It just keeps getting worse:

Sen. Lindsey Graham (R-S.C.) was more direct in his assessment. “Other than destroying every instrument of democracy in his own country, having opposition people killed, dismembering neighbors through military force and being the benefactor of the butcher of Damascus, he’s a good guy,” Graham said of Putin on Thursday. “This calculation by Trump unnerves me to my core,” added Graham, who has been one of Trump’s most vocal critics in the Senate. . . .

Sen. Marco Rubio (R-Fla.), who has had an uneven track record of backing Trump, told the Guardian that he would give the Manhattan billionaire the benefit of the doubt. “My sense is those views will probably change once he understands better who Vladimir Putin truly is — that’s my hope,” Rubio said.

But he also railed against Putin for his tight control on the media and the military and for the fact that his political opponents are often jailed or disappear. “I don’t think what Vladimir Putin exhibits is leadership. I think what he exhibits is thuggery … and we should be clear-eyed about that,” he said.

So Rubio’s “hope” is that “once he understands” just how dangerous Putin is, Trump will come to his senses.  I think that’s quite possible.  But I guess I’d prefer a president who already has a basic understanding of geopolitics, before taking office.

Here’s how I envision Trump coming to his “senses”.  He sends signals that he doesn’t care about a Russian border disputes with Estonia.  Some majority Russia village on the Estonian border votes to join Russia, and Putin invades and annexes.  The Joint Chiefs of Staff tell Trump that the US must honor its Nato commitments, or lose all credibility.  Trump is enraged that Putin put him in this embarrassing position, his face turns bright orange, and he lashes back in the usual Trump fashion–with ten times the retaliation as is actually appropriate.  (Recall this is the guy that would have abandoned the recent G20 meeting due to a lousy staircase.  Yeah, he has that kind of temper and judgment.) Things escalate from there.

Remember the children’s story called “The Emperor’s New Clothes”?  I always thought that was a bit far-fetched, until Trump.  His supporters will defend literally anything he says:

Corey Lewandowski, Trump’s former campaign manager who still talks regularly to the nominee, pushed forward the idea that Putin is a stronger leader than Obama.

“Vladimir Putin has had a stronger influence on his country than Barack Obama has had here.  He’s been a stronger leader,” Lewandowski, now a CNN contributor, said on the network’s “New Day” program on Friday.

Also calling Putin “a fighter” for his people, Lewandowski said Trump’s willingness to work with Putin presents an opportunity “to work with what would normally be an adversary.”

. . . Conservative radio host Hugh Hewitt, who often focuses on foreign policy matters, offered a more nuanced view. “Putin’s an evil man. POTUS a good but incompetent man. Putin has served his country’s national interest better,” Hewitt tweeted Friday morning.

In the 1950s, people denied they were Russian sympathizers when attacked by Joe McCarthy.  Now the GOP leader just comes right out and admits it.  Early in the campaign, commenters said I was unhinged when I pointed to the quasi-fascist style of Trump’s campaign.  Now Trump and his supporters tell us that they think Putin is doing a good job for the Russian people.  So I guess that means Trump thinks an American president would be doing a good job for the American people by assassinating opponents, demonizing unpopular groups, shuttering the press, and invading neighboring countries.  After all, that shows much more “strength” than Obama has shown.  And look how well the Russian economy is doing.

And then I think back to all of those cowardly conservative talk show hosts who wet their pants in fear of a dictatorship every time Obama issues some sort of executive order on the environment, and yet drool all over a GOP candidate who sees Vladimir Putin as the model.  You can’t make this stuff up; it’s just too weird.

There are days I have to pinch myself.  If you wrote a movie scrip analogous to The Producers, but for a presidential campaign, it would look a lot like the actual Trump campaign. This is what a campaign would look like if they were trying to lose.  But just as in The Producers, Trump rises in the poll after every outrage.  In a world where I was not dreaming, a presidential candidate would go out of his way to deny having a positive view of a bloodthirsty authoritarian leader like Putin.

Fortunately, the US has strong democratic institutions, and Trump has no chance of becoming a dictator.  He’s not even all that popular on the GOP side of Congress, and I could easily see him being impeached.  Then his only hope would be stirring up supporters with dark theories about rigged elections, and the incitement of violence, and that’s not like Trump.  In any case, in the end the military would not allow him to take absolute power.  After, all it’s not like he’s planning to fire the top generals and replace them with a compliant Praetorian Guard.

Oh wait . . .

Embarrassing to our country’: Trump suggests he’ll fire top generals.

. . . Individual generals and admirals have traditionally been removed from their posts for misconduct or a failure to perform their duties. Cashiering a group of them en masse would be unheard of — and could irrevocably tarnish the perception that the military is an institution divorced from politics.

“Under the leadership of Barack Obama and Hillary Clinton, I think the generals have been reduced to rubble,” Trump said at the NBC News “Commander in Chief Forum,” where he and his opponent, Clinton, appeared. “They have been reduced to a point where it’s embarrassing to our country.”

Traditionally divorced from politics?  How quaint!  That’s not how Putin does things.

Like any single currency area, the eurozone has only one AD.  That’s true despite the fact that it contains 19 countries.  In contrast, China has 4 ADs, for Mainland China, Hong Kong, Macao and Taiwan.  (The Taiwanese constitution says they are part of China, who am I to argue?)

Here is the eurozone unemployment rate:

The disastrous policy tightening of 2011 pushed eurozone unemployment up from 10% to 12%.  Then policy eased slightly, and NGDP started growing again. Unemployment fell back to 10%, about the rate of 1999, when the euro was created.

Unemployment is still very high in Greece and Spain, but that fact does not and should not matter to the ECB.  There is only one AD for the eurozone, and it needs to be appropriate for the entire region, not any single country.  By analogy, the unemployment rate in Nevada should have and does have no bearing on Fed policy, which looks at the national unemployment rate.

That doesn’t mean ECB policy is not too tight—after all, they target inflation, not unemployment.  But here again I detect a weird pattern among pundits, to talk almost as if there are two ADs for the eurozone, one for inflation and one for unemployment.  Consider the ECB’s recent action, or should I say non-action:

US and European equities are under pressure as disappointment over the European Central Bank’s decision to stand pat on monetary policy and uncertainty over the Federal Reserve’s interest rate trajectory force up borrowing costs. . . .

Ian Williams, economist at Peel Hunt, said investors appear “rather underwhelmed by the ECB announcement, both the absence of further policy action and the lack of guidance offered by Mr Draghi at his press conference about what may come next”.

Fixed income analysts at Citi said the ECB had introduced volatility by failing to even discuss QE. “The decision not to extend the timetable of QE from Mar-17 weakens forward guidance and is bearish.”

So the ECB tightened monetary policy yesterday—why does that matter?  Here’s why it’s a big deal; roughly 90% of pundits, and even professional economists, don’t seem to have a clue as to what’s going on.  If asked to explain the recent ECB non-action, most would say the ECB is satisfied with the pace of recovery, including the fall in the unemployment rate, and that it expects inflation to rise in the future. They may not agree with that outlook (I don’t think inflation will rise as much as the ECB expects) but that’s why the ECB effectively tightened yesterday, disappointing markets.  So far, so good.

But when the discussion turns to inflation, these same pundits will insist that the ECB is trying and failing to hit its inflation target, and/or they are out of ammo.  In other words, the implicit assumption is that a single monetary policy can target two different ADs, one for inflation and one for employment.  On the employment front, the ECB still does normal monetary policy, tightening when they think the recovery needs no more juice.  But on the inflation front the pundit class insists the ECB is out of ammo.

Of course none of this makes any sense.  Obviously the ECB is not out of ammo, or markets would not have reacted negatively to their recent tightening of policy   So why do so many economists think they are out of ammo for inflation, but not employment?

Maybe they are dumb.

More plausibly, pundits and economists are smart, but excessively deferential to the wizards behind the curtain of our central banks.  People like Yellen, Bernanke, Draghi and Kuroda are deserving of our respect.  They are more qualified than most pundits and most economists, including me.  So if they are falling short on inflation, people assume that it must be because they do not have the tools to hit the inflation target.

What’s wrong with this view?  I think it’s a mistake to judge the competence of central banks by the competence of their leaders.  Central banks are complex and powerful institutions, embedded in even more complex and even more powerful political entities.  Assuming that the performance of the central bank represents the competence of their leaders is a big mistake, even if the leaders voted in favor of the recent policy action.  If the central bank heads had been assigned to the position of dictator of the world, we might be seeing an entirely different set of monetary policies.

PS. The ECB currently forecasts 1.6% inflation by 2018, which is close to its target of slightly below 2%.  I think they are too optimistic.  But excessive optimism and lack of ammo are two entirely different concepts, which most people don’t seem to be able to grasp.

China is a glass half full country, and will be for the foreseeable future.  Here I’ll point out what’s wrong with the China bulls and bears.  Let’s start with the bears.

Last year lots of China bears predicted recession, after the stock market crashed and the yuan fell in a disorderly fashion in forex markets.  The recession did not happen.  In recent years, lots of people have pointed to “ghost cities” in China. According to this article, the ghost cities are filling up quite nicely:

Lingang was built for one reason: to support the new Yangshan deep sea port and corresponding FTZ, which link into the new city’s southern edge, as well as the nearby Lingang Industrial Zone. 800,000 people were projected to be living there by 2020, and the phrase “mini Hong Kong” was often uttered to describe what it was meant to become.

Construction on the $5.6 billion, 133 square kilometer satellite city began in 2003, but ten years later the place was a virtual ghost town. While I was told at that time that the emerging city had 50,000 residents, its wide open, empty streets and completely vacant housing blocks indicated that this may have been a wishful overestimate. While every property that went on the market there sold quickly, home buyers were hesitant to move in — who is going to move into a city before it’s ready to be inhabited?

On one of my early visits to Lingang in 2013 I met with a team of researchers from Colliers who were scouting out a location for an impending hotel for a client. They weren’t put off by the excessive amount of empty buildings.

“It has potential,” Marco Zhou, the leader of the team, said as we looked out over an expanse of vacant construction lots and a yet-to-be-used high-tech park.

“Who do you think will come to this hotel?” I queried skeptically. “There really isn’t much going on here.”

“Don’t worry, man, all that will change,” Zhou replied with a laugh. “It is just a matter of time. They will all be filled . . . The only question here is when.”

This sentiment was echoed by the fact that a couple of days before two nearby plots of land sold for record prices, going for 445.45% and 427.4% premiums respectively.

Sounds like a typical ghost city, right?  Here’s a return visit, two years later:

Since the last time I was in Lingang, Shanghai’s Free Trade Zones had been officially commissioned and its administrative offices moved in, the deep sea port continued expanding, the high-tech park began welcoming businesses, some of the office complexes had opened, the 100,000 student university town continued developing, and a new metro line linking in the new city to the core of Shanghai went into operation.

While not yet running at 100% capacity, considerable progress had been made. There was a steady stream of cars on the main road where there wasn’t any sign of traffic before, workers were walking in an out of previously unused office towers, a slew of new restaurants had opened, and many once-uninhabited residential complexes had filled up. The new city that had once been the domain of exiled students and migrant construction workers was now home to actual residents, white collar workers, researchers and shoppers.

“It’s full of life,” the news anchor complained. “It just looks like normal.” . . .

China seldom builds colossal new cities without a broader, larger-scale development plan. The ghost city narrative of cities built for nobody doesn’t stand up if you look at how many of the country’s booming new metropolitan areas were once mocked as being ghost towns.

New city building is obviously a long-term endeavor — long-term meaning 15 or 20 years, not five or six. Nearly all of China’s major “ghost cities” have by now filled up or are on pace to meet their population goals, giving the phrase “too big to fail” real-life relevance:

Shanghai’s Pudong financial center can no longer be considered a “statist monument for a dead pharaoh on the level of the pyramids;” Zhengdong New District is now the million person plus financial capital of Henan province rather than being “uninhabited for miles and miles and miles;” and even the “Great Ghost Mall of China” has come back from the dead.

The reason why China never gives up on its ghost cities is that they tend to eventually work.

And now for the bulls.  This article claims that China (and India) is booming because of lots of state investment:

Why Are China and India Growing So Fast? State Investment

. . . In 2015 China’s per capita GDP growth was 6.4 percent and India’s 6.3 percent based on World Bank data.

These are easily the fastest growth rates for any major economies. They also propel the most rapid rates of growth of household and total consumption. In particular, both China and India are growing far more rapidly than the Western economies — in 2015 the EU’s per capita was only 1.7 percent, the U.S. 1.6 percent, and Japan’s 0.6 percent. Data for 2016 to date show the same pattern of rapid growth in China and India and slow growth in the U.S., EU and Japan.

Marcus Nunes directed me to a recent post by Michael Hatcher, discussing NGDP targeting:

(1) To the extent that future output is uncertain, nominal GDP targeting does not provide an anchor for inflation expectations. Nominal GDP targeting does provide an anchor for nominal spending. What it does not do, however, is provide a clear focal point for inflation or price level expectations. To see this, note that a nominal GDP target of N* will be met when P.Y = N*, where P is the price level, and Y is real GDP. Hence, the central bank should promise to set P = N*/Y, making the price level countercyclical. Since future output is uncertain, there is no fixed point on which price level expectations will gather given a promise to move the price level inversely with output. The same reasoning also applies to inflation, except that expected future inflation will be inversely related to expected output growth under (credible) NGDP targeting. All this matters because having a clear focal point for inflation or price level expectations is crucial for keeping actual inflation low and stable. Indeed, there is good evidence from bond yields that inflation targeting has lowered inflation expectations and reduced inflation uncertainty (see here and here). This would be lost under nominal GDP targeting, putting the economy at risk of higher and more variable inflation.

There are several points that need addressing.  A switch to NGDP targeting does not necessarily result in higher or lower average inflation; rather inflation might become more countercyclical.  The trend rate of inflation is just as likely to fall, as it is to rise.  It’s not even clear that inflation would be more unstable, as inflation targeting is probably not the best way to stabilize actual inflation.

But there’s a far more important issue here.  In my view, inflation expectations don’t matter very much; it’s NGDP growth expectations that matter. The so-called “welfare costs” of inflation, such as “shoe leather” costs and the cost of excess taxation of investment income, actually apply better to NGDP growth, for the simple reason that NGDP growth is more closely tied to nominal interest rates than is inflation.  So if inflation expectations do become more unstable, that’s actually a point in favor of NGDP targeting, as long as NGDP growth expectations become more stable.

(2) Nominal GDP targeting is not easy to communicate to the general public. Proponents of nominal GDP targeting have argued that it would be easy for central banks to communicate monetary policy in terms of a target for nominal spending. But as I argued in point (1), the problem comes when individuals attempt to forecast the two variables (price level and real GDP) that make up nominal GDP. For instance, the guidance nominal GDP targeting gives about future inflation is minimal, since there are an infinite number of price level and output combinations (or, equivalently, inflation rates and growth rates) which are consistent with any given nominal GDP target. Hence, any inflation rate is desirable, given wild enough swings in output. In such circumstances, central banks would presumably be forced either to deviate from the nominal GDP target (losing credibility) or to specify circumstances in which the target would not apply (big shocks). But then the target itself becomes state-contingent and its simplicity is lost.

I don’t see why central banks would deviate from NGDP targeting in response to wild swings in inflation, because it is NGDP growth, not inflation, that matters.  It is NGDP growth shocks that destabilize labor markets and financial markets, not inflation shocks.  Indeed there was a positive inflation shock in the first half of 2008, and yet NGDP growth was slowing.  In retrospect, it is NGDP growth that should have been stabilized in 2008—that was the much more important shock. Unfortunately, the Fed and ECB paid too much attention to the inflation shock in mid-2008, and as a result monetary policy was too tight.

The public would actually find it much easier to understand NGDP targeting, whereas the public is completely mystified by inflation targeting. They don’t even know what inflation is. The public thinks that inflation should measure the rise in the cost of living, the way we live now.  Thus they would include the average amount of money that people spend to buy a TV set in a price index, whereas we actually put in the price of a quality-adjusted TV set, which is vastly different.  Even worse, they don’t understand the purpose of inflation targeting.  In 2010, core inflation had fallen to 0.6% and Bernanke announced the Fed would try to increase inflation.  The public should have jumped for joy; “Great, we are going to get closer to the inflation target of 2%”.  Instead there was outrage that the Fed was trying to increase the “cost of living” for Americans who were already suffering from recession.

When the public thinks about “inflation” they tend to implicitly hold their nominal income constant.  Thus they wrongly think that inflation lowers their living standard, and they thought Bernanke’s 2010 policy would reduce their real income. Implicitly they equate “inflation” with “supply-side inflation.” But of course the Fed has no impact on supply-side inflation, it can only influence demand-side inflation. And an increase in demand-side inflation (which is what Bernanke was trying to achieve in 2010) would actually increase the real incomes of Americans.

Now let’s assume that in 2010 Bernanke had said that a healthy economy requires adequate growth in the incomes of Americans.  Suppose he said that the economy was weak due to slow growth in incomes, and that the Fed would try to generate 5% growth in our incomes.  That would have probably provoked much less outrage from the general public than his call for higher inflation.  It would also have had the merit of being more accurate, as Bernanke was actually trying to boost demand (NGDP) and he hoped most of the rise would be in RGDP, not inflation.  When he suggested the need for higher inflation in 2010, he actually meant that he wanted more NGDP, hoped it would be mostly RGDP, but expected it would also lead to more inflation.

3)Credibility would be strained in the face of demand shocks under nominal GDP targeting. Scott Sumner and others have argued that one benefit of nominal GDP targeting is that it provides flexibility in response to supply shocks. It would not require, for example, that the central bank raise interest rates in response to stagflation: a rise in inflation would be permitted, temporarily, while output is weak. But large supply shocks are fairly infrequent. If we look instead at demand shocks, nominal GDP targeting looks less attractive. Suppose, for example, that the nominal GDP target is 100, but that nominal GDP overshoots to 105 due to the price level and output being higher than expected in the face of a positive demand shock. Nominal GDP is now at the level it should be next year, assuming an NGDP target path that rises by 5% per annum.  As a result, the central bank now wants nominal GDP to flatline next year. It is therefore faced with three unattractive choices: keep both inflation and output growth at zero; combine positive inflation with negative output growth; combine positive output growth with deflation. The likely result is that the central bank would not follow through in these circumstances, and its credibility would be eroded. Enough such episodes could reduce credibility to the point where nominal GDP targeting would have to be abandoned.

Once we factor in negative demand shocks and the zero lower bound on nominal interest rates, things look even worse. For instance, suppose that nominal interest rates are near the zero lower bound and nominal GDP undershoots to 95, i.e. 5% below the target of 100, due to a series of negative demand shocks that lower the price level and real GDP. Now, given trend nominal GDP growth of 5%, the central bank would have to promise to raise nominal GDP by 10% next year in order to meet the new target of 105 (=100*1.05). Ten percent(!) – through inflation or output growth, or some combination – when the economy is at the zero lower bound. What central bank can credibly promise that? That would take a massive amount of credibility, probably too much to be plausible in practice.

Here I think Hatcher partly misses the point.  The main purpose of NGDP targeting is to reduce the severity of demand shocks. For instance, in mid-2008 inflation in the US had risen well above target, and hence the Fed tightened monetary policy, causing NGDP to fall 3% over the next year.  This was a powerful negative demand shock, caused by the Fed’s tight money policy.  This shock made the financial crisis much worse, and also sharply increased unemployment.  Under NGDP targeting the Fed would have had a much more expansionary monetary policy in late 2008, and hence the demand shock would have been much smaller.

Hatcher might reply that even with the best of intentions there would still be negative demand shocks under NGDP targeting, as monetary policymakers are not perfect.  I agree.  But the make-up required to reach the old trend line would actually be stabilizing under NGDP targeting.  For instance, if the Fed makes a mistake and NGDP growth overshoots the target, then they need to gradually reduce NGDP to bring it back to the trend line.  Normally a policy of reducing NGDP growth might cause a recession.  But if you start from a position where NGDP has overshot the target, then you are starting from a position where output and employment are above their natural rates.  So the contractionary monetary policy is actually stabilizing, as it brings you closer to the natural rate.  Something like that happened in Australia in 2008, when the economy (NGDP) had overheated.  A sharp slowdown in NGDP growth in 2009 did not cause a recession in Australia, but rather brought output and employment closer to the natural rate.  So these moves to bring NGDP back to the trend line would actually be less controversial than you might assume, if you simply had looked at the NGDP move without reference to where the economy was relative to the natural rate.

How about the zero bound problem?  Ironically, Michael Woodford endorsed NGDP level targeting a few years ago precisely because it does a better job of handling the zero bound problem.  When NGDP falls well below trend, it’s hard to reduce real interest rates under an inflation-targeting regime.  In contrast, under NGDP targeting you can call for a temporary period of above average nominal growth, which reduces interest rates relative to both inflation and (more importantly) NGDP growth.  Now of course there is still the underlying problem of having concrete policy tools that are effective at zero interest rates, and I’ve written zillions of posts on options for doing so.  But for any given policy tool, it would be more effective at the zero bound under NGDP level targeting (or price level targeting) than under inflation targeting.Here’s another way of thinking about it.  Asset prices are closely linked to changing expectations of two or three-year forward NGDP.  In late 2008 and early 2009, those expectations plunged, and this sharply depressed asset prices—also hurting the balance sheets of highly leveraged banks like Lehman Brothers.  Under NGDP targeting, two or three-year forward NGDP expectations are more stable, and hence asset prices are more stable. That would tend to reduce the severity of demand shocks.  In modern macro models, current moves in aggregate demand (NGDP) are closely linked to future expected changes in demand.

To summarize, the best argument for NGDPLT is not that it handles “shocks” better than other regimes such as inflation targeting, but rather that it recognizes that most so-called “shocks” are simply bad monetary policy, and NGDPLT makes for a more stable economy by reducing the frequency and severity of those monetary shocks.

PS.  I’ve been catching up on old podcasts from David Beckworth, which I missed the first time around.  This morning I listened to the one with Ramesh Ponnuru, which does a really nice job explaining the intuition behind NGDPLT.  The podcast with George Selgin provides another excellent perspective on the basic idea.

I recently did a post on the global struggle for rents.  In response, Jason Potts sent me a very interesting paper co-authored by Sinclair Davidson that discusses similar ideas.  Here is one excerpt:

Governments predate on intellectual property. Where they protect it, and seek to do so globally—as the US does when tying intellectual property agreements into trade treaties or other foreign policy sanctions—they do so not out of moral respect for the creative rights of its citizens, but because that offer of protection maximizes the government’s future tax stream (the corollary is that US citizens are taxed by the US government wherever they are domiciled). But where they predate directly, through theft or various mechanisms to minimize its value, they do so because governments are most everywhere the predominant consumers of intellectual property—examples are in socialized healthcare, infrastructure, media and communications, and defense, all of which are technology intensive.

The global distribution of intellectual property, and of firms and industries that are heavily reliant on it, seems to conform to our models predictions. Intellectual property intensive industries predominantly locate in institutionally robust tax havens, such as the US, Switzerland, and more recently Singapore and Ireland.