Archive for July 2016


Steel jobs are gone forever

CNN has an interesting article on Trump supporters in Youngstown, Ohio. Trump fans will like what they read (even 18 Democratic precinct captains voted for Trump).  But what struck me was the interview with voters.  I don’t know what makes me sadder, the fact that they think Trump sincerely wants to help them, or their belief that he could bring back steel jobs if he were sincere. Contrarian intellectuals tell us regular intellectuals that we need to “listen” to what the working class voters are saying.  But when I listen all I hear are pathetic fairy tales.

Back in 1967, the US steel industry employed about 780,000 workers, and produced about 115 million tons of steel.  By 2015, employment had fallen to 90,000, producing about 79 million tons of steel.  In both years the US consumed about 130 million tons of steel.  (I’m not sure these figures are exactly right, but I think they are close enough.)

The bottom line is that even if we still produced 115 million tons, or even upped it to 130 million, the level of employment in steel would be in the 120,000 to 150,000 range.  The vast majority of those 780,000 steel jobs were lost to automation, and they aren’t coming back.

Back in the late 1800s, William Jennings Bryan told farmers their problems were caused by eastern bankers, whereas the real problem was that rapid productivity improvements were relentlessly lowering relative food prices and driving farmers into the cities. Trump blames Mexico and China for problems that are actually caused by automation.

PS.  I’m not certain about the 780,000 figure, which was derived by multiplying 4.4% times 17.9 million manufacturing workers in 1967.  This source reports 521,000 steel employees in 1974, and another source listed 680,000 in 1953.  So I’m not sure the peak employment level.  There may be definitional issues from different sources.

Update:  A helpful reader sent me the following:

The Statistical Abstract of the US seems a fair choice, and the 1968 release provides numbers for workers in “Blast furnace and basic steel products” and “Iron and steel foundries” on page 59 of the PDF linked below (page 221 of the original publication).

All workers In Blast furnace / basic steel products: 631K

All workers in Iron and steel foundries:  225K

Total = 856K

Production Workers In Blast furnace / basic steel products: 506K

Production workers in Iron and steel foundries:  190K

Total: 696K

Statistical Abstract of the US 1968

Your estimate of 780K is just about the midpoint between the 2 totals.

PPS.  The Springsteen song “Youngstown” lamented the collapse of a once proud economic dynamo.  It was written in 1995, before Trump scapegoats like NAFTA and China had any significant impact.

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[Most readers will want to skip this post]

Don’t you hate those clever inside the Beltway reporters, like Ezra Klein?  Always showing their superiority by mocking the views of GOP candidates.  Look how he characterizes a recent Trump interview on 60 Minutes:

Let’s recap: Donald Trump says he opposed the war in Iraq from the beginning, which he didn’t. He says one reason you can’t trust Hillary Clinton’s judgment is that she supported the war in Iraq. But his vice presidential pick also supported the war in Iraq, and his justification for that is, literally, “I don’t care.” When asked to explain the discrepancy, his answer, literally, is that Mike Pence is allowed to make mistakes and Hillary Clinton isn’t.

Now let’s start with the obvious, Trump certainly didn’t say what Klein claims he says.  He didn’t say that Pence is allowed to make mistakes and Clinton isn’t. He’s not going to spout utter nonsense on national TV.  He may give misleading answers, or incomplete answers, or incorrect answers. But he’s not going to provide completely idiotic remarks of the sort that Klein attributes to him. Nobody talks that way once they graduate from 8th grade.  Klein must be twisting his words. So let’s go to the tape and see what Trump actually said:

Lesley Stahl: But you’ve harped on this.

Donald Trump: But I was against the war in Iraq from the beginning.

Lesley Stahl: Yeah, but you’ve used that vote of Hillary [Clinton]’s that was the same as Gov. Pence as the example of her bad judgment.

Donald Trump: Many people have, and frankly, I’m one of the few that was right on Iraq.

Lesley Stahl: Yeah, but what about he—

Donald Trump: He’s entitled to make a mistake every once in a while.

Lesley Stahl: But she’s not? Okay, come on—

Donald Trump: But she’s not—

Lesley Stahl: She’s not?

Donald Trump: No. She’s not.

Lesley Stahl: Got it.

Aha!  Trump did not say that “Hillary Clinton isn’t” allowed to make mistakes, he said “No, she’s not” allowed to make mistakes.  And Trump did not say “Mike Pence is allowed to make mistakes”, he said “He’s entitled to make a mistake”.

Trump also gives a thoughtful and incisive explanation of his plan to eliminate terrorism, which Klein mocks unfairly:

So here is Donald Trump’s plan to destroy ISIS: He will declare a war. He will promise, from the outset, not to include substantial numbers of American troops in that war. He is going to make NATO fight the war by threatening to withdraw American support from NATO. And he believes Turkey, which was roiled by an attempted coup as recently as Friday night, can wipe out ISIS if we just give the country the right incentives. (Presumably, the fact that ISIS has killed dozens in Turkey through a series of terrorist attacks isn’t sufficiently motivating.)

Read the original to see just how unfair Klein is.  And if that’s not bad enough, he then starts to go after Pence:

At about this point in the interview, you could see Pence get concerned. What happened next deserves to be quoted in full:

Lesley Stahl: But declare war—

Donald Trump: —get neighboring states and I’m going to get — we are going to get NATO; we’re going to wipe ’em out. We’re gonna—

Lesley Stahl: But declare war?

Mike Pence: Lesley—

Lesley Stahl: What does that mean—

Mike Pence: This is — this is the kind — this is the kind of leadership that America needs, and it—

Lesley Stahl: But what—

Mike Pence: —and it begins with deciding to destroy the enemies of our freedom.

Lesley Stahl: How?

Mike Pence: And how we do that? I have every confidence. You — you remember I served on the Foreign Affairs Committee. And I’m very confident that when Donald Trump becomes president of the United States, he’ll give a directive to our military commanders, bring together other nations, and we will use the enormous resources of the United States to destroy that enemy.

Now I think I understand what Trump saw in Pence.  Trump is an old man (70 years old to be precise), and we need someone capable of filling Trump’s (smallish) shoes if he should, God forbid, die.

Or be impeached.

Krugman on high stock prices

Paul Krugman has an excellent post discussing why stock prices are relatively high.  Apart from the opening paragraph, where he (implicitly) dismisses the EMH and rational expectations, I almost entirely agree with his interpretation.  (OK, the last bit defending Obama is also a bit questionable.)  I have expressed similar views, although of course Krugman expresses his ideas in a much more elegant fashion.  David Glasner was critical of this observation by Krugman:

But why are long-term interest rates so low? As I argued in my last column, the answer is basically weakness in investment spending, despite low short-term interest rates, which suggests that those rates will have to stay low for a long time.

Here’s how David responded:

Again, this seems inexactly worded. Weakness in investment spending is a symptom not a cause, so we are back to where we started from. At the margin, there are no attractive investment opportunities.

First let’s be clear about what Krugman means by “investment spending” in the quote above.  He clearly does not mean the dollar volume of investment spending, in equilibrium, because equilibrium quantities cannot “cause” anything, including low interest rates.  Instead he means the investment schedule has shifted to the left, and that this decline in the investment schedule (on a savings/investment diagram) has caused the lower interest rates.  And that seems correct.

Unfortunately, Krugman adds the phrase “despite low short-term interest rates”, which only serves to confuse things. Changes in interest rates have no impact on the investment schedule.  There is nothing at all surprising about low investment during a time of low interest rates, that’s normally the relationship we see.  (Recall 1932, 1938, and 2009).

David is certainly right that Krugman’s statement is “inexactly worded”, but I’m also a bit confused by his criticism. Certainly “weakness in investment spending” is not a “symptom” of low interest rates, which is how his comment reads in context.  Rather I think David meant that the shift in the investment schedule is a symptom of a low level of AD, which is a very reasonable argument, and one he develops later in the post.  But that’s just a quibble about wording.  More substantively, I’m persuaded by Krugman’s argument that weak investment is about more than just AD; the modern information economy (with, I would add, a slow growing working age population) just doesn’t generate as much investment spending as before, even at full employment.

I’d also like to respond to David’s criticism of the EMH:

The efficient market hypothesis (EMH) is at best misleading in positing that market prices are determined by solid fundamentals. What does it mean for fundamentals to be solid? It means that the fundamentals remain what they are independent of what people think they are. But if fundamentals themselves depend on opinions, the idea that values are determined by fundamentals is a snare and a delusion.

I don’t think it’s correct to say the EMH is based on “solid fundamentals”.  Rather, AFAIK, the EMH says that asset prices are based on rational expectations of future fundamentals, what David calls “opinions”.  Thus when David tries to replace the EMH view of fundamentals with something more reasonable, he ends up with the actual EMH, as envisioned by people like Eugene Fama.  Or am I missing something?

In fairness, David also rejects rational expectations, so he would not accept even my version of the EMH, but I think he’s too quick to dismiss the EMH as being obviously wrong. Lots of people who are much smarter than me believe in the EMH, and if there was an obvious flaw I think it would have been discovered by now.

David concludes his post as follows:

Thus, an increasing share of total investment has become capital-deepening and a declining share capital-widening. But for the economy as a whole, this self-fulfilling pessimism implies that total investment declines. The question is whether monetary (or fiscal) policy could now do anything to increase expectations of future demand sufficiently to induce an self-fulfilling increase in optimism and in capital-widening investment.

I would add that the answer to the question that David poses is clearly “yes”, as the Zimbabweans have so clearly demonstrated.  I would rather avoid terms like “self-fulfilling pessimism”, as AD depends on monetary policy, or combined monetary/fiscal policy is you are a Keynesian.  Either way it don’t think it’s useful to view AD as depending on the expectations of investors, pessimistic or not.  Those expectations merely respond to what the policymakers are doing, or not doing, with NGDP.

PS.  Yes, I do understand that under certain monetary policy stances, such as a money supply or interest rate peg, exogenous expectations impact AD.  I just don’t think it’s useful to view those pegs as a baseline policy.

PPS.  Let me repeat what I said earlier, we are going to have an interesting test of the impact of uncertainty on (British) GDP, over the next few months.  Not a definitive test (which would require observations with and without NGDP targeting, to tease out AD vs. AS channels), but certainly a suggestive test.  I have an open mind at this point, and am eager to learn.

Random notes

Here are a few articles that caught my eye:

1.  Incentives matter

But on the central question—whether Uncle Sam will pay ransoms—Mr Obama was firm. American officials cannot brook the idea of funding the groups they want to destroy, and they claim that kidnappers specifically avoid taking American (and British) hostages because they do not expect a return on the investment.

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There is some empirical support for that theory. In a forthcoming study of over 1,000 kidnappings by terrorists in 2001-13, Patrick Brandt, Justin George and Todd Sandler of the University of Texas at Dallas found that the number of Americans and Britons abducted each year stayed constant, whereas the totals for countries known to meet captors’ demands rose steeply. They estimate that if a non-paying government were to start offering ransoms, the number of its citizens taken hostage would jump by at least 30%.

I’d love to see the demographic breakdown of that 25%.

2.  Culture matters

According to a study from the Institute of Economic Affairs, Swedish-Americans are considerably richer than the average American—as are other Scandinavian-Americans. The poverty rate of Americans with Swedish ancestry is only 6.7%, half the national average. Swedish-Americans are better off even than their cousins at home: their average income is 50% higher than theirs, a number used by opponents of the Swedish model as an argument against the shackles of big government.

Their success in America seems solidly grounded in old national virtues. They have more trust in each other and in government; they tend to obey rules (leading to many jokes about “squareheads” and “dumb blondes”). The Protestant work ethic is strong: in Minneapolis in particular, the number of Lutheran churches is striking. Scandinavian-Americans also display a keen civic sense, whether in shovelling snow or helping elderly neighbours, from which everyone benefits.

I am 1/8th Swedish and 1/8th Norwegian.

3.  Good forecasters are just lucky

At times, Lord [Mervyn] King can be refreshingly frank. He is no fan of austerity policies, saying that they have imposed “enormous costs on citizens throughout Europe”. He also reserves plenty of criticism for the economics profession. Since forecasting is so hit and miss, he thinks, the practice of giving prizes to the best forecasters “makes as much sense as it would to award the Fields Medal in mathematics to the winner of the National Lottery”.

4.  Never trust an America official

DEVIN NUNES raised eyebrows in 2013 when, as chairman of a congressional working group on tax, he urged reforms that would make America “the largest tax haven in human history”. Though he was thinking of America’s competitiveness rather than turning his country into a haven for dirty money, the words were surprising: America is better known for walloping tax-dodgers than welcoming them. Its assault on Swiss banks that aided tax evasion, launched in 2007, sparked a global revolution in financial transparency. Next year dozens of governments will start to exchange information on their banks’ clients automatically, rather than only when asked to. The tax-shy are being chased to the world’s farthest corners.

And yet something odd is happening: Mr Nunes’s wish may be coming true. America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. The Tax Justice Network, a lobby group, calls the United States one of the world’s top three “secrecy jurisdictions”, behind Switzerland and Hong Kong. All this adds up to “another example of how the US has elevated exceptionalism to a constitutional principle,” says Richard Hay of Stikeman Elliott, a law firm. “Europe has been outfoxed.”

I can’t believe the Europeans actually trusted us.  Reminds me of those naive conservatives like Ann Coulter who thought him Trump was sincere, and then were outraged when he picked a VP who doesn’t agree with his stated views on the key issues.

5.  Piketty is just as left wing as I claimed

The heart of the complaint is that a Socialist government, meant to be the guardian of workers’ rights, is pandering to corporate bosses by dismantling them. Worse, goes the charge, it is making the disingenuous claim that this will help employers create jobs. “Who could possibly believe that making redundancies easier will create jobs?” reads a union flyer handed out at the rally. “Thomas Piketty agrees,” says one student triumphantly, referring to an article in Le Monde, a newspaper, in which the best-selling French economist argued that reducing redundancy costs will not curb unemployment.

Yet Mr Piketty was not the only rock-star French economist to opine on the labour reforms. In his own piece in Le Monde, Jean Tirole, a Nobel prize-winner, argued the opposite: that the insecurity of the young is precisely the fault of over-protected “insider” jobs. Because businesses fear being burdened with such employees, 90% of new hires are now for temporary jobs, and young people can be stuck with short-term contracts for years. The new labour law, argued Mr Tirole, should lead to more permanent hires and curb youth insecurity.

When I reviewed Piketty’s book on inequality, I pointed out that his views were surprisingly left-wing.  He’s far to the left of France’s Socialist Party, and France is one of the most socialist countries in Western Europe.  Even very modest and sensible market reforms are too much for Piketty.

And as far as the young people in France, don’t they realize that the current system discriminates against them?

6.  (Human imperfection)X(US legal system) = $∞

FOR an inkling of how good intentions can go awry, consider Title III of the Americans with Disabilities Act (ADA). Passed by Congress in 1990 with the laudable aim of giving the disabled equal access to places of business, it has been supplemented with new Department of Justice standards (in 2010, for example, the DOJ said that miniature horses can qualify as service animals). . . .

What’s next? Omar Weaver Rosales, a Texas lawyer, has sued about 450 businesses in the past two years; more than 70% paid up to avoid a trial. But even more lucrative pastures are coming into view. In March a California judge ordered Colorado retailer Bag’n Baggage to pay $4,000 in damages and legal fees thought to exceed $100,000 because its website didn’t accommodate screen-reading software used by a blind plaintiff. Mr Rosales says extending ADA rules to websites will allow him to begin suing companies that use colour combinations problematic for the colour-blind and layouts that are confusing for people with a limited field of vision.

The DOJ is supporting a National Association of the Deaf lawsuit against Harvard for not subtitling or transcribing videos and audio files posted online. As such cases multiply, content may be taken offline. Paying an accessibility consultant to spot the bits of website coding and metadata that might trip up a blind user’s screen-reading software can cost $50,000 for a website with 100 pages. Reflecting on the implications of this, Bill Norkunas, a Florida disability-access consultant who was struck with polio as a child (and who helped Senator Ted Kennedy draft the ADA), says that removing videos that lack subtitles would deprive wheelchair users and the blind, who could at least listen to them. Mr Norkunas hopes that won’t happen, but reckons it very well might.

I’m proud to say that I’m one of the few who opposed the ADA back in 1990.

7.  Who should you fear?

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Here’s an interesting factoid about contemporary policing: In 2014, for the first time ever, law enforcement officers took more property from American citizens than burglars did. Martin Armstrong pointed this out at his blog, Armstrong Economics, last week.

Officers can take cash and property from people without convicting or even charging them with a crime — yes, really! — through the highly controversial practice known as civil asset forfeiture. Last year, according to the Institute for Justice, the Treasury and Justice departments deposited more than $5 billion into their respective asset forfeiture funds. That same year, the FBI reports that burglary losses topped out at $3.5 billion.

8.  Is modern science an offshoot of economics?

In the dialectically structured thought-world of the late-thirteenth- and early-fourteenth-century universities (Latinscholae or schools, hence the adjective “scholastic”), the understanding of nature and the practice of natural science underwent profound change. A universe governed by hierarchically fixed and absolute values, Kaye argued, gave way to one characterized by change and motion. Observation and measurement displaced abstract speculation as the ways to understand nature, and that shift from deduction to quantification laid the foundations for a modern understanding of science.

That much was conventional enough. Kaye’s originality lay in his claim that the cause of this radical shift in thinking about nature was to be found in thought-patterns derived from the rapidly changing world of economics and transferred to scientific inquiry. Late medieval economic thinking was dominated by Aristotle’s discussion of value in the fifth book of his Nichomachean Ethics, where money features as the medium that makes possible comparison, measurement, and exchange between apparently unrelated things: How many shoes are equal to a house? What is the right proportion between goods and the labor that produces them?

Aristotle’s intellectual preeminence, newly restored to Europe from Arab sources, was of course foundational for the scholastic intellectual enterprise. But the rediscovery of Aristotle was not the only impetus to new thinking. In the booming mercantile economies of the thirteenth-century cities, and with the spread of the use of money, concepts rooted in the realities of the market were rapidly evolving.

Money itself was increasingly conceived as a dynamic medium connecting the constantly shifting values of commodities, labor, demand, and economic risk. The university thinkers responsible for the great shift in the understanding of the natural world, Kaye maintained, were themselves deeply immersed in this innovatory world of economics, as agents and administrators for their colleges and religious orders, and as members of the vibrant urban communities in which their universities were located. They were not only natural philosophers and theologians, but often also economic theorists and moralists, concerned with practical matters such as economic justice and especially the religious and ethical limits on usury in moneylending. And so the dynamic and shifting values of supply and demand in the marketplace, and the “monetization” of the cities, came to provide paradigms for a new and more dynamic understanding of the world as itself a dynamic realm best understood in terms of proportion, relativity, and mathematical measurement.

. . .

Kaye believes that there emerged after 1275 a novel and transformative conception of balance that revolutionized the thought of an age. A single if complex development, the emergence of “a new model of equilibrium” transformed thinking across many disciplines—economics, political theory, natural sciences, and mathematics among others—bringing to them an entirely new level of sophistication, flexibility, and explanatory power.

Food for thought.


The China boom continues

A year ago the Chinese stock market was crashing, Chinese exports were declining, and many sectors such as steel production were going through a wrenching downturn.  Many pundits predicted a sharp slowdown or even recession.  But not me:

My general view is that most types of recession are almost unforecastable, and that the least bad prediction is always “more of the same.”  (Here I’m thinking of ordinary demand shocks or financial crisis; a recession caused by something like the Syrian civil war can be predicted once the war begins.)  Thus people who in 2007 didn’t predict a recession for 2008 were making sensible predictions, and those who did predict it were making foolish predictions, and just got lucky.  So I’m going to predict no recession for China, this year or next.

Kudos to Julian Evans-Pritchard, who kept his head when many were insisting that the Chinese sky was falling.

I was too pessimistic. The new figures are well above the 6.0% growth that I predicted a year ago. Even better, there are increasing signs of a healthy rebalancing of the economy:

China’s economy is in the midst of a wrenching transition from a growth model based on construction and heavy industry towards greater reliance on consumption and services.

In a sign of progress towards rebalancing, investment contributed only 2.5 percentage points to GDP growth in the first half, down from 2.9 points last year, while the consumption contribution rose from 4.2 points to 4.9 points. Net exports subtracted 0.7 points.

And this is also quite positive:

“The value added of the tertiary industry accounted for 54.1 percent of GDP, 1.8 percentage points higher than the same period last year, 14.7 percentage points higher than that of the secondary industry,” said the NBS. . . .

Financial markets have responded positively to the news, an unsurprising outcome given it’s as close to a “Goldilocks” scenario as one can get.

As China develops, the service sector will rise into the 70% to 80% of GDP range. When the infrastructure is fully built out, and their population starts declining, the state sector (dominant in infrastructure) will shrink rapidly. More good news. Indeed this may already be happening faster than the official data suggests:

Chinese statisticians are studying ways to include industries such as ride-sharing, crowd sourcing and couch surfing in China’s official growth figures as a way to more accurately reflect the “new economy”.

While some economists are sceptical of efforts to pump up China’s gross domestic product numbers, few can deny that the mobile phones in the hands of 700m Chinese have begun to transform the economy, along with apps such as Uber, Didi Dache and other sharing economy services. . . .

While the “new economy” includes sectors partially accounted for in GDP, such as green energy, robotics, and mobile communications, the sharing and digital economies are among those that are wholly ignored, Mr Xu said.

Chen Qin, chief economist of BBD, an economics research group that has a “New Economy Index” including data such as advertisements on hiring websites, says China’s way of calculating GDP ignores many small and medium-sized enterprises in high-growth sectors.

This is because GDP figures are calculated based on taking figures from all the big enterprises — which tend to be the old industrial firms — and a sample of small and medium-sized enterprises. SMEs in new sectors are under-represented in the sample. BBD found that activity in undercounted sectors made up almost a third of total economic activity.

Global living standards continue to improve rapidly—a true golden age for humanity.