Here’s Noah Smith at Bloomberg:

Japan’s great monetary policy experiment is drawing to a close, and the results may change the way the world thinks about central banking. The Bank of Japan’s recent quarterly report says, in effect, that the central bank has done all it can do to raise growth and inflation, and that fiscal policy needs to step in and help. The BOJ admitted that monetary policy alone won’t be enough to hit its 2 percent inflation target, now or ever.

This is very troubling for monetarists (as those who think that monetary policy is the key to macroeconomic stabilization are sometimes called). If central banks can’t control the rate of inflation, what hope do they have of affecting the economy?

I was surprised to read that the BOJ’s quarterly report had said that the BOJ had done all it could, particularly since the head of the BOJ frequently says exactly the opposite.  So I followed the link to the “quarterly report” and found . . . another Bloomberg article:

Many economists interpreted a BOJ policy shift in September as preparation for a sustained fight to generate inflation. Shirai said the central bank would maintain the status quo on policy unless the yen surges or economic data deteriorate.

And what will it do to policy if the yen “surges”?  Let me guess, it will ease policy. So why not ease policy today?

In fact, the BOJ denies that it is out of ammo.

Market monetarists have been more accurate in their Japan forecasts than any other group.  I believe that I was the first western blogger to comment on Abenomics, and I consistently predicted that the policy would raise inflation, but not all the way up to 2%.  That’s been my view all along, and that’s exactly what’s happened.  The actual inflation rate has averaged closer to 1.0%, but even that is a dramatic improvement over the deflation that preceded Abenomics (and this occurred during a period of rapidly falling oil prices, when even US inflation underperformed).  I also pointed out early in 2016 that the BOJ was moving to a more contractionary policy, and we now see the effects of that policy switch on Japanese inflation, which has fallen.  Even so, the impact of Abenomics on NGDP is clearly positive.  It began rising almost immediately after Abenomics was announced in late 2012:

The rest of the article makes the usual mistakes, confusing low interest rates and QE with easy money, whereas they are usually reflective of the fact that the central bank policy is too contractionary.  The market monetarist solution now is the same as it always was—NGDPLT—combined with a “whatever it takes approach” to monetary stimulus.  If you want a smaller central bank balance sheet, then aim for a higher NGDP growth target.  This is not rocket science; we know how to do it, we just need to get real world central banks to try.

But don’t let the perfect be the enemy of the good.  Abenomics really was much better than what came before, and we can do still better.  Instead of abandoning monetary policy, why not improve it?

There’s another thing I don’t understand about all these “monetarism has failed” articles—where are all the “Keynesianism has failed” articles? Didn’t Japan do massive fiscal stimulus, causing it’s debt to balloon to 250% of GDP?  Why isn’t fiscal stimulus viewed as a failure?  I suppose a Keynesian would say, “well they should have done even more”?  OK, but why doesn’t that also apply to monetary stimulus?  After all, fiscal stimulus is far more costly. In contrast, there’s no limit to how much money can be printed.  And why do we get this:

If Japan is out of the monetary easing game, other countries will doubtless follow. The era of bold monetary policy experimentation that began with the global financial crisis is now drawing to a close. More and more, economic policy makers will look to fiscal initiatives and to deeper structural reforms to boost growth and stop deflation.

Why not say the failure of fiscal stimulus in Japan means that governments are “out of the fiscal game”?  In fact, governments can never be out of the monetary policy game, unless they revert to barter.  As Nick Rowe likes to point out, there is no such thing as not doing monetary policy.  The only question is where are you going with that policy.  If you have a policy that delivers low NGDP growth rates and near zero interest rates, then you will end up with a big central bank balance sheet. There’s no way to avoid that except by aiming for a higher NGDP target.  Fiscal policy doesn’t create any short cut to success, as the Japanese case already showed. In January 2015, the Swiss tried to “get out of the monetary policy game” so they could shrink their balance sheet, and the balance sheet is now bigger than ever.  If you are going in the wrong direction, then switch policy.

If any central bank was going to fulfill the dreams of monetarists, it was Kuroda’s BOJ.

Actually, Australia’s much closer to what monetarists have in mind, unless you consider letting the yen appreciate from 125 to 100/dollar to be a monetarist “dream”.

Here’s another article on the BOJ, from last month:

“We are buying government bonds to achieve the 2% price target,” Kuroda said.

Kuroda said that he doesn’t expect the BOJ to run out of JGBs to purchase.

He said that the BOJ’s easy policy would not lead to hyper-inflation.

PS.  Stephen Kirchner sent me to this. Great idea, do massive fiscal stimulus when unemployment is 4.9% and the Fed is raising rates to prevent an overshoot of 2% inflation.  Why didn’t I think of that? I often say that talking about politics takes 30 points off a person’s IQ (including me).  I have a new one.  The zero bound takes 30 years of progress away from macroeconomics.  It took macro 30 years to recover from the Great Depression, and it’ll probably take 30 years to recover from the Great Recession. I won’t live that long.

🙁

I’ve never liked the Electoral College; I prefer a direct election of the president.  The person with the most votes wins, perhaps with a playoff if no one gets 40% the first time.  Lots of people disagree with me, especially Republicans.  Hmm, I wonder why the GOP likes the Electoral College?  And every 4 years in December we must waste 13 seconds of our life listening to some stupid radio commenter telling us that, “actually the President was officially elected today”.

But now I’m reconsidering.  It seems I never actually understood the purpose of the Electoral College:

One Texas GOP elector, Chris Suprun of Texas, a firefighter, told Politico in August that he finds Trump so unpalatable he’d consider voting for Clinton when he gets to Georgia’s capital on Dec. 19th.

Baoky Vu, a Decatur businessman, told the Atlanta-based news site AJC.com in August that he couldn’t stomach voting for Trump either, and was quietly convinced by local GOP leaders to resign as an elector.

Clinton would need more than 20 GOP electors to go rogue and vote instead for her — a mighty tall order.

Even then, the new, Republican-controlled Congress meets Jan. 6 to approve the electoral college vote, and would certainly vote to void any roguery, handing the victory firmly back to Trump.

The Founding Fathers created the electoral college because they were “afraid of direct Democracy,” according to FactCheck.org.

In fact, Alexander Hamilton thought the electors would make sure “the office of President will never fall to the lot of any man who is not in an eminent degree endowed with the requisite qualifications.”  (Emphasis added.)

Well why didn’t you say so!

PS.  The plural of anecdote is data.  In one comment section I had two very similar comments (here and here) from people who went into the voting booth contemplating a third party (in varying degrees), and in the end just couldn’t stand the idea of a President Hillary, and pulled the lever for Trump.  Yes, that’s just 2 out of maybe 100 commenters.  But consider that the difference between the pre-election poll consensus and the actual results is that third parties got a couple percent less and Trump got a couple percent more than polled.  That’s it.  That’s the entire difference.

I expected the opposite, that people would think of Trump with his finger on the nuclear trigger, and just not be able to do it.  Maybe that’s just too abstract a threat.  What does it mean for the risk of nuclear war to go from 0.1% to 0.2%?  Heck, I find people don’t even understand what Nate Silver meant when he said Trump had a 30% chance.

And I wasn’t quite wrong about everything.  Take a look at this prescient post from a month ago, for which I got roundly criticized.  What do my critics say now?  Still don’t see a trend?

Before starting this post (which won’t interest most people) let me just reiterate that the big question going forward is whether Trump will govern as a populist or a GOP supply-sider.  The markets clearly expect the latter–they think he conned the blue-collar workers to get their votes.  Since I’ve been wrong about Trump before, I won’t offer an opinion—just wait and see.  Perhaps the funniest and most clueless headline I saw today is that markets are rising because they expect “infrastructure”.  Will Keynesians ever give up?  Like infrastructure is going to drive biotech 10% higher in 2 days.  And that’s not even accounting for monetary offset.

The “Wisconsin Idea” is a progressive strand of politics that is usually attributed to immigrants from Germany and Scandinavia.  Wisconsin was deeply involved in the progressive movement of the early 20th century (La Follette, etc.), and pioneered legislation like unemployment insurance. We abolished the death penalty 100 years before less civilized places like Britain and France.  But in recent years the Wisconsin idea has been fading, and now I think it’s effectively gone.  This election was the final nail in the coffin.

The story can be told in maps.  Four years ago I did a post on the “Driftless Area”, where Wisconsin, Illinois, Iowa and Minnesota all meet up.  It was the one white, rural agricultural area of the country that stayed blue, as other rural regions went for Romney:

Brian Donohue sent me a map showing counties that switched from blue to red in this election:

You can see that the Driftless Area stands out as moving to the GOP, delivering states like Iowa and Wisconsin to Trump.

BTW, don’t be fooled by the other blue rural areas on the first map, they are generally special cases, reflecting Indian reservations in the southwest, Hispanic areas on the Texas/Mexico border, the black belt along the ancient SE coastline of America, and the mining belt of northern Minnesota, etc.

The transformation of the GOP into the rural party and the Dems into the urban party is now almost complete.  The suburbs are split, with suburbs in the more highly educated areas trending blue, and working class suburbs moving red.

Thomas Frank should write a book “What’s the Matter with White America”, as both the rich and poor (white) regions seem to be voting against their interests.  (I’m not convinced by that hypothesis, I’m just saying that if you believe it, it applies to far more than Kansas.)

FYI, here is a map of the Driftless Area:

Here’s Nate Silver:

But ignore that for now — elections, after all, are contested in the Electoral College. (Hence the name of this website.) So here’s another question. What would have happened if just 1 out of every 100 voters shifted from Trump to Clinton? That would have produced a net shift of 2 percentage points in Clinton’s direction. And instead of the map you see above, we’d have wound up with this result in the Electoral College instead:

That shift would have led to a 3.2% victory for Clinton, exactly what the pollsters predicted on average, instead of the 1.2% margin she’ll have after California absentee ballots are counted.

Earlier I pointed out that the Wisconsin polls were pretty far off, but it turns out the national polls were pretty accurate.  As with Brexit, however, the experts had trouble processing the idea that Trump could win.

Apparently the mistake was underestimating GOP turnout, which explains why the GOP senators also did better than expected.  Interestingly, the one poll that predicted a Trump victory (LA Times) did fairly poorly, with a 3% victory margin predicted.  That’s actually further off than my absurd 5.13% predicted Hillary victory.

Given how much I’ve gotten wrong about Trump over the past year, I doubt if anyone is still reading this blog.  But just in case, here are a few reactions to recent market moves:

1.  It seems like a “growth reaction” to me, at least after the initial decline. Investors now expect faster economic growth.  Why more growth?  It might be tax reform.  It might be infrastructure (although monetary offset applies there.)  But one thing I heard a lot today (on CNBC) was deregulation.  Private prison stocks soared.  Coal stocks rose.  Bank stocks rose.   Biotech soared.  Many of these are clearly related to regulation.  We often forget how many regs the Obama administration had imposed, and Hillary was promising still more (her talk of drug price controls had been crushing biotech.)  Probably small business readers are thinking, “you forgot, I didn’t”.

2.  It seems to me that investors are assuming that Trump will give us the good stuff, but not the bad stuff (the reverse of last night).  That is, he’ll cut taxes on capital, he’ll deregulate, but he won’t do a trade war and he won’t expel 11 million illegals, many of which provide important labor services.  They started by treating it as a Trump win, and later began treating it as a GOP win.  Markets usually rally about 2% on a GOP presidential win.

3.  From my perspective, this is obviously not the worst-case scenario, although I’m not sure we can count on it.  Think about this.  If I’m right about the market reaction, then a man elected to help the struggling blue collar workers left behind by globalization will mostly help affluent stock investors like me.  (My wife’s in biotech, so we did very, very well today.)  But I’m not sure that Trump will leave things at that.  German industrialists also thought . . . oh, I better stop going down that road.

4.  Nonetheless, a rising stock market is better than a falling stock market, even if some of the individual cases (defense stocks, coal stocks, private prisons, etc.) leave me less than enthused.  (I’m not opposed to private prisons; I am opposed to burning more coal and building more weapons.)

I read the stock market rally as a sign that investors are assuming that Trump doesn’t know anything, and hence will have to leave the day to day policy work to the GOP supply-side “experts”.  I agree he doesn’t know anything, but I’m not so sure he’ll defer to others—we’ll see.

Here’s another way of putting it.  Somebody is going to be really disappointed–either discouraged unskilled workers looking to go back to a 1972 economy, or affluent stock investors like me.  Time will tell who it will be.

5.  I don’t have much to say about monetary policy. I think people overrate the impact of elections on Fed policy, and quite frankly I have no idea what Trump will do.  If he’s smart he’ll focus on taxes and regulations, because those will be really difficult issues to address—he needs to pick his fights.  Just imagine the complexity of replacing Obamacare—and that’s just one program.  The GOP has promised to repeal it, but they’ll be under pressure to preserve insurance for the millions who have recently become insured.  There are lots of tricky trade-offs, although that’s not to say there aren’t some good ideas being kicked around, such as interstate competition.

6.  Keep in mind that Trump may also do lots of things to hurt the economy. Infrastructure could be a black hole for money unless the process is reformed to inject more of a profit motive into the system (as in Europe).  Building the wall is 100% pure Keynesian waste–it won’t even boost AD.  But if we are going to do it, we could save a lot of money by using illegal Mexican immigrants.  BTW, I don’t think a wall would actually stop illegal immigration; it’s like the war on drugs–almost impossible.  Trump might raise the minimum wage, which would be a drag on the economy.  He might impose tariffs.  We simply don’t know.

7.  The deficit could get really, really big, especially for a period of peacetime with no recession.  Or Trump could severely disappoint some people by reneging on his promises.

PS:  Off topic:  File this under “It sucks to be Hillary”:

2008 total primary vote count:  Obama 17.87 million  (47.4%)   Hillary:  18.05 million  (47.9%)

2016 general election:  Trump:  around 47.0%      Hillary:  around 48.2%

The latter are estimates, as we are still waiting (as usual) for the lazy vote counters in California and Washington to get act together.  Late West Coast votes will boost Hillary’s margin well above the current 0.2%–it happens every election.

Think about this.  The 2008 Democratic primary was for all intents and purposes the general election, given the collapsing economy.  Twice Hillary fell just short twice, in elections that were “rigged” to favor her opponent.  In both cases she got more votes than her opponent.  In one case the rigging was the caucus system, which Obama did relatively well in, and in the second it was the Electoral College, which Trump did relatively well in. It would be like if Nixon had lost narrowly to Humphrey, after losing narrowly to Kennedy.

Of course I’m using “rigged” in a loose sense, I don’t see anything sinister in either case, just bad luck for Hillary.

PPS.  Trump got 4.1% of the vote in DC, versus 7.3% for Romney.  In contrast, he got 8% of the black vote (nationwide).  That backs up my feeling that I don’t meet many Trumpistas when I visit DC.  The GOP really has work to do if it wants to compete for DC’s 3 electoral votes.  Trump will enter DC sort of like a German barbarian tribal chieftain entering classical Rome.  He’ll need a good praetorian guard!