and other extraordinary measures aimed at driving it higher.

Before raising rates, Fed officials want to be confident inflation will rise to 2%. They have a theory it will. Unemployment is falling””reaching 5.3% in July””and slack in the economy appears to be diminishing. As supplies of labor and productive capacity become more constrained, officials believe wages and prices will rise.

So far, however, there are few indications that’s happening. The Commerce Department reported Friday that U.S. consumer prices rose 0.3% in July from a year earlier, well below the Fed’s goal. Stripping out volatile food and energy categories, officially measured inflation also runs below 2%.

The economy’s performance has “really challenged” the notion of a strong link between unemployment and inflation, Mr. Bullard said on the sidelines of the conference. The existence of such a link was also challenged in the 1970s, an era of high inflation and high unemployment.

Fortunately, there another nominal variable that still does track the business cycle very closely:

Screen Shot 2015-08-29 at 10.42.05 AMMarcus’s post also has some interesting graphs.

PS.  I have a new article on Milton Friedman and the euro, published in Reason magazine.  (Subscribers only, but why wouldn’t you already be a subscriber?)


Back to the countryside, once again

Tyler Cowen recently linked to this story in The Guardian, and wondered whether it was an indication of a Chinese recession:

China’s Workers Abandon the City as Beijing Faces an Economic Storm 

Labour disputes are rising and some workers are leaving for the country amid fears a crashing economy could cause political and social unrest

Liu Weiqin swapped rural poverty for life on the dusty fringes of China’s capital eight years ago hoping – like millions of other migrants – for a better future.

On Thursday she will board a bus with her two young children and abandon her adopted home.

“There’s no business,” complained the 36-year-old, who built a thriving junkyard in this dilapidated recycling village only to watch it crumble this year as plummeting scrap prices bankrupted her family.

And here’s The Guardian in May 2009, a year when China experienced 9.2% real GDP growth:

Unemployment forces Chinese migrants back to the countryside

Factory to farm: millions who had enjoyed a taste of city freedom are returning to their villages

Until a week ago, Liu Xiao was part of the Pearl river delta’s army: one of the thousands of workers streaming along a Shenzhen road, gulping down breakfast, texting, lighting a final cigarette, teasing friends and swapping gossip – rushing rushing rushing to the factory for another shift making bras, computers and plastic toys for the world.

Today she waits patiently at the railway station across town. This region was the motor of China’s economic boom, but plummeting exports have forced it to slow and millions of those who kept it running have given up and gone home. Liu Xiao is one of the latest to return to the countryside: in her case to a village of just 200 people a 10-hour ride – and a world away – from Shenzhen.

So will 2015 be a repeat of 2009?  Not entirely, the trend rate of growth in China is now lower, and the risks of recession really are higher than in 2009.  But the similarity of these two articles should provide a cautionary note.  Adam Smith said, “there is a great deal of ruin in a nation”, and there are very few countries where that aphorism is more apt than China.

PS.  Here is an excellent article on the situation in China.  It points out that the Chinese government is tightening monetary policy to stabilize the yuan.  That’s not the right move at a time like this.

PPS.  This is a really good article on why Chinese stock market regulation is so inept.

PPPS.  This article suggests that as of August 25, 2015, the consensus forecast of economists is that China will have 6.9% growth this year and 6.7% next year.  That makes Tyler and I China bears, as we both expect less growth than the consensus. For some reason it makes me feel better to be on the same side as Tyler.  (I forecast about 6% going forward, and Tyler expects a very bad recession.)  Willem Buiter forecasts, 4% on official figures, in reality even less.  He says it will drag the world into a mild recession.

August 25, 2015

The main downside risk to the economy in the short term is that high volatility in the stock markets could translate into turmoil in the financial sector. On the other hand, a sooner-than-anticipated recovery in real estate and further action from authorities could spur growth in the next months. Panelists maintained their GDP projections for 2015 at the previous month’s 6.9%. Next year, the panel foresees growth at 6.7%.

But if China’s growth goes negative, I don’t think Tyler will let me get away with “I predicted less growth than the consensus, and I was right!!”

HT:  Marcus Nunes