Archive for September 2018


About that “malinvestment”

When I first started blogging, a number of Austrian commenters told me the real problem was not tight money.  Rather there had been “malinvestment” in housing, especially in the “sand states”.  The recession was the price we had to pay for all of this poorly thought out investment.

That theory never even made sense in 2009.  If the problem was malinvestment in housing, then resources would have shifted to the other 95% of the economy. Instead, output fell in almost all sectors.  (I’m referring to 2008-09; resources did shift to other sectors during the 2006-07 construction slump.)

Today it makes even less sense. The NYT has an article on the housing market in North Las Vegas, which was the epicenter of the bust. It’s now booming:

Amazon has opened two huge centers in North Las Vegas for distributing goods and handling returns, bringing thousands of jobs. A third facility is on the way. Sephora, the cosmetics company, recently broke ground here for a giant warehouse.

With nearly a quarter-million people, North Las Vegas is one of the fastest-growing cities in the country. It’s also young — the average resident is just 33 years old.

The Times reports that prices are soaring and homes typically sell in three days.

I agreed that there had been some excessive housing construction in the inland portion of the sand states, perhaps because builders expected the US population in 2050 to be 50 million higher than is now predicted.  (Recall that 2006 was the year of the immigration crackdown.)  But I argued that these cities were fast growing, and this problem was relatively mild.  In my view the malinvestment is better termed “too early investment”—some houses were built a few years before they were needed.  The Austrian counterargument was that these houses would remain empty for decades, and eventually depreciate sharply (in a physical sense.)  It looks like I was closer to the truth.

I would add that Kevin Erdmann’s take on the crisis is being increasingly confirmed by events:

Jazzmine Guiberteaux moved here a few years ago from Oakland, Calif. — one of many California real estate refugees who headed to Nevada in search of more space and cheaper housing. But she is increasingly being priced out.

A 35-year-old mother of two, with another child on the way, she works in a clothing shop and drives for Uber to earn extra cash. She has had to move three times in five years.

Ms. Guiberteaux’s previous landlord terminated her month-to-month lease on Mother’s Day. It took her 10 days to get a new place. “The rent is higher,” she said. “But it’s in a better neighborhood.”

When Kevin’s book comes out in a few months, it may end up being the most important housing book of the decade.

BTW, the NYT has this picture of a downtrodden resident, who is forced to rent rather than own:
Screen Shot 2018-09-14 at 8.34.30 PM

You can see the picture more clearly in the NYT article. I couldn’t help but notice the Pottery Barn look.  The downtrodden have certainly come a long way from the 1960s, when the NYT carried pictures of shacks in Appalachia and slums in the Bronx.

I know, I’m a heartless out of touch elitist who doesn’t understand how much people are suffering.

PS.  Ten years after Lehman, market monetarists should feel really good about how things are playing out.  Not only is the boom in the housing market tending to confirm the MM/Erdmann view of the world, but more and more policymakers are talking in terms that sound suspiciously market monetarist.  Clare Zempel directed me to an article discussing Janet Yellen’s take on what we should do next time:

Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

Does that remind you of anything?  Hint, here’s my new California license plate, which I picked up a few days ago:

Screen Shot 2018-09-11 at 2.08.35 PMOh, and NGDP just keeps chugging along at a fairly stable rate.

There may be no blogging tomorrow, as I plan to attend a 13-hour film in crime-ridden Santa Ana.  Wish me luck.


Anne Applebaum on Eastern Europe

Anne Applebaum is one of America’s most distinguished conservative reporters.  (In the “classical liberal sense.)  Interestingly, in 2018 we’ve reached the point where distinguished conservatives and center-left reporters are almost identical on a wide range of foreign policy issues.  She has written the single best article I’ve ever read on the recent transformation of Eastern Europe.

Applebaum has dual citizenship with Poland, and is especially good on that country.  But the essay ranges over a wide range of topics.  For instance, until today I could never really “get” the Dreyfus Affair of 1894.  I knew that a French military officer was wrongly accused of treason.  And that the fact that he was Jewish probably played a role in this scandal.  But I never understood why this event was viewed as being so important.  It’s mentioned in almost every book I’ve ever read on French society in the late 1800s and early 1900s.  You could be reading a biography of an artist or author, and they’ll always spend a lot of time discussing that person’s opinion on the Dreyfus Affair.  Why?

After reading Applebaum’s story you’ll suddenly get it. History will start locking into place, at a psychological level. Indeed any future historian that wants to write a 21st century history of Europe should probably start with the Dreyfus Affair.

She’s also great on Hungary.  It’s long, but read the whole thing.

PS.  I see that Trump is gloating about how Nike stock dropped right after the Kaepernick ad was put out:

President Donald Trump had plenty to say about a topic he has been obsessed with, tweeting that Nike was getting “absolutely killed with anger and boycotts” and asking what the company was thinking with their divisive decision.

If the President were smart then he should have waited to see the impact on sales.  But then if he were smart . . . well a whole lot of things would be different:

Ten days after Nike announced that Colin Kaepernick would be the face of its “Just Do It” 30th anniversary ad campaign, the sports apparel behemoth’s stock price closed at an all-time high on Thursday at $83.47, according to a report from Bloomberg.

People seem to have tuned Trump out, which bodes well for the midterms.  And the good news keeps piling up, as the “brave” Manafort flipped today.

PPS.  Robert Shiller is in the news today:

At the same time, the president’s apparent Teflon to slough off scandals, conflicts of interest, evidence of incompetence, and other issues that would doom traditional political figures is well documented.

Shiller says this mindset is reflected in the market, which he considers overvalued.

“I think Trump encourages us to be more risk-taking” when it comes to investments, said Shiller.

Shiller’s hypothesis that this thinking may have seeped into the public consciousness.

How can I put this politely . . . umm, no.

I just don’t understand

Trumpistas in 2016:  “Sumner, you just don’t understand.  You professors live in an upper middle class bubble, where you don’t see all the suffering out in the real America.  The economy is not doing well; it’s doing horribly.  Things are so bad that average people are turning to meth, to opioids.”

Trumpistas in 2018:  “Sumner, you just don’t understand.  Trump has made America great again—the economy has never been better.  Look at the stock market.  Look at the black unemployment rate.  As Trump says, America is doing great.”

I’m willing to concede that I just don’t understand, so please help me to learn.

Are we really doing better than ever?  Better than the LBJ years, when RGDP growth averaged 5% over 21 quarters, instead of peaking at 4.2% for one or two quarters?  Maybe so.  After all, we really are richer than in the 1960s.  But if that’s your criterion, then wouldn’t the same apply to Obama’s second term, when real median household income reached an all time record in 2016?

Today the Census bureau released the income data for 2017, and it showed another 1.8% increase in real median household income, to a new record of $61,372.  Pretty impressive.  But it’s also true that this measure rose by an even more impressive 3.2% in 2016, and by an extremely impressive 5.2% in 2015.

They also announced a reduction in the poverty rate, from 12.7% to 12.3%.  Again, pretty impressive.  But the rate fell from 13.5 % to 12.7% in 2016.  And it fell from 14.8% to 13.5% in 2015.

There are many ways of looking at a picture as complex as the US economy.  In 2016, I saw an amazing wealth generating machine that produces living standards that earlier generations (and most other countries) can only dream about.  Trumpistas saw economic carnage everywhere they looked.  Both are valid arguments, depending on what data points you want to emphasize.  You can even claim the economy is doing better under Trump than Obama.

What is not a valid claim is that we’ve suddenly gone from being a disaster to being great again, because of a few upward tweaks in some data points. Tweaks that are not dramatically different from what occurred in previous years and decades.  All the problems in the Rust Belt are still out there.  Either the Trumpistas were lying in 2016, or they are lying today.  (I say they were lying in 2016–we’ve always been great.)

PS.  In a previous post I noted that people in south Orange County seemed friendlier than in Boston.  In fairness, I should note that this might partly reflect my “white privilege”.  People in south Orange County are certainly not as friendly to a visiting high school football team from Santa Ana, a city that is 80% Hispanic.  In that respect, my daughter’s Newton, Massachusetts high school was superior to the Aliso Niguel high school.

My wife and I like to visit Santa Ana, which is less boring than Mission Viejo.  You might wonder how we dare visit a city full of “rapists and murderers”.  Here’s Wikipedia:

In 2011 Forbes ranked Santa Ana the fourth-safest city of over 250,000 residents in the United States.

That ranking partly reflects traffic safety, but its crime rate is also fairly low.  (Ranking 11th safest in terms of violent crime.)  Ironically, I almost ran someone over in Santa Ana a few days ago.  A motorcycle merging onto the freeway flipped over right in front of me, and the guy tumbled into my lane.  Fortunately, I was going a bit slower than normal (I had just merged, and was only up to about 60mph.) I slammed on the brakes and came to a stop about 10 feet from the guy.  Drive defensively!

PPS.  Commenter Ben Cole will like this:

“Just run the presses — print money,” Trump said, according to Woodward, during a discussion on the national debt with Gary Cohn, former director of the White House National Economic Council.

And this made me smile:

As a candidate, Donald Trump pledged to balance the federal budget and lower the national debt, promises that are proving difficult to keep.

Actually that’s fake news.  Trump didn’t promise to balance the budget; he promised to run budget surpluses that were so enormous that the national debt would be entirely paid off in 8 years.  And yes, I’d say if you increase government spending and sharply cut taxes, causing the deficit to suddenly double to $1.1 trillion (in 2019), despite 3.9% unemployment, then it would prove “difficult” to keep your promise.

As an analogy, if a person who goes to AA each week suddenly goes out and buys an entire crate of Jack Daniels, it might be difficult for them to keep their sobriety promises.

Economic reform in China

There’s a more interesting new post over at Econlog.

Almost every week I see articles about China opening up its economy.  Here’s a recent example from The Economist:

CHINA is home to 1.4bn people. The population is ageing, and thus more vulnerable to ailments. Sustained economic growth is making the country richer, and more able to afford remedies. To foreign pharmaceutical firms, this looks like a winning combination. They are less keen on protracted review times, onerous rules and the reams of paperwork required to sell drugs in China. It can take a decade after approval in America for foreign drugs to reach Chinese patients.

The Chinese authorities at last appear to have acknowledged the problem—and are administering a cure in doses that have surpassed even optimists’ expectations. A reinvigorated regulator is waving through drugs from abroad, and clamping down on unscrupulous domestic companies. The government is spending more on drugs, including foreign ones, as it expands public health care. It is letting market forces weed out frail local firms. In other words, China is becoming a more normal market. Global drugmakers are rubbing their hands. By some estimates China became the second-largest global consumer of medicines in 2017. The market is worth $122.6bn, according to IQVIA, a research firm.

And another recent example from the Financial Times:

China has been opening up its financial sector in recent months, a move that some Wall Street groups hope to benefit from. Since Beijing raised the cap on foreign ownership of securities trading and fund management companies from 49 per cent to 51 per cent in April, several big US banks have said they aim to gain majority control of their operations in China.

A few months back, CNN provided this example:

China is making good on the promise to open its huge car market to foreign automakers.

The country will remove its longstanding restriction on foreign ownership for manufacturers of electric cars, ships and aircraft this year, the government announced Tuesday.

The announcement is just a first step in what China promised will be gradual phasing out of all restrictions on foreign ownership in the automobile industry.

This has been going on for decades, and I could cite many other examples.

Another trend that has been going on for decades is media claims that China is no longer reforming its economy, and is going back to the bad old days of state control.

Which set of news stories is true?

PS.  Sometimes things happen that are so weird that if they were not true you could never imagine making them up:

For decades, Taiwan and China have competed for recognition. In 1979, the United States switched its support and officially established sovereign relations with China, and many other countries followed. . . .

In recent years, China has had success in courting Taiwan’s diplomatic partners. Only 17 nations recognize Taiwan; outside the Vatican and Swaziland, they are all islands in the Pacific and the Caribbean or countries in Latin America.

American officials have expressed growing concern over the shift.

The US government, the Chinese government in Beijing, and the Chinese government in Taipei all agree that there is only “one China”, which includes the Chinese mainland and Taiwan.  In 1979, the US decided that the Beijing government was the legitimate government of China.  That’s still our official policy.  Now several countries in Latin America are following our lead, and we are upset with them.

PPS.  Tyler Cowen has an interesting Bloomberg column about 30 years of changes in Guangzhou.

PPPS.  This Fu Ying essay is one of the few articles on US/China relations that I actually agree with.

PPPPS.  Russ Roberts has a very interesting interview of Frank Dikötter on the Great Leap Forward.  This caught my eye:

Anyway, in October 1957, to mark the 40th Anniversary of the Bolshevik Revolution, 1917, all the leaders of the socialist camp are invited to Moscow, and there Khrushchev announces that he will overtake your country, the United States, in the production of dairy products. Mao doesn’t miss a beat: he says, without even standing up, ‘If you wish to overtake the United States, we will beat England–the United Kingdom–in the production of steel within 15 years.’ That’s the start of the Great Leap Forward.

At the time, the goal seemed preposterous.  China’s attempt to do this with backyard steel mills backfired, causing lots of misery.  Interestingly, today China produces 100 times as much steel as the UK.

Market monetarism is gaining ground

I recently did a post over at Econlog, discussing how Jerome Powell has adopted some ideas that sound vaguely market monetarist.  Marcus Nunes sent me another example, this time from St. Louis Fed President James Bullard:

In his talk, Bullard laid out a possible strategy for extending the U.S. economic expansion—one that relies on placing more weight on financial market signals, such as the slope of the yield curve and market-based inflation expectations, than has been customary in past U.S. monetary policy strategy. He explained that the empirical relationship between inflation and unemployment has largely broken down over the last two decades and that many current approaches to monetary policy strategy continue to overemphasize the now-defunct empirics of the Phillips curve.

“U.S. monetary policymakers should put more weight than usual on financial market signals in the current macroeconomic environment due to the breakdown of the empirical Phillips curve,” he said. “Handled properly, current financial market information can provide the basis for a better forward-looking monetary policy strategy.”

Market monetarists have long argued that financial market indicators are superior to the Phillips Curve as a forecasting tool for inflation.

On another topic, Karl Rhodes directed me to some Richmond Fed research on the zero bound.  Here’s the abstract of the paper, written by Thomas A. Lubik, Christian Matthes and David A. Price:

The likelihood of returning to near-zero interest rates is relevant to policymakers in considering the path of future interest rates. At the zero lower bound, the Fed can no longer lower rates and thus can respond to a contraction only through alternative policy measures, such as quantitative easing. Recent research at the Richmond Fed has used repeated simulations of the U.S. economy to estimate the probability of such an occurrence over the next ten years. The estimated probability of returning to the zero lower bound one or more times during this period is approximately one chance in four.

I certainly don’t have any reason to contest their finding, but I do have doubts about the method they used:

Lubik and Matthes began by estimating the TVP-VAR model over the full sample from 1961 to 2018 for quarterly data on real GDP, inflation (personal consumption expenditures inflation), and the federal funds rate. They then used the model’s estimated coefficients to produce forecasts over a ten-year horizon. The researchers generated multiple simulations of the shocks hitting the economy over the ten-year period and recorded their effects on macroeconomic variables for each quarter. The result of this process was a distribution of likely outcomes for each quarter.

In my view, the US is extremely likely to hit the zero bound in the next recession.  Thus for me, the chance of hitting the zero bound over the next 10 years is almost identical to the chance that there will be a recession during the next ten years.

If they agreed with my intuition, and used a VAR model to predict the chance of recession during the next 10 years, they might have come up with a figure higher than 25%. So does that mean that the risk of hitting the zero bound is greater than 25%?  I’m actually not sure, because I’m also skeptical of whether past performance is the best way to predict the timing of the next recession.  Yes this is true:

1. The US has never gone more than 10 years without a recession.

But these claims are also true:

2.  The US business cycle has recently been “stretching out”, getting longer.

3.  Other similar economies such as the UK and Australia have recently experienced extremely long expansions—about 15 years for the UK, and 27 years (so far) for Australia.

Is fact #1 more relevant for forecasting the risk of recession in the US over the next 10 years?  Or facts #2 and #3?

Forecasting is more an art than a science.