Archive for October 2015


Bernie Sanders’ silly “socialism”

The more I find out about Bernie Sanders the more I like him.  But I just can’t get past that “socialist” label.

1.  For years people like me have been called “McCarthyite” if we label someone a socialist.  And now we are suddenly to believe that socialism in America is perfectly acceptable?  So I’m no longer a McCarthyite?

2.  Bernie Sanders claims he wants to make the US more like Denmark.  But Denmark scores higher on the Heritage “Economic Freedom” ranking than does the US.  How will Sanders boost economic freedom in America up to Danish levels?  He doesn’t tell us.  Although Denmark scores only slightly higher than the US, his social welfare plans would push the US far lower on the Heritage Economic Freedom ranking.  So to catch Denmark he’d have to make the US massively more market-oriented in other areas. Will we have Denmark’s private fire companies?

It’s true that there are many countries in the EU with socialist parties.  Here they are, with unemployment rates in parentheses:

Belgium (8.6%), Bulgaria (9.6%), France (10.2%), Greece (25.6%), Hungary (7.0%), Italy (12.7%), Luxembourg (5.7%), Portugal (12.4%), Spain (22.5%)

OK, Luxembourg is doing well.

And here are some European countries without (AFAIK) any major party that calls itself “socialist”:

Austria (6.0%) , Britain (5.6%), Denmark (6.0%), Finland (9.5%), Germany (4.7%), Ireland  (9.7%), Netherlands (6.9%), Sweden (7.5%)

[Update:  I should not have relied on Wikipedia.  Garrett M points out that the Netherlands does have a socialist party.]

Bernie Sanders likes to say that he favors the Scandinavian model, but doesn’t seem to realize that the Nordic countries view the socialist label as toxic.  The term ‘socialism’ used to actually mean something.  It meant opposition to capitalism. It meant government ownership of the means of production.  The socialist parties in southern Europe actually favored socialism when they first choose their name.  Yes, they did edge somewhat away from government ownership of industry in the neoliberal era, but the name stuck.  And they are still more socialist than northern Europe.

So why would Bernie Sanders call himself a socialist, and not a social democrat?  I’m going to give him the benefit of the doubt, and assume he’s a little bit ignorant and a little bit eccentric.  However, not only does he not favor the Nordic economic policies that earned those countries high rankings in economic freedom, he doesn’t seem to favor their paternalistic social policies either.

You might say this stuff doesn’t matter, what matters is “substance.”  Really?  Is American politics about “substance”? What is the “substance” of Donald Trump’s tax plan to go after the hedge fund owners? How will he do that? What is the “substance” of Hillary Clinton’s true underlying views on the TPP?  American politics is about many different things, but “substance” is certainly not one of them.

Almost overnight the term ‘socialism’ has gone from being toxic in America, to non-toxic.  As I indicated, that doesn’t really tell us anything interesting about Bernie Sanders, he’s just confused.  But it just may tell us something important about America.

PS.  The left in America likes to think of itself as “reality-based” and the right as being “faith-based.”  But that’s not how things work in the rest of the world.  Elsewhere, Socialists oppose reforms to make the economy better, they are the new reactionaries. Here’s a recent example from the FT:

Portugal’s bonds started the day looking queasy, and they haven’t picked up since.

The problem is politics. Acting prime minister, the centre-right Pedro Passos Coelho, has still not been able to forge the coalition he heeds to govern with the opposition socialists. (Elections were held at the start of this month, and while Mr Passos Coelho won the most votes, he did not snag large enough share of the vote to govern alone.)

Analysts at RBS warn that the political situation in the country is more complicated than many assume.

The ball is in the court of the defeated Socialist party – they could either support centre-right PàF, or form a coalition with the radical left. The first has always been the base case of analysts; yesterday however Socialist leader Costa declared his party was closer to an agreement with anti-austerity parties and negotiations with PàF were interrupted.

We now see a 50% probability of a left-wing government, which would halt the country’s reform momentum and would likely start rolling back the reforms already implemented. Such political risk adds up to Portugal’s worrying economic fundamentals.

And check out how Brazil’s socialists are doing.  (A few years ago Krugman praised their policies.)  And how about Venezuela?  (praised by Corbyn)  How about Greece? How’d that negotiating advice from Stiglitz and Sachs work out?  Yes, I’m cherry picking.  But when I read America leftists I sometimes have the impression that they have no idea what’s going on in the rest of the world.  If America ever adopts socialism is will look far more like the Brazilian variety than the Danish variety.

PPS.  From the list above, it sort of looks like socialism appeals to Catholic and Greek Orthodox countries. But my hunch is that the true cultural divide is language, not religion.  Northern Belgium, Bavaria, Ireland, and Austria are all Catholic regions, and all speak non-Latin languages.  And all four places are prosperous.  The cultural dividing line in Europe is not at the Belgium/Netherlands border, it runs right through the center of Belgium.  It’s probably more correlated with language than religion.

PS.  I have a much more important post over at Econlog.

Real shocks vs. NGDP shocks (and their effect on unemployment)

Real shocks are far, far more important that nominal shocks, for long run growth in living standards.  But for the business cycle, and especially for fluctuations in the unemployment rate . . . well, it’s all about the musical chairs model.  Here are two more recent examples.

Let’s start with Australia, which has been hammered by a global commodity downturn, especially by falling Chinese imports of iron and coal.  In the past when I praised the RBA of Australia for keeping a rising trend of NGDP during the global crisis (after a small blip), people scoffed that the Aussie’s were just lucky.  Even then that argument made no sense.  Australia has no had a recession since 1991, but in theory a country susceptible to commodity shocks should have more recessions than the US.

And now the evidence is even weaker.  Look at the unemployment rate in Australia since the commodity bust began:

Screen Shot 2015-10-15 at 4.15.50 PMIt bounces around, but I see no significant trend.  Ironically, Aussie unemployment had a mild upward trend before the commodity bust:

Screen Shot 2015-10-15 at 4.17.52 PMThat was probably due to the slower than trend rate of NGDP growth.

And then there is Texas.  Recall that progressives keep telling us that the Texas miracle is due to oil.  Obviously there’s a grain of truth in that.  Texas does have lots of shale oil.  But so does Europe, and so does California.  The difference is that Texas actually believes in producing it.  I said a “grain” of truth, because most of the Texas growth is due to other factors.  It’s not oil, and it’s not weather (which is actually worse than many other slower growing states.) Nor is it housing, which is just as cheap in neighboring slow growth states. It’s good economic policies.

Now that we have had a big oil bust, the progressives were probably expecting a recession to hit Texas.  And yet the unemployment figures keep getting better and better:

Screen Shot 2015-10-15 at 4.21.53 PMNotice that between February 2008 and June 2008, Texas unemployment actually rose from 4.3% to 4.7%, despite soaring oil prices.  The reason? US NGDP growth was slowing sharply.  Then in the second half of 2008, unemployment soared much higher, as NGDP fell (as did oil prices.)  Over the past year, the unemployment rate has continued to decline, and is now at 4.1%, just above the all-time record low of 4.0% of late 2000.

Bottom line:  Real shocks, and “reallocations” resulting from real shocks, generally don’t significantly impact the overall unemployment rate.  It’s changes in NGDP (monetary policy) that drive the business cycle.  On the other hand, real shocks can have a modestly larger impact on Texas RGDP, as the drop in oil output affects RGDP more than employment.  It’s a capital-intensive industry.

PS.  Over at Econlog I have a post on a big breakthrough for market monetarism.

Wise comments from the ECB

Yes, you read that correctly.  Here’s a recent news story:

FRANKFURT (Reuters) – U.S. rate hikes could have greater global repercussions than in the past and affect the euro zone more in some respects than the domestic market, European Central Bank Vice President Vitor Constancio said on Thursday.

A Federal Reserve rate rise would have a bigger impact because emerging markets, particularly China, are more integrated into the global economy than before, countries are more interlinked in production, cross-border capital flows have increased, and forward guidance has become a crucial monetary policy instrument, Constancio said.

China’s economy is now as big as the US economy, and with its currency loosely fixed to the dollar, it is directly impacted by Fed policy. And forward guidance is much more important than the current rate setting.

An additional hurdle is that central banks do not have experience in raising interest rates from an extended period at zero, so they will have to learn through practice, without a full understanding of how economies and markets may respond, Constancio told a conference in Hong Kong.

The biggest global impact of a Fed hike will be through capital markets, not international trade, and German yields already follow the change of U.S. yields in response to Fed tightening by more than one third, Constancio said.

“Overall, the evidence even suggests that spillovers from U.S. monetary policy might be larger (on the euro area) than the domestic effects in the U.S.,” Constancio said.

I think the effect is still stronger in the US, but the need for monetary stimulus is much greater in Europe, so I can see how Constancio would have that perception.  The global economy is particularly sensitive to a slowdown in Chinese investment. Less Chinese investment means reduced commodity exports from Brazil, and lower capital goods exports from Germany. The problem is not just that Chinese growth is slowing, but also that it’s shifting toward consumer goods and services, which are mostly produced within China.

On another topic, I was criticized last month for saying that the market response to the recent Fed meeting was muddled, and hard to interpret.  Some felt that it clearly showed the markets did not oppose a rate increase, or perhaps even favored one.  That’s possible, but I remain skeptical.  Hardly a day goes by without stories like this:

German Bund yields rose on Friday, with investors preferring stocks after minutes of the Federal Reserve meeting suggested that the U.S. central bank was not in a hurry to raise interest rates.

I’ve closely follow market responses to Fed policy for decades, and seen hundreds of similar stories. Any single story can be questioned, but is it likely they are all incorrect?  I’ll keep an open mind on the question, but I am reluctant to change my views based on one confusing market response.

PS.  Over at Econlog I have a reply to Kevin Drum


AD curves don’t actually exist

Here’s Nick Rowe:

I got this idea from reading a Matt Rognlie comment on a previous post. (But Matt may or may not agree with what I say here).

A. Suppose the government sells bonds, and finances those bonds by imposing a 10% sales tax on (say) milk.

B. Suppose the government sells transferable milk quotas, and sells just enough milk quotas that milk prices rise 10% above marginal costs.

C. Suppose the government sells transferable local monopoly rights to sell milk, and those local monopoly rights cause milk prices to rise 10% above marginal costs.

A, B, and C are basically [weasel word] all the same.

.  .  .

If you think you understand how fiscal policy works, in a Keynesian or New Keynesian model, you should be able to see the equivalence. Though macroeconomists who believe it is nominal wages rather than nominal prices that are sticky, and think that the AD curve slopes down (e.g. Scott Sumner), will object that increased monopoly power raises P, which moves us the wrong way along the AD curve in a recession.

Because I’m a really shallow person, my brain cells all light up like a police car flashing light whenever I see my name mentioned in another blog.  Hence I need to comment on this.

Nick’s right that I view the AD curve as downward sloping, but I don’t quite like the way Nick phrased this.  It would be more accurate to say I think it’s useful to view AD as a rectangular hyperbola.  But I certainly don’t think Nick is wrong if he prefers something else, say a horizontal line.  I just don’t think it’s as useful.  In my view the AS/AD model is most useful when it tries to separate out nominal shocks (to M*V) and real shocks (which affect the composition of P*Y).

I should add that it’s not quite right to say that I think “nominal wages rather than nominal prices” are sticky.  I do acknowledge that there is substantial price stickiness, but I don’t view it as being very important.

Let me explain my focus on wages with a thought experiment.  Consider the sales tax increase discussed by Nick, and also consider two possible monetary policy targets, NGDP and nominal national income (NNI).  National income is GDP minus depreciation and indirect business taxes.  Thus a sales tax or VAT increase will drive a larger wedge between NGDP and NNI.  In that case, which should the central bank target?  In my view, the level of employment will track NNI/W much more closely than NGDP/W.  If wages are sticky, then a stable growth path for nominal national income will tend to stabilize employment.  If the central bank targets NGDP, then a rise in the VAT will reduce NNI, and with sticky wages this will also reduce employment.  Price stickiness might play a role in this process (by changing the labor share of NNI), but it would be a very minor role.

The preceding suggests that the most useful way of thinking about AD might be as a given level of NNI, not NGDP.  In that case, the vertical axis of the AS/AD diagram is still P, but the horizontal axis is now real national income, not real output. Or call it “real before-tax net output.”

As a practical matter, NGDP and NNI in the US track each other very closely over the business cycle.  Hence there is almost no difference between a monetary policy that targets 12-month forward NGDP growth at 4%, and one that targets 12 month forward expected NNI growth at 4%.  In other countries with national VATs, there may be a significant difference at times.

PS.  Last night I returned from a lot of travel with a bad cold.  I just feel like sleeping.  I do plan to start on Bernanke’s book today, and know that I have lots of catching up to do.  I have a new post at Econlog.

Dumbo parents

Reihan Salam has an interesting piece on public schools in gentrifying portions of Brooklyn:

Taylor cites evidence that blacks and Hispanics benefit from attending integrated schools. What she does not address is whether white and Asian students attending these schools also fare better, which is the chief concern of the largely white Dumbo parents subject to this rezoning. My first instinct in reading Taylor’s story, and in observing the anguished reaction from Dumbo parents who see themselves as committed progressives, is to note their hypocrisy. As Laurie Lin recently remarked, it’s easy to imagine how these Dumbo progressives might have reacted had this story unfolded in Atlanta or Birmingham “” they’d surely chalk up resistance to the rezoning to racism.

More than one Dumbo parent has tried to explain to me how they’re totally different from other people who fight against integration. They explain that what they really want is a better world in which we spend far more on our public schools, not mentioning, or perhaps not knowing, that New York city spends $20,331 per pupil, almost twice as much as the national average of $10,700, and that much of this money is spent very inefficiently. Of course they want integration, they’ll tell you, but only if it entails no sacrifice on their part. “It’s more complicated when it’s about your own children,” says one Dumbo parent. Well, yes, it is more complicated, and that is exactly what every parent believes, whether they are in Brooklyn or South Boston or Kansas City.

There’s no “perhaps” here, they do not know how much New York City spends on schools.  Over the years I’ve spoken to many people similar to the Dumbo parents discussed in this article, and they are almost universally ignorant of the basic statistics that underlie public policy.

So is this a problem?  Is this ignorance more comparable to the GOP voters who don’t know about evolution, or the GOP voters who don’t know about global warming?  I’d say the latter.  It doesn’t much matter if a few schools in the Bible Belt don’t cover evolution, as anyone going into a field where they need that knowledge (such as a biology majors) would quickly pick it up in college, if not earlier (via word of mouth.)  Global warming is a tougher case, where it really might matter a lot.  (But even there I’d guess if you convinced most Republicans about global warming, they’d still oppose carbon taxes for other reasons, saying we can live with a warmer planet, or that other countries will free ride if we sacrifice.)

Ignorance of how much the government spends on education is a huge problem, because it causes these Dumbo parents to vote for politicians who will waste even more money on education.

I’ve noticed that Republicans are always hyperaware of the flaws in Democrats, and vice versa.  Democrats think Republicans are corrupt, and Republicans think Democrats are corrupt.  The same is true of epistemic closure.  Each side thinks the other lives in a bubble.  Epistemic closure is real, but the accusations are pretty meaningless, as there is actually far more of it than either side imagines.  It’s everywherer we look.

We can’t eliminate epistemic closure, but the policy consequences can be reduced through radical decentralization.  The parents in a New Hampshire town of 10,000 probably have a much better sense of the costs and benefits of extra spending on education than those Dumbo parents in New York.

Decentralization doesn’t mean you can’t have some tax redistribution to poorer neighborhoods.  But it should be lump sum redistribution.  And once you’ve done the redistribution then 100% of each marginal dollar spent on a school should come from taxes levied in the neighborhood that sends kids to that school.  Some political systems produce smarter voters than other regimes, and we need to create smarter voters.

Don’t blame Dumbo parents, blame the system that produces Dumbo parents.

For some reason I really like typing the phrase ‘Dumbo parents.’

Alternate closing:  Dumbo parents aren’t dumb, just ignorant of the relevant empirical magnitudes.

PS.  Scott Alexander has a wonderful example of epistemic closure on the left:

Dutch study shows rampant sexism in scientific community. Dutch establishment promises reforms, says they will push “gender awareness” on everyone involved. Outside observers point out basic statistical error, anctual results show no gender bias at all. Original authors say it doesn’t matter and the Dutch scientific community is still sexist because grant review forms use “gendered language” like the word “excellent” which is apparently “male-coded”. Dutch establishment says reform and gender awareness programs are “still a good idea, regardless of the paper’s quality”, and vow to push ahead. Why are we even bothering to do science anymore? Why don’t we just write the only acceptable conclusion on a piece of paper beforehand and save however much it cost to do the study?

Read the article that Scott links to, it’s laugh out loud funny.  This is no different from believing in creationism.  It just isn’t. And yes, the right is just as bad, I’m picking on the left because most intellectuals I meet think there really is a difference, and that the left is more scientific.

PPS.  Been very busy lately, hope to get to the comments soon.