Archive for April 2016


MM goes mainstream

I was listening to some speakers on Bloomberg discussing the Malaysian and Chinese credit markets, and this comment (by David Stubbs) caught my attention:

Default cycles tend to come when you get that weaker nominal GDP and certainly when expectations of nominal GDP are not met—indeed the expectations that were embedded in the lending contracts themselves, which drove the credit expansion.

Bank in 2009, this argument was viewed as borderline “crackpot”.  I was told that it was “obvious” that the debt problems were due to reckless subprime mortgages, highly leveraged banks like Lehman and irresponsible Greek deficit spending, and that falling nominal GDP was the result.  Now the heterodox (market monetarist) view seems to be going mainstream.


The Phillips Curve in the US and Japan

Over at Econlog, I have a post on the Phillips curves for Hong Kong and Singapore. That’s the one to read, if you only have time for one post.  Here’s the Phillips Curve for the US:

Screen Shot 2016-04-16 at 9.05.41 PM

Notice that there is almost no correlation. With the exception of 2009, when prices fell slightly and unemployed soared, it seems like monetary policy in the US was pretty good after 1984.  Supply and demand shocks roughly offset, leading to almost no correlation.  This graph is one of the best arguments against the gold standard.

A clearly observed Phillips curve is a sign of procyclical monetary policy, which is poor quality monetary policy.  What does a classic Phillips curve look like?

Like Japan:

Screen Shot 2016-04-16 at 9.09.49 PM

Japan has a low natural rate of unemployment, and a more flexible labor market than the US. But don’t be fooled by that.  The specific role of monetary policy in Japan has been destablizing, as evidenced by the clear Phillips curve relationship. They can and should do better.

This post might be clearer after reading the Econlog post.

America’s “middle class” shrinks, as many move into the upper middle class

The Financial Times has a diagram showing that less than 50% of Americans are now viewed as “middle income”. Elsewhere I’ve pointed out that almost 90% of Americans self-identify as middle class, so these stories are highly misleading.  Here I’d like to point to another problem with the analysis:

Screen Shot 2016-04-12 at 8.20.55 PMDo you see the problem?  The main reason that the middle income group has shrunk is that more and more Americans have incomes above the (arbitrary) cut-off point, and fewer and fewer are either “middle income” or poor.

The middle class is shrinking because we are becoming better off.

Let me head off some comments by acknowledging that there are certain areas that are worse off than in 1971, such as Detroit. But overall, the country is more prosperous than ever.  (Also note that these are inflation-adjusted incomes.)

Then why is Trump doing so well?  For the same reason the Polish version of Trump did well in the recent election, despite per capita incomes in Poland doubling since 2004.  What is that reason?  I have no idea, but it obviously wasn’t stagnant incomes in Poland, or in Massachusetts for that matter (where Trump got 49%.)

I do see more people at the very bottom ($0 to $5000) of the graph, and don’t know the reason why. It could be due to expansion of the welfare state, the break-up of the traditional family, or perhaps growth in the underground economy. Nonetheless, it is cause for concern.  But it has nothing to do with the mythical decline in the “middle class.”

Speaking of the FT, Martin Wolf has an excellent piece on Trump.

OK, now what’s the excuse?

[I suggest readers skip this rant; I have a long queue of better stuff, waiting to be posted.]

For months, apologists for the voters have been talking about unemployed factory workers who don’t have enough education to know better, who were fooled by a politician that anyone with half a brain can see is a buffoon.  I began to have doubts when I saw Trump run up huge margins of victory in Middlesex county (where I live), which is full of affluent professionals.  Now polls show Trump winning 55% in New York.  That’s right, not Mississippi, not Alabama, but New York.  You know, the state that likes to sneer at how stupid people are in flyover country—states like Utah, that gave Trump 14% of the vote.

Here’s Jonah Goldberg:

On the drive in to my office this morning, I heard Hillsdale College president Larry Arnn, one of the wisest and gentlest souls I’ve ever encountered, describe Trump as a “good and honest man” and “quite brilliant.” A few minutes ago on Twitter, the great semi-retired editorialist Don Surber said to me, regarding Trump, “You will come around. Others may not because they are childish.”

A college president?  What the heck is going on at Hillsdale College?  And I have no idea who Don Surber is, or if he even knows that he’s parroting lines from bad 1950s sci-fi movies.  And here’s the “endorsement” from the New York Post:

No, pulling US troops out of Japan and South Korea — and pushing both countries to go nuclear to defend themselves — is not remotely a good idea. American commitments may need rethinking — but careful rethinking.

Yes, controlling the border is one of Washington’s fundamental duties — but “Build the Wall” is far too simplistic a policy for a nation of immigrants.

By all means, get the best trade deals for America — but remember that trade means cheaper goods for the less well-off, and challenge US industries to improve.

Trump’s language, too, has too often been amateurish, divisive — and downright coarse.

But what else to expect from someone who’s never been a professional politician and reflects common-man passions?

Translation:  He’s an imbecile who isn’t qualified to be dogcatcher, so we are going to endorse him for President of the United States.  What better entry level position into politics?  What could go wrong? Putin will help him out if he gets confused by international affairs.

A month ago I predicted that the GOP establishment would eventually kowtow to Trump, and I admit I’ve been wrong so far, but Goldberg suggests it may be starting to happen:

As for the intellectuals, politicians, and donors just now jumping on the Trump bandwagon, or simply opting to get out of its way, they aren’t even wrong. I very much doubt their opinions of the man have changed much (and in more than a few cases, I know this because they have told me so). Rather, they are jumping on the Trump bandwagon because their calculations of his chances have changed. It’s the same as Kent Brockman fashioning his “Hail Ants” sign and declaring, “I for one welcome our new insect overlords” and then vowing to help them round up human slaves to toil in the sugar mines.

For instance, there is no way Karl Rove has suddenly seen the light on Trump. To the extent he’s reportedly softening on the anti-Trump stuff, it must be a purely political decision, not a philosophical one.

The people who are smart enough to know better, and yet are still kissing up to Trump, will have a lot to answer for in 2017. What I can’t figure out is why are so many smart people voting for him in private, even though they are not angling for cushy jobs?  I travel all over, and I meet lots of liberals and lots of conservatives.  Everyone I meet seems to regard Trump as a buffoon. Are some of them voting for Trump, in secret?  How can someone get to be a college president and still not be able to see what is plain as day?  Doesn’t Larry Arnn have friends or associates to point out what a fool he’s making of himself?

As if we need anything more, Trump told us a few days ago that he’d eliminate the entire $19 trillion national debt in 8 years.  How will he do this?  Perhaps by refusing to cut entitlements or military spending, and by slashing taxes so sharply that most people won’t have to pay any, and even his hedge fund buddies will face a top rate of 25%?  No, that’s not how.  His answer was “trade”.  That’s how he pays off the national debt in 8 years.  Don’t other candidates say stuff like this?  No they do not! Never.  They say idiotic things, but they are adult level idiotic things. Like promising to balance the budget.  Unlikely, but Bill Clinton did it, so it’s not utterly laughable. Trump’s statements are below the 2nd grade level, just babble, like a baby with a pacifier in its mouth.  We now live in a country where a college president views this sort of drivel as “brilliant”.

No matter how cyclical I get, I still can’t keep up with reality.  Electing Trump is no different from putting a homeless drunk into the White House.  I’m not the cyclical one; it’s the voters, stupid.

OK, end of rant.

Cal minimum wage hurts Asians, whites and blacks, “helps” Hispanics

The Los Angeles Times has an article describing how the new minimum wage law is contributing to exactly the sort of industry outflow that I predicted:

After years of net losses, moving production out of Los Angeles is necessary for the survival of American Apparel, industry experts said. The company initially considered staying in California and moving to the city of Vernon, according to a person familiar with the discussions who was not authorized to speak publicly. After the state raised the minimum wage, executives began looking at manufacturers in the South, the person said.

Sensing opportunity, garment makers from Las Vegas, El Paso, Texas, and Las Cruces, N.M., have already come to the Southland to tout the benefits of moving production to their regions, said Sohn, the economist.

To be fair, the minimum wage is not the only factor, high real estate costs in LA (also due to foolish government regulations) are also a problem.  I predict that the gap between the population growth rate gap between Texas and California will accelerate further.  Unfortunately, I expect the GOP to sign off on an increase in the national minimum wage after the 2016 elections, which will narrow the gap.  So some of those apparel jobs will go right past Texas, all the way to Mexico.  (That’s assuming the GOP still exists in 2017, hopefully the party will be as defunct as the Whigs.)

People who study the minimum wage often miss the indirect costs, such as reduced benefits.  Another example is queuing costs.  In the economic development literature there are models where the urban formal sector pays wages far higher than those earned in the rural and informal sectors.  So peasants flock to the cities, and hang around waiting for one of those good jobs to open up.  Being unemployed 1/2 the time at $5/hour, is better than working full time at $2.50 hour.  Because labor markets in the US are fluid, the theory of “compensating differentials” insures that hotel maids in LA can’t really be “better off” than hotel maids in Houston or Phoenix, even if they earn more.  If the LA government tries to make them better off, enough people will migrate to equalize total utility of being in the hotel maid profession, between Texas and California, if only through queuing costs.

As usual I’ve buried the lede.  Here is a breakdown of who “benefits” from the minimum wage in California, by race:

Screen Shot 2016-04-16 at 9.42.41 AM

Note that the California population is 42.3% white, 37.6% Hispanic, 14.9% Asian, and 7.8% black.  If you don’t benefit, then you are hurt by the higher prices.  Looks like African Americans come out on the short end of the stick, just as when the minimum wage was first enacted in the 1930s, to protect white jobs.