Archive for December 2017


Abenomics after 5 years

Abe won a massive election victory in December 2012 on a promise of higher inflation.  He was subsequently re-elected in 2014 and 2017, again by a huge margin.  This sort of political success is actually very unusual in Japan, where PMs tend to come and go.  It’s also unusual that he made such a big issue of inflation, in a country full of elderly savers.  (So much for armchair public choice theory.)  So how’s he doing after 5 years, apart from being highly popular?

The most important impact of Abenomics was on NGDP, which had been trending downwards prior to his election:

It’s actually better than this Fred graph shows, as Q2 NGDP was revised up to 544.9 trillion yen, and the third quarter came in at a very strong 549.2 yen.

According to market monetarist theory, strong NGDP can be useful in solving 2 problems, excessive debt burdens and high cyclical unemployment.  Abenomics has been very successful on both fronts.  Unemployment had fallen to 2.7%, the lowest level in 23 years.  And the public debt to GDP ratio has leveled off, after soaring higher at a dangerous rate in recent decades.

The debt ratio achievement is especially impressive given the extremely unfavorable demographics facing Japan:

Normally a rapidly falling population makes the debt situation worse, and also makes it more difficult to boost NGDP.  Abe overcome this obstacle on both fronts.  The boost to NGDP also occurred during a period of fiscal austerity, which of course contradicts the Keynesian model.

The BOJ has an inflation target of 2%, and this is one area where they have fallen somewhat short.  Prices are up about 5% in five years, which is certainly better than the deflation that preceded Abenomics, but well short of success:

Don’t pay too much attention to the year-to-year changes, as the inflation rate in 2014 was boosted by a sales tax increase, and the inflation rate after 2014 was held down by plunging oil prices.  Most forecasters see an inflation rate of just under 1% going forward.  Over at Econlog I explain why that’s still too low, even though the Japanese economy can do fine with 1% inflation.

To summarize:

1. NGDP was a big success

2. The debt situation is dramatically improved.

3. The labor market is far stronger

4. Inflation is higher, but well short of the 2% target.

I’d say that Abenomics deserves a B+ on monetary policy.  I don’t know enough to comment on the other aspects of his policy, although obviously I don’t agree with his nationalism.

PS.  I’d like to thank Ralph Benko for his very generous comments in Forbes.  I still feel pretty good about the prediction I made in “An Even Greater Moderation”, which he links to.

Why I’m not impressed by “conservative judges”

When people summarize the first year of the Trump administration, they often focus on the appointment of lots of “conservative judges”.  Oddly, this is often considered a praiseworthy achievement, which is a sad commentary on our society.  I’d prefer a country where presidents were praised for appointing lots of “good judges”.

There are many definitions of conservative judges, but here’s mine.  Consider a closely fought election, such as 2000.  If the courts end up ruling on the outcome, then a conservative judge will support the conservative candidate, regardless of the facts of the case, and a liberal judge will support the liberal candidate, regardless of the facts of the case.  In a well functioning country, the political preferences of the judges would not factor into their decisions.  We’d have good judges, who looked at the specific facts of the case.

Another possible definition of conservative judges is one that views legislation passed by liberals as unconstitutional and legislation passed by conservatives as constitutional.

I have no opinion on whether the actual 2000 presidential election case was correctly decided.  But when people tell me I should support a judge because he is conservative, they are wasting their time.  In my view, the country would have been better off if Al Gore had won the 2000 election.  I certainly don’t want judges who will favor Trump in a court case (nor ones biased against him.)

I’m a libertarian, but I also don’t favor the appointment of libertarian judges.  I favor good judges.

PS.  If you tell me that my views are hopelessly utopian, that impartiality is impossible, that the rule of law is a myth, and that judges will inevitably have biases, then I still won’t favor conservative judges, I’ll favor utilitarian judges.  I.e. someone like Posner.

PPS. Note that because I’m a “rules utilitarian”, I don’t actually favor utilitarian judges.

PPPS.  And now they’ve politicized Christmas.  As our President tries to turn Christmas into a political football by promoting it, China and India wage war on the holiday.  Sad.  In retrospect, it’s now possible to clearly see Trump as just one aspect of the global rise of nationalism that accelerated around 2015.  It’s pointless to try to explain Trump; we should be trying to explain the global surge in right wing nationalism.  If your explanation for Trump doesn’t apply to India, China and Poland, it’s worthless.  That means your explanation should not include phrases such as “West Virginia” or “illegal immigrants”.  If it does, you are missing the big picture.

Why is inflation so low?

I have a new piece on low inflation in US News and World Report:

Surprisingly, the recent undershoot of inflation had occurred during a period when the Fed has been raising interest rates, a policy that is normally aimed at slowing, not increasing, inflation. It’s as if a ship captain responded to persistent headwinds by turning the rudder in the wrong direction.

Off topic, a couple National Review pieces caught my attention:

In Rome in 1973, a grandson of the richest man in the world, J. Paul Getty, was kidnapped. In All the Money in the World, director Ridley Scott’s bizarre take on this story, Getty is the villain, while the kidnappers are simply dutiful professionals tasked with carrying out their unfortunate mission as best they can despite Getty’s intransigence about paying them ransom.

They don’t use the term ‘nepotism’, but that’s what this is all about.  Nepotism is frowned on in the US and Northern Europe; indeed favoring your relatives at the expense of society is viewed as completely unethical.  In most of the world things are exactly the opposite; it’s viewed as unethical not to favor the well being of one’s grandchildren over the best interest of society.

I doubt that many Sicilians would agree with me, but my utilitarian value system forces me to view Getty as a hero, not a villain.  The world would be a better place if everyone viewed things as I do, and no one paid ransom to kidnappers.  (That doesn’t mean I’d refuse to pay ransom, just that I’d be a hero if I did.  I never claimed that I’m a hero.)

Hollywood often promotes utilitarian values, but this is less true in the case of economic issues.  In those cases, Hollywood focuses on the “seen”, not the “unseen”.

Here’s the excellent Ramesh Ponnuru in the National Review:

Many Republicans credit Trump for presiding over a strong economy, too. It’s a point that requires some context. Job growth has not been quite as fast as it was in Obama’s last year, but you’d expect it to slow after an expansion this long.

That’s a defensible argument, but only if you assume that the entire alt-right/Trump campaign was built on a pack of lies.  Recall the economic “carnage” that Trump referred to in his inaugural address.  Recall the claims of 30% to 40% unemployment.  Recall the claims that downtrodden unemployed workers in West Virginia, Wisconsin, Pennsylvania and Michigan voted for Trump out of desperation.

So yes, it’s possible that job growth slowed in 2017 because Obama left Trump with an American job market that was already “Great Again.”  I’m not going to take a position either way on this issue; just point out that Trumpistas can’t have it both ways.

US News has a new article pointing out that the legalization of pot in Colorado did not lead to the total disaster predicted by drug warriors:

Over at Econlog I have a recent post discussing Portugal, which has decriminalized the use of all drugs.  Heroin addiction has fallen sharply, again just the opposite of what the drug warriors predicted.

I’d have a tad more respect for conservative Republicans like Jeff Sessions if they spent less time gloating over tax cuts for corporations, and instead expressed a bit of remorse over the millions of lives they have ruined with their punitive policies.  Policies that we now know were ineffective.  Here’s one example from Reason magazine:

About a year later she was picked up in another undercover sting.  This time, having turned 18, she was arrested for prostitution (a misdemeanor) and possessing a small quantity of marijuana (a felony).  The conviction shattered her dreams of someday becoming a nurse.

Now, she says, “I’m a single mother with a felony and I will be labeled a loser and a whore for the rest of my life.”  Mere months ago, she was being exploited.  Today, for the same behavior, she’s a criminal.

HT:  Ben Cole

Is Christmas even merrier than in 1967?

This graph in the FT caught my eye:

The graph shows two measures of the rate of increase in the “cost of living” in China.  The blue line is the government CPI, while the red line shows the results of public opinion surveys.

At first glance they look pretty similar, but check out the two scales.  Chinese CPI inflation has been running at about 2% in recent years, while the public’s estimate of inflation is around 6%.  The gap was even bigger in the (booming) early 2010s.  So what’s going on here?

This is just one more illustration of my claim that inflation is a pretty meaningless concept.  To economists, it’s the increase in the price of a bundle of goods, adjusted for quality changes.  To the public, it’s the increase in the cost of “living the way we live now.”

Thus if a nice flat panel TV cost $600 today, and a nice black and white TV cost $300 back in 1967, then the public would say that the TV part of the cost of living has doubled, while economists would say that the price of TVs has plunged by something like 90%, because the quality improvements have been so massive.

[In 1967, I frequently had to shake the antenna on top of our TV set, to prevent constant flickering and “snow”.  I didn’t even know that the Wizard of Oz was a color film until I saw it in the theatre at age 35.)

Alternatively, the public would say that Christmas today is about equally merry as in 1967, while economists would say that today’s Christmas is far merrier due to technological progress.

Here’s my take on the Chinese data.  The top line is strongly correlated with growth in NGDP per capita, i.e. average income.  If Chinese living standards are rising rapidly each year, then this factors into what people feel they need to earn to “keep up with the Zhangs”.  They are interested in knowing how much it costs to have a middle class Chinese lifestyle.  Indeed this concept may be even more important in “communist” China than in supposedly materialistic America.

On closer inspection, however, the rise in the perceived Chinese cost of living is a bit less that the rise in NGDP.  And I think that’s due to lifecycle effects.  Thus the older Chinese don’t need all the fancy new gadgets that millennials buy, and hence their cost of living rises a bit less rapidly than the overall rise in NGDP/person.

I’d expect that surveys of American perceptions of inflation would show something similar; a subjective inflation rate that is above the official CPI, but below the growth rate of NGDP/person.  Does anyone know of such a survey?

PS.  The FT article says the Chinese economy is accelerating into 2018.  It looks like those who predicted that the Chinese “bubble” would burst will be wrong for the 40th year in a row.  Indeed 2018 looks like a relatively strong year for the entire global economy.

PPS.  Check out the new Tianjin library:

Merry Christmas and a Happy New Year to all my readers.


Taxes, trade and GDP

Noah Smith has a good post on a topic that’s getting a lot of attention in the blogosphere.  It seems that the recently enacted tax reform is likely to dramatically boost reported exports, without (necessarily) impacting actual exports at all:

Here’s an example adapted from Guvenen et al.’s paper. Suppose that NoahCorp produces the NoahPhone, using research, design and branding done in the U.S., then sells it to people in Japan. Normally, the revenue from that sale would be counted in U.S. exports. But in order to avoid paying corporate tax on the profits from the sale, NoahCorp sells its patents and brands to NoahCorp Ireland for a pittance. It then declares that the profit from the Japanese phone sale actually goes to the Ireland subsidiary, not the U.S. parent company. The parent then doesn’t have to pay U.S. corporate tax. And the phone sale doesn’t get counted in U.S. exports. . . .

The result of all this profit-shifting is that the U.S. trade deficit seems wider than it really is, while U.S. income on foreign investments gets overstated. It looks like the U.S. is really bad at selling things overseas, but very good at choosing its foreign investments. For many years, pundits believed that wise U.S. investing was partially making up for uncompetitive manufacturing — now, it turns out that both of those stories might be different aspects of the same illusion.

With the new and lower corporate tax rate, companies will now be willing to declare this revenue as income from US exports.  And that could have political implications for an administration that is all about smoke and mirrors and marketing:

Nothing real will be changing, of course. The same phones will still be sold, and the same intellectual property will be created. But it will look like a huge win for the Donald Trump administration, which pledged to cut trade deficits.

I’m a bit skeptical that this will work.  Unless I’m mistaken, any gain in the trade account will be offset by deterioration in the services account as investment income declines, leaving the current account unaffected.  (Someone tell me if I’ve made a mistake here.)  And it’s the current account that pundits focus on, not the trade account.

On the other hand, this would tend to boost reported GDP, without boosting actual GDP.  It will be interesting to see how large the effect will be, and how durable.  My hunch is that any boost to growth would be modest (below 1%) and temporary.

I don’t worry at all about the President taking credit for things that are not real, as the public sees through the phony data.  When Trump took office he claimed the the unemployment rate almost immediately fell from the 30% to 40% range, down to about 4.1%.  But nobody took this seriously.  (Ditto for his recent claim to have repealed Obamacare).  Trump has made so many absurd claims that even his supporters don’t take anything he says seriously.  All that matters in 2020 is how the American people feel they are doing, not what the data show.

HT:  David Levey