Archive for September 2016


This post is not about Scott Alexander and Trump

Scott Alexander has a new post out about Trump, and it’s everything this blog is not. (I.e. it’s intelligent and non-hysterical)

A commenter on here the other day quoted an Atlantic article complaining that “The press takes [Trump] literally, but not seriously; his supporters take him seriously, but not literally”. Well, count me in that second group. I don’t think he’s literal. I think when he talks about building a wall and keeping out Muslims, he’s metaphorically saying “I’m going to fight for you, the real Americans”. When he talks about tariffs and trade deals, he’s metaphorically saying “I’m going to fight for you, the real Americans”. Fine. But neither of those two things are a plan. The problem with getting every American a job isn’t that nobody has been fighting for them, the problem with getting every American a job is that getting 100% employment in a modern economy is a really hard problem.

Donald Trump not only has no solution to that problem, he doesn’t even understand the question. He lives in a world where there is no such thing as intelligence, only loyalty. If we haven’t solved all of our problems yet, it’s because the Department of Problem-Solving was insufficiently loyal, and didn’t try hard enough. His only promise is to fill that department with loyal people who really want the problem solved.

I’ve never been fully comfortable with the Left because I feel like they often make the same error – the only reason there’s still poverty is because the corporate-run government is full of traitors who refuse to make the completely great, no-downsides policy of raising the minimum wage. One of the right’s great redeeming feature has been an awareness of these kinds of tradeoffs. But this election, it’s Hillary who sounds restrained and realistic, and Trump who wants the moon on a silver platter (“It will be the best moon you’ve ever seen. And the silver platter is going to be yuuuuuge!”)

Read the whole thing.

But this post is not about Scott Alexander and Trump; it’s about cognitive illusions involving numbers.  This appeared in the same post:

If Trump fails, then the situation is – much the same, really, but conservatives can at least get started right now picking up the pieces instead of having to wait four years. There’s a fundamental problem, which is that about 30% of the US population is religious poor southern whites who are generally not very educated, mostly not involved in US intellectual life, but form the biggest and most solid voting bloc in the country. If you try to form two parties with 50% of the vote each, then whichever party gets the religious poor southern whites is going to be dominated by them and end up vulnerable to populism. Since the religious poor southern whites are conservative, that’s always going to be the conservative party’s cross to bear and conservatism is always going to be less intellectual than liberalism in this country. I don’t know how to solve this. But there have been previous incarnations of American conservatism that have been better at dealing with the problem than this one, and maybe if Trumpism gets decisively defeated it will encourage people to work on the problem.

This isn’t accurate.  I don’t know the correct figure, but the following explains how my brain works.  Without looking up any of the numbers, here’s what I’d guess:

1.  About 14% of Americans are poor.

2.  About 7% of Americans are poor whites.  The rest are poor blacks, Latinos, Asians and Native Americans.

3.  About 3% (at most) of Americans are poor white southerners.  The rest of the poor whites live in the East, Midwest, or West.

4.  About 2% of Americans are religious poor southern whites.

There’s a big difference between 2% and 30%, and this affects Scott’s argument. There’s a tendency (which I sometimes fall into) of assuming that the most distinctive characteristic of a candidate’s supporters is also the majority of the candidate’s supporters.  The whites of West Virginia form a more distinctive part of Trump’s base than the whites of affluent suburbs in Southern California.  But Trump will win far more votes in suburban Southern California. He’ll get more votes from college grads than high school dropouts, even while being the first GOP candidate in ages to (narrowly) lose the college vote. I have commenters who are extremely intelligent, and plan to vote for Trump.

A conservative might argue that the 2% of religious poor southern white voters who are mindlessly supporting the right is offset by an equal or greater number of poor black and Hispanic voters who mindlessly support the left.  Those two groups don’t decide elections.  If Trump wins, it will be because millions of highly educated professionals also voted for him.  Let’s not blame “stupid” poor people.

PS.  Even if you define “poor” more generously, assuming that Scott meant to also include lower middle class workers, you still don’t get past 10% of the electorate, probably not even 7%.

PPS.  Keep in mind that “the South” includes millions of affluent whites in the vast Texas triangle of metro areas, and Florida (which has more people than New York State), and the triangle region of North Carolina, and the Virginia suburbs of DC, and the affluent Atlanta suburbs and lots of other areas like that. I’d guess there are more “atypical southern areas” than typical southern areas.

PPPS.  Tom sent me a great youtube of Sam Harris discussing Trump’s mind. Trump’s suggestion that we should have taken Iraq’s oil has been weirdly overlooked. If it’s not the most disgusting thing said by a presidential candidate since the Civil War, it’s surely in the top 5.



Trump and the markets

I probably have pretty much the same (negative) view of Trump as does Tyler Cowen.  But I’m not particularly surprised by the stock market evidence that Tyler presents, suggesting that the election of Trump would not have much impact on the market. Tyler points out that in past elections the markets respond to a GOP victory by rising 2% or 3%, but this time there seems to be no effect.  So Trump is less positive for the market than usual, but not a negative.

[Update:  Randomize left the following comment:

Although it’s dangerous to argue from a price change, Dow futures did rise 1% during the debate. Given the way Trump performed, it may be reasonable to say that the market prefers Hillary.

Perhaps a bit less than 1%, but that’s still important, as the odds of Trump winning fell by only 5% during the debate.  We may need to get closer to the election to get an accurate take on the market reaction.]

Here’s my take on it:

1. The usual 2% to 3% bump mostly reflects expected tax changes, with regulation also playing a modest role.  I think markets are factoring in the same sort of plus for Trump as they always do for a GOP candidate.  Trump is likely to cut corporate taxes, and reduce some regulations.

2.  Hillary is not worse than average, considered as an individual, but leads a party that has swung very sharply to the left.  So she would govern very differently than Bill Clinton.  For that reason, I think if Rubio or Bush were running against Hillary a GOP victory would be worth more like 4% to 5% this year.  This is also because the GOP is likely to retain control of Congress if they win the Presidential election.

3.  Offsetting that 4% or 5%, Trump’s views on trade are a big negative.  His views on government spending are about equally reckless as Hillary’s. His views on immigration are only a mild negative, as the markets don’t expect him to expel the illegals.  His racism is obnoxious, but not something the stock market cares about. If he increases the risk of nuclear war from 0.2% to 0.3% (due to his immature and reckless personality), I’d consider that a huge negative, but the market would not care at all.

4.  People tend to greatly exaggerate the impact of a president.  Virtually all countries moved in a neoliberal direction after 1980, not just Reagan’s America and Thatcher’s Britain.  Almost all countries got inflation under control in the 1980s and 1990s, not just Volcker and Greenspan.  Individuals are not as important as you think.  People who talk of moving to other countries are just silly.

To conclude, the market thinks Trump would give them a better tax system, as with any other GOP candidate.  The reason he would not provide the normal 2% to 3% GOP bump is that some of his other views are worse (for the stock market) than average for a GOP candidate.  As I keep saying:

“There’s a great deal of ruin in a nation”

(A concept that also applies to Brexit.)

PS. Evidence as to how markets actually performed during GOP administrations (poorly) is of course irrelevant, for standard EMH reasons.

PPS.  Tyler has a post on VATs and trade, which makes things way too complicated.  The question is whether a VAT favors exports and discourages imports relative to an ordinary domestic consumption tax.  Navarro and Trump say (or imply) it does, which is an EC101 level error (contrary to Tyler’s claim). Yes, it may boost exports relative to Mexico imposing an income tax, just as it boosts exports relative to Mexico dropping a nuclear bomb on Monterrey.  Bottom line, a VAT is trade neutral.

Trump favors teasier money

Does Trump favor tighter money or easier money?  Neither, he favors teasier money.  He likes to tease us with ambiguity.

Here’s what we know so far.  He’s a “debt guy” who likes low interest rates.  And he’s complaining that the Fed’s low interest rate policy is hurting the economy, or helping Obama, or something.

Ramesh Ponnuru emailed me the following comment after the first debate:

if you didn’t watch it, you missed the part where Trump said our currency is overvalued and then called for an interest-rate hike.

Judy Shelton (a hard money advocate) has been advising Trump on money, and has a piece in the Financial Times explaining his views:

Donald Trump has broken a cardinal rule in US presidential campaigning by openly questioning the effectiveness of the Federal Reserve. He believes that the low interest rate regime engineered by America’s central bank has not stimulated real growth but has rather created a “false economy” that could lead to the next global financial meltdown. Moreover, he questions the motives of Fed officials. “The Fed is being more political than Secretary Clinton,” he said in Monday night’s presidential debate.

OK, so he doesn’t like Fed policy—so what are Trump’s views on money?  Shelton clarifies things at the end of her piece:

By focusing on the Fed, Mr Trump raises the importance of restoring monetary integrity. The dollar should be the world’s most trustworthy currency.

Can the pursuit of sound money at home be reconciled with the notion of American economic leadership on the world stage? Mike Pence, Mr Trump’s running mate, has called for a rethinking of the international currency system — even proposing that perhaps the time has come to have a debate over gold and the proper role it should play in monetary affairs.

Mr Trump has not publicly embraced any such idea, although he has mused: “Bringing back the gold standard would be very hard to do, but boy, would it be wonderful.” No one anticipates that a Bretton Woods-style conference will soon take place at Mar-a-Lago, the exclusive Trump resort in Florida. Still, as Mr Trump often urges: it is time to start thinking big once again.

The writer is a member of the Trump economic advisory council

So what are Trump’s views?  Very simple.  For elderly savers, Trump favors higher interest rates.  For big developers, he favors low rates.  For consumers, he wants a strong dollar.  For exporters, he wants a weaker dollar.  Each group will get what they want, but not all in the same universe. You see, Trump’s monetary views are best described as a wave function, which will collapse to a single outcome on January 20th. Trump is the first post-modern candidate, the first to understand that truth is what the voters let you get aways with, and that the multiverse offers the possibility of achieving seemingly irreconcilable aims.

The same is true in the realm of tax policy.  Trump’s new tax proposal, recently unveiled, eliminates the earlier proposal for a sharp cut in business taxes on passthrough entities.  But the new proposal also maintains the earlier proposal for a sharp cut in business taxes on passthrough entities (which cuts the top rate for family businesses from 40% to 15%).  Isn’t that impossible?  Not at all.  The elimination of the tax cut only applies to the deficit hawks at the Tax Foundation, who estimate the cost to the federal budget.  The proposed giveaway to big developers still applies to business associations.  Here is the NYT:

The campaign then told the Tax Foundation, a conservative-leaning Washington think tank it asked to price the plan, that Mr. Trump had indeed decided to eliminate the tax cut.

Call it the trillion-dollar lie: Both assertions cannot be true.

At issue is whether Mr. Trump’s plan would tax small businesses, partnerships and other “passthrough” entities at the same 15 percent rate as large corporations, as he proposed last year, or whether they would continue to pay individual income taxes, at rates as high as 33 percent.

The campaign’s conflicting accounts of its own proposal are particularly remarkable because Mr. Trump and his advisers have taken months to refine the details, which Mr. Trump, the Republican presidential nominee, unveiled in an economic policy speech on Thursday in New York.

In this case, however, telling two versions of the same story benefited the Trump campaign.

Dropping the tax cut was central to Mr. Trump’s optimistic claim that his plan would not increase the federal debt. But by simultaneously promising to keep the tax cut, the campaign won the support of the National Federation of Independent Business, an influential small-business lobbying group.

“We’re comfortable” that Mr. Trump is committed to preserving the tax break, Jack Mozloom, a spokesman for the group, said Friday morning. “We have it directly from his campaign.”

The Tax Foundation was not so comfortable.

“There is a disconnect between the plan as understood by us and the plan as understood by the N.F.I.B.,” said Alan Cole, an economist at the foundation who worked on the cost estimate that Mr. Trump cited in his speech.

What does Binyamin Appelbaum mean by saying “both assertions cannot be true”? Has he never heard of quantum mechanics?

Given the closeness of the election, it seems almost certain that Trump will win in at least some universes in our multiverse, and Clinton will win in others.  In fact, I think nature has “rigged” things that way.  And in some of the Trump winning universes the 15% rate will be implemented, while in others it will not.

I used to think QM was too complicated for me to understand, but with Trump’s help I’m beginning to get the hang of it.  Don’t worry, it’s all going to happen anyway . . .  somewhere.

PS.  You might wonder why other candidates haven’t adopted this strategy.  It appears that most are deficient in a very important substance that scientists call “gall”.  Just look at Jeb Bush, you can see in his pale skin a clear deficiency in gall. In contrast, Trump’s orange complexion is just bursting with gall.  He must take gall enrichment vitamins every morning.  Bush was only able to come up with a pathetic 2 “pants on fire” lies during the debates, while Trump destroyed the rest of the field with 48.  Jeb tried putting an exclamation point after his name, but even that didn’t work.

PPS.  Trump assured us that while he knows nothing about government policy, he would get the “best people” to advise him.  I guess that means Peter Navarro on trade, Judy Shelton on money, and Larry Kudlow on tax policy.

HT:  Ravi

Futures targeting at the ECB

Geoff Orwell sent me the following:

The idea that monetary policy could use derivative markets to pursue its objectives has appeared in the literature 3) but has very seldom found application. The need to find new tools for the intractable problem of unanchored inflationary expectations could now provide the incentive to test the idea in practice.

The basic idea is that the European Central Bank could offer an option in which it would pay to counterparties in the contract a certain amount of money if the inflation rate was, over a certain period, lower than a certain level, constituting the strike price of the option. Alternatively, or may be in addition, the European Central Bank could intervene in the inflation swap market, offering a fixed rate of inflation against a floating inflation.

Purchasers of the option or counterparties in the swap would make money if the rate of inflation was lower than, say, the ECB objective of 2.00 per cent over a certain period, corresponding to the “medium term” in the inflation objective. This should raise inflation prospects through a number of channels.

In the financial market, the higher inflationary expectations, coupled with cash purchases of securities under QE (or EAPP – Extended Asset Purchase Program as the ECB calls it), would lower the real rate of interest, thus favouring investment. The entry of a big seller of protection against deflation could not only change the expected value of future inflation, but also shift its entire distribution, reversing the unwelcome tendency presented in Chart 1. As a result, the probability of an extended period of deflation – as perceived by market participants – would fall, improving general sentiment and lifting “animal spirits.” In the product market, incentives to postpone purchases for consumption waiting for lower prices would be offset, since consumers could purchase the protection offered by the European Central Bank against too low inflation, thus compensating for the possibility of lower prices. In the labour market, firms could offer higher wages since they would be compensated, if inflation was too low, by the protection offered by the option or the inflation swaps entered with the ECB. Symmetrically workers would demand higher salaries (or would not accept lower salaries): in a way, it would be as if the Phillips curve had shifted up and to the right. Overall there should be a positive effect from a tool that is directly aimed at the problem: too low inflation.

There would also be “political” advantages, since the use of this tool would raise no question of a possible confusion between fiscal and monetary policy, which is indeed an issue, as there would be no obvious link between action in the derivative market and the funding of government deficits. This should be welcome to the ECB hawks, who could see the reliance of the ECB on QE being reduced. . . .

This post was written jointly by Juliusz Jabłecki, head of monetary policy analysis team at the National Bank of Poland (here in personal capacity) and Francesco Papadia. Madalina Norocea provided research assistance.

This is similar to the NGDP futures targeting concept.  Of course we are a long way from actually implementing this sort of plan, but it’s good to finally see central bank officials talking about the idea.  When I proposed negative IOR in early 2009, that also seemed like a crackpot idea.  And speaking of negative IOR, here’s the latest from Benn Steil and Emma Smith (at the Council on Foreign Relations):

Back in 2013, we showed that the ECB’s monetary transmission mechanism had broken down in the crisis-hit periphery countries.  ECB rate cuts were not being passed on to rate cuts on new loans to businesses.

For all the bad news that has come out of Europe since then, it is noteworthy that this mechanism has now been restored in most periphery countries.  In fact, the link between ECB rates and the rates banks charge on new business loans is now, on average, stronger in the periphery than in the core—as can be seen in the graphic above.  (We use the overnight interbank rate as a substitute for the ECB’s policy rate, as it captures both the ECB’s policy rate and the effects of its QE and lending to banks.)

The turning point was the ECB’s June 2014 announcement of a negative deposit rate and cheap long-term loans to banks—known as targeted long-term refinancing operations, or TLTROs. This is because these new measures have disproportionately benefited periphery banks.

Ezra Klein on Trump and the media

Here’s Ezra Klein on the recent debate:

Here is the conventional wisdom about last night’s presidential debate, as I understand it. Hillary Clinton won in a rout, but that’s largely because Donald Trump flagged after an excellent first 30 minutes in which he hammered away at his strongest issue: trade.

“Donald Trump won the first 25 minutes of the first presidential debate,” writes Ross Douthat at the New York Times, in a representative piece. “He was too bullying and shout-y, too prone to interrupt, but he seized on an issue, trade, where Hillary Clinton was awkward and defensive, and he hammered away at his strongest campaign theme: linking his opponent to every establishment failure and disappointment, and trying to make her experience a liability rather than a strength.”

His colleague, Maggie Haberman, made much the same point. “Trump has a strong case to make on trade, when he makes it,” she tweeted. “He made it once and then chased shiny objects for most of the debate.”

Of course, I said the same thing yesterday.  I can’t even imagine what Douthat and Haberman were thinking, as Trump’s comments on trade were shockingly ignorant and nonsensical. He made a complete fool of himself.  Over at Econlog I pointed out that he seems to be getting advice on trade from an economist who doesn’t even know the basics.  Klein has an interesting explanation:

There’s a deep tension in the way the media judges presidential debates. On the one hand, we know that our coverage affects the public’s ultimate view of the event — in that way, we are key participants in the debate, not merely observers of it.

But that knowledge is uncomfortable. It’s not the role we are meant to play. The press wants to reflect reality, not shape it.

And so we attempt, peculiarly, to recast ourselves as observers of voter reactions we can’t observe. We judge the debate based not on what we think to be true about it but on what we think the public will think to be true about it. And so we end up asking not whether the candidates made good arguments given what we know to be true but whether they made good arguments given what we imagine voters know to be true. And once you’re in that mindset, a section where Trump sounded good can be a win even if nothing he said made sense — after all, fairly few voters are trade policy or labor market experts.

But the public isn’t relying on us to tell them what we thought they thought watching the debate. They’re relying on us to tell them what we found when we compared the candidates’ answers to reality, and to the best analysis on offer from experts, so they can make a better-informed judgment on what actually happened in the debate. And sometimes there’s a very big gap between how good a candidate’s answers sounded and how good his or her answers actually were.

That’s the case for Trump’s opening section last night. He was speaking on the issues where he’s supposed to be strongest — his whole pitch is he’s a businessman who knows how the economy really works and what is really needed to fix it — and he showed he didn’t have any real idea what he was talking about. Voters deserve to know that.

Here’s the great irony; the media is almost universally biased against Trump (excluding Fox News.)  And that’s because media people can recognize a demagogue.  But despite this bias, they are actually helping Trump by trying to be “evenhanded”, to direct equal amounts of criticism both ways. They don’t seem willing to come right out and say that the things Trump says are idiotic, and that his advisors are incompetent people who don’t know their subject.  Instead they praise his strong “performance” in the first 30 minutes.

PS.  Notice that my posts on Trump, which are admittedly very poorly done, are actually doing the job that Klein says the press should be doing, but isn’t. I’m telling people that the content of Trump’s remarks are idiotic.  I wish the press would do its job, so I could get back to monetary policy.

HT:  Last Men and Overmen, who has the following to say:

So you have several levels. One the most basic, the media is ignorant of economics. Sumner gets to the deeper level: the media cares only about style. But Klein brings it home: the reason the media cares more about style is they are in denial that they shape the news, they aren’t just pure observers of it.

The classic case of this was 2000 where most voters thought Gore won the first debate with Bush, the media reaction focused on Gore’s alleged sighs. The polls ultimately went W’s way.

Update:  I strongly recommend this piece from the FT, which could be enjoyed equally by Trump fans or foes.  It shows how the mood in Britain has shifted in a Trump-like direction, as it has elsewhere in the developed world.  And yet Trump isn’t even mentioned.