India’s Modi shares some similarities with other populists in places like Turkey, Italy and the US.  Here’s a recent FT story:

Tensions between the RBI and Mr Modi have been mounting for months over the central bank’s hawkish monetary policy, use of its mounting reserves and the tough measures taken to clean up bad loans at India’s state-run banks.

Mr Modi has been accused of demanding that the RBI ease back on its crackdown out of fear it will hit economic growth during his drive for re-election, particularly as liquidity in non-bank lenders has dried up after a series of defaults at IL&FS, a high-profile finance and infrastructure group.

At a 10-hour board meeting last month, Mr Patel made a number of concessions under heavy pressure from government nominees, including promising to review restrictions on fresh lending by banks that already have high levels of bad debt. Pressure on the RBI was expected to continue at Friday’s meeting.

Fresh lending from banks that already have high levels of bad debt?  What could go wrong?

As a result of the pressure, Patel announced his resignation today.  (Recall that Raghuram Rajan was let go two years ago, for similar reasons):

“By forcing Mr Patel’s hand, the government has now made it clear who runs the show,” said Eswar Prasad, a professor at Cornell University, adding that the move marks “the culmination of the government’s taking the hammer to a cherished and widely respected institution”.

The Indian rupee fell more than 1.8 per cent against the dollar in the immediate aftermath of Mr Patel’s resignation.

If you look around the world, there is more and more evidence that the left and right are switching position on a wide range of issues:

1.  The populist right is increasingly supportive of monetary stimulus and opposed to central bank independence. (Easy money)

2.  The right is increasingly supportive of protectionist trade policies. (Mercantilism)

3.  The right is increasingly supportive of ramping up “moral hazard” in the financial system. (Easy credit)

4.  The right is increasingly supportive of deficit spending, including entitlements.

Those used to be left-wing positions.  Of course there are plenty of Republican politicians and pundits in the US that still oppose this populism, but this is the way that politics are evolving, all over the world.

I predict this process will continue, with local variations. Many other left wing ideas will flip to the right. The right will advocate a higher minimum wage and more government spending on infrastructure.  Right wing populists will increasingly oppose Silicon Valley type companies.    But this switch on tech firms will be less noticeable in the US, as it conflicts with the desire of nationalists to extract rents from the rest of the world.  In contrast, populists in the other English speaking nations will be less protectionist than in the US, as the costs of protection are more obvious in those smaller trading nations (Canada, the UK, Australia, New Zealand, Ireland, etc.)

Nonetheless, at a deep psychological level, the forces reshaping politics are obviously global.  The Economist has a fascinating article on the recent dramatic changes in Australia’s (conservative) Liberal Party, in which a Trumpian wing is suddenly becoming far more powerful.  Interestingly, the factors that supposedly led to the rise of Trump in America (opposition to imports, the Great Recession, low-skilled immigration, etc.) are largely absent in Australia.  This suggests that the psychological cause of this phenomenon is far deeper that the shallow explanations offered by media pundits.  I have no idea what those causes are, but imagine they will become clearer over time.  Why is misogyny usually a part of the package, for instance?

The Conservative Party in the UK is going through turmoil very similar to what’s reshaping Australia’s Liberal Party.  Unlike in Australia, however, it stays afloat because its opposition is even more loony.  The Australian Liberal Party doesn’t benefit from such a weak opposition, and thus faces a disaster at the next election.

The good news is that all of this turmoil may eventually lead to a US political party that is socially liberal and economically liberal.  I fear, however, that in the short run we’ll have two economically illiberal parties.

Christian List directed me to some studies of the costs of IP theft.  The first link was to an AEI report on the subject, which criticized the US definition of IP theft:

The leaders of the IP commission, Admiral Dennis Blair and General Keith Alexander, penned an opinion piece last year that not only points the finger directly at China but also illustrates confusion as to just what the US should target. They stated: “Chinese companies, with the encouragement of official Chinese policy . . . have been pillaging the intellectual property of American companies.” They listed a large array of US economic sectors as examples, including automobiles, chemicals, aviation, pharmaceuticals, consumer electronics, and software, among others.

But even these two highly knowledgeable leaders then went on to confuse the US case against Beijing’s “pillaging” by adding a list of military IP thefts, including plans and designs related to the F35 fighter, the Patriot missile system, the Aegis Combat System, thermal imaging cameras, and unmanned underwater vehicles, among others, as examples of Chinese spying operations. The problem and confusion to the reader here is that such military espionage is considered fair game by all nations, including the US. And one hopes that US intelligence agencies have been equally diligent in ferreting out Chinese (and other nations’) advanced military designs and equipment.

Chinese theft of US military secrets is certainly something that the US should be concerned about, and try to prevent.  But perhaps the moralistic tone one sees is a bit inappropriate, given that the US government does the same thing.  I’m all for trying to prevent this sort of espionage, but here I’ll focus on commercial theft, which seems to be the bigger issue.  The AEI piece linked to a 2017 US government report on IP theft.  Indeed the term ‘theft’ is used right in the subtitle of the report:

THE THEFT OF AMERICAN INTELLECTUAL PROPERTY: REASSESSMENTS OF THE CHALLENGE AND UNITED STATES POLICY

I was thus surprised to see the report discuss activities that cannot possibly be regarded as “theft”:

China continues to obtain American IP from U.S. companies operating inside China, from entities elsewhere in the world, and of course from the United States directly through conventional as well as cyber means. These include coercive activities by the state designed to force outright IP transfer or give Chinese entities a better position from which to acquire or steal American IP.

I.e., we’ll let you invest in China if you share technology.  In fairness, most of the report does focus on three types of outright IP theft:

We estimate that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion.

Wait until you see where they got these numbers:

Counterfeit and pirated tangible goods.

In 2016, the OECD and EUIPO used worldwide seizure statistics from 2013 to calculate that up to 2.5%, or $461 billion, of world trade was in counterfeit or pirated products.23 By applying this percentage to U.S. trade, we estimate that in 2015 the value of these goods entering the U.S. market was at least $58 billion.

The United States, however, is a much larger market for imports than the average market. It is nearly equivalent in size to the European Union, where the OECD/EUIPO study determined that approximately 5% of imports are counterfeit or pirated tangible goods. By using 5% as a proxy for the proportion of counterfeit and pirated tangible goods in U.S. imports ($2.273 trillion),25 we estimate that the United States may have imported up to $118 billion of these goods in 2015. Thus, anywhere from $58 billion to $118 billion of counterfeit and pirated tangible goods may have entered the United States in 2015. This represents the approximate value of counterfeit and pirated tangible goods (not services) entering the country.

With respect to counterfeit and pirated tangible U.S. goods sold in foreign markets, the OECD/EUIPO study found that they accounted for nearly 20% of the value of reported worldwide seizures. In 2015, estimated worldwide seizures of counterfeit goods totaled $425 billion, meaning that as much as $85 billion of counterfeit U.S. goods (20% of worldwide seizures) entered the world market (including the U.S. market).

Certainly, in the absence of counterfeit goods some sales would never take place, and thus the value of illegal sales is not the same as the sales lost to U.S. firms. The true cost to law-abiding U.S. firms in sales displaced due to counterfeiting and pirating of tangible goods is unknowable, but it is almost certain to be a significant proportion of total counterfeit sales. For purposes of aggregating the total cost to the U.S. economy of IP theft, we have estimated that 20% of counterfeits might have displaced actual sales of goods. When applied to the low-end estimate ($143 billion) of the total value of counterfeit and pirated tangible goods imported into the United States and counterfeit and pirated tangible U.S. goods sold abroad, the conservative estimate of the cost to the U.S. economy is $29 billion. When applied to the high-end estimate ($203 billion), the cost to the U.S. economy is estimated at $41 billion.

“Displaced”?  So let me get this right. If my wife buys a Coach handbag for $100, and it’s a counterfeit from China, and she enjoys the handbag, then the “cost” to America is $100?  I’m guessing that no actual economists participated in the writing of this government report.

Update:  Bob Murphy pointed out that my wording was wrong.  I should have said; “So let me get this right. If my wife buys a Coach handbag for $100, and it’s a counterfeit from China that displaces the sale of an American handbag, and she enjoys the handbag, then the “cost” to America is $100?”

Otherwise, my point is the same.

You might argue that my handbag example trivializes the problem, and that the real problem is patent infringement, which slows innovation.  I agree.  But how big a problem is patent infringement? And how to patent an idea with InventHelp successfully? Again, the US government:

The same OECD/EUIPO study found that while 95% of counterfeit goods seized by customs officials were protected by trademarks, only 2% were counterfeits of patent-protected goods.

Here is the summary data for all three types of IP theft:

Totaling It All Up

In summary, we estimate that the total low-end value of the annual cost of IP theft in three major categories exceeds $225 billion, or 1.25% of the U.S. economy, and may be as high as $600 billion, based on the following components:

• The estimated low-end value of counterfeit and pirated tangible goods imported and exported, based on a conservative estimate that 20% of the cost of these goods detracts from legitimate sales, is $29 billion. The high-end estimate for counterfeit and pirated tangible goods imported and exported is $41 billion.

• The estimated value of pirated U.S. software is $18 billion.

• The estimated low-end cost of trade secret theft to U.S. firms is $180 billion, or 1% of U.S. GDP. The high-end estimate is $540 billion, amounting to 3% of GDP.

The software estimates are flawed in much the same way as the pirated goods estimates.  But it really doesn’t matter, because the total estimated cost of IP theft is almost entirely driven by the third category (trade secret theft), especially when you consider that the first two categories use methods that exaggerate the costs by at least an order of magnitude—indeed it’s not obvious that there are any net costs at all.  So where does the trade secret data come from?  The report doesn’t provide any methodology, merely citing a PriceWaterhouseCoopers study.  The following graph summarizes the methods employed by PWC:

PWC have done the following.  They start with the admission that they have no idea how to directly estimate the losses from trade secret theft.  Instead, they look at 8 other types of (mostly) illegal activities, which are also extremely difficult to measure.  Then they notice that 4 of these 8 activities involve between 1% and 3% of GDP.

Where to begin?

1.  Why assume that the estimates for other activities are accurate?

2. Why assume that the loss from trade secret theft is typical of other activities?

3.  If this is indeed the right method, then why not include other illegal sectors, such as the smuggling of tropical birds into the US?  Why just pick the large activities?

4.  Why assume that the size of an illegal activity like drug smuggling is a proxy for the cost of that activity to society?

5.  Why include R&D, which is 2.7% of GDP?  It’s not an illegal activity.  And does it seem plausible that the losses from trade secret theft exceed the total amount spent on R&D? But the high end of their range is 3% of GDP. As an analogy, is it plausible that losses from shoplifting exceed total revenue for retail sales?

6.  Notice that the most similar activity (software piracy) has a far smaller cost than the other 7.

The bottom line is that there is no there there.  No matter where you look, there is no reliable estimate of the cost of IP theft to the US (much less the cost in foregone utility to the entire world.)

In fairness, it’s quite plausible that the losses in this area are pretty large in dollar terms, certainly in the billions, or even tens of billions.  But that view is not based on any of these near worthless studies; rather it’s my intuition given two facts:

1. Information is a more and more central part of the global economy.  Commodities are an increasingly small share of the economy.

2. Information is easy to steal, and can be almost costlessly replicated.

Given these facts, IP theft will almost inevitably be an increasing problem.  Not just with China, but with India and many other countries as well. (Recall the slogan, “information wants to be free”) For fans of IP protection, this theft is a valid concern.

But this perspective also suggests that as with drug smuggling, the problem will be almost impossible to stop.  Consider the 2017 US government report’s discussion of China’s new communication satellite technology:

Perhaps the most recent case is China’s development of the Micius satellite, considered the world’s first quantum communications satellite, which China launched into orbit in 2016. Scientists at national laboratories and academic institutions around the world have been working on developing technology based on quantum mechanics to create a communications system that is considered to be completely secure from penetration. China is eager to develop this technology to protect its own communications from potential adversaries like the United States. However, perhaps ironically, China was able to develop quantum communications technology ahead of its rivals by incorporating their research findings. In an interview with the Wall Street Journal, Pan Jianwei, the physicist leading the project, was quoted saying, “We’ve taken all the good technology from labs around the world, absorbed it and brought it back.” This may be just an innocent quip about how scientists share their basic research findings with one another across borders. However, it has been demonstrated that the Chinese government systematically collects information and secrets from abroad to further its technology development goals, as illustrated by the cases discussed above.

This anecdote reveals more than the US government might have intended.  It suggests that it will be almost impossible to prevent scientific and technical information from rapidly spreading around the world.  The US should still crack down on IP thieves on a case-by-case basis, when they are caught, but we should not assume that this “war” is any more winnable than the drug war. Our pharma companies have basically accepted the fact that they are innovating for the high price American market, and the Europeans and Canadians will (legally) free ride.  Our other companies need to accept that there will be a lot of (illegal) free riding in IP intensive products, and there’s only so much we can do about it when it occurs in other countries.  Starting a trade war is a particularly inappropriate response.

I’m going to end with a comment left by Dallas Weaver after an earlier post on this topic:

You can divide IP into “real deep knowledge based IP” such as detailed scientific inventions and “fluff stuff” like “mickey mouse” or the business methods or “single click” IP.   The latter is obvious and easy to “borrow” and the owner could and do object.  I don’t care that much as the outcome is usually just rent-seeking with little contribution to humanity.

However, in the case of “real IP”, if you don’t have the knowledge base you can’t even steal it.   You could give the detailed IP for the F-35 to all the countries in the world and only a very few could, even, in theory, make the plane.    You can’t steal what you don’t understand.

If you have the ability to steal and utilize “real IP”, you also have the ability to create your own inventions.   Why copy the obsolete designs of others rather than creating improvements.   If you copy, you are always behind the curve.

Modern technology is so complex that the associated IP is all about people who understand the technology and China produces more STEM graduates in two weeks than we do in a year.  Guess who will win the real IP game?   Meanwhile, we demand that the new Ph.D. STEM graduates from our universities who are from China go home after graduation.

Most of the discussions about IP theft are by people who don’t have a strong enough STEM background to really understand what they are talking about.  Even Tyler with his deep understanding of economics doesn’t understand that the “tree of knowledge” is producing more fruit than ever in history, but to reach it requires “standing on the shoulders of giants”.

To even be able to stand on the shoulder of giants requires being able to read primary references in the area and I would like to drop the challenge to the readers to pick up the Reports section of Science Magazine (AAAS Journal) and see how many refereed articles they could read and understand.   When you stand on these shoulders you can see tons of what appears from your lofty perspective “low hanging fruit” for the picking.

PS.  I’m pretty sure that Tyler does understand the amazing fruits produced by the “tree of knowledge”, but I thought his comment made some interesting points.

PPS. I have a related post at Econlog.

I occasionally get comments suggesting that the Fed is somehow “holding down growth” in the economy.  That makes me wonder if the Fed has some sort of magic dust, capable of holding down growth without leaving a trace.  So let’s look at some of the traces the Fed has actually left.

Before doing so, recall that some conservative economists claim that the Fed has no first order impact on growth, because money is neutral.  I don’t agree, and neither do those who claim the Fed is holding down growth.

More likely, wages and prices are sticky in the short run.  The Fed can temporarily boost growth by increasing the rate of inflation, and thereby reducing the unemployment rate.  I’ve argued that we should look at NGDP growth rather than inflation, which can be distorted by supply shocks.

So let’s look at the data:

1.  Over the past two years the unemployment rate has fallen all the way to 3.7%, one of the lowest rates in modern history.  Other employment indicators have also been quite strong, with employment rising far faster than the working age population.

2.  Over the last two years, inflation has risen up to around 2%, roughly the Fed’s target.

3.  Most importantly in my view, the rate of NGDP growth has been increasing rapidly, from well below trend to above trend:

One can’t just argue that the Fed is holding down growth, without providing any evidence.  All the evidence points in the other direction, that the Fed has been juicing the economy.  Perhaps that will change in the future, time will tell.  But they have certainly not been holding down growth in the recent past, precisely because they haven’t been taking the steps that would be necessary to hold down growth—slowing NGDP and inflation in order to raise the unemployment rate.

Some will inevitably argue that there has been a supply-side “miracle” that’s hard to see because the Fed refuses to “let the economy rip”.  Supply-side miracles leave very specific tracks in the data, such as a slowdown in inflation.  But inflation has been rising.  And of course that doesn’t explain the strong NGDP data.

I encourage people not to go with their gut instincts, rather to look very closely at the actual data and think about what it means.  You can’t just make up any old story and be expected to be taken seriously.

Everything in this post is past tense.  Obviously the Fed may start holding down growth in the future, and if so we’d see the unemployment rate rise to a level above the natural rate.  I can’t rule out that possibility, indeed I’d expect it to occur at some point in the next decade.  But as of now it’s clear that they have not been holding down growth, and indeed have been stimulating the economy.  In fairness, that stimulus was appropriate, as for years we’ve been running well below the Fed’s 2% inflation target.

PS.  At the risk of saying “I told you so”, I’d like to remind readers of a half dozen posts I did around 2016-17, where I said I was not convinced that the Fed was trying to keep inflation below 2%, and that it might have been a mistake on their part.  I pointed out that the consensus of private sector forecasters had also erred, not just the Fed.  I said I’d defer judgment for another year to see if they could make further progress on inflation.  And now we are at 2% inflation, just as the consensus of private sector forecasters and the Fed predicted.  I’m willing to stop deferring judgment and come to a conclusion.  I conclude the Fed really does want 2% inflation, which is the average inflation rate since 1990 and also the 30-year TIPS spread.

PPS.  After a recent post on neoliberalism, some questioned my definition of the term.  I was mostly responding to how others use the term.  In other words:

1. Most intellectuals describe the current economic system in most developed countries as neoliberal.

2. Lots of populists on the left and the right have been running against that regime.

3.  And yet the regime seems hard to dislodge, in any significant way.

Again, I was responding to the way that others define neoliberalism (usually with a negative connotation).  Among opponents of neoliberalism, there is enormous surprise and disappointment that so little has changed over the past ten years.  I see that disappointment frequently expressed in essays on the topic.  They expected the aftermath of the Great Recession to produce the sort of change we saw during and after the Great Depression.  It didn’t happen.

PPPS.  China bleg:  I’m looking for empirical studies of Chinese theft of American intellectual property.  Any links would be appreciated.

Most foreign policy experts in the US, and the overwhelming majority of foreign countries, believe the Iran nuclear deal was a good thing, and that Trump made a mistake in walking away from the agreement.  But it’s worse than that.  Not only does the US no longer wish to participate in this agreement, but we insist that the rest of the world follow our wishes.

And now the US has arrested a top Chinese business executive for violating our misguided Iran sanctions policy.  News of the arrest caused stock prices to plunge all over the world, as investors expected the US-China trade war to get worse.  And the war may not be confined to China, as there is talk of putting tariffs on cars made in Europe and Japan.  Let’s hope the administration comes to its senses, before things get out of control.  Everyone loses from trade wars.

I still expect neoliberalism to win out in the long run (see my previous post), as the alternative is too dangerous.  But right now the Trump administration is playing with fire.

In recent posts here and at Econlog I’ve been discussing how the US should respond to Chinese misbehavior.  How should the rest of the world respond when the US becomes a rogue nation?  That’s a difficult question.

PS.  The 10-year yield still exceeds the 3-month yield by 45 basis points.  Based on an empirical study by Arturo Estrella and Frederic Mishkin, the probability of recession within 12 months is now about 15%:

Fed funds futures also point to a slowdown but no recession.  A slowdown doesn’t concern me because recent growth has been unsustainable—partly a sugar high from fast NGDP growth, and partly a one-time response to the corporate tax cut.

BTW, fed funds futures markets are currently predicting a fed funds rate of 2.55% in July 2020.  If that outcome occurs, the yield curve will still likely have a positive slope, and we probably won’t be in recession.

Nonetheless, the probability of recession is certainly a bit higher than last week.  There is reason to be concerned.

If I were the Fed, I’d probably raise rates this month (by 20 basis points), but also announce that no further rate increases are expected, unless the economy moves in an unanticipated direction.  But then if I were the Fed, I wouldn’t even have this policy regime in the first place.  I’d end IOR and use the monetary base (which would then be 98% currency) as my policy instrument.  I’d use 3.5% and 4.5% futures contract “guardrails”, to help steer the base.

Monetary policy should be about money and NGDP expectations, not about banking and finance and interest rates and inflation. K.I.S.S.

This post is loosely related to themes such as “The Great Stagnation” and “The Complacent Class”, to cite two recent books by Tyler Cowen.  Also loosely related is Scott Alexander’s epic blog post Meditations on Moloch.  And perhaps “The End of History”.

As time goes by, neoliberalism seems more and more like a immovable force.

Think about it.  The Great Recession seemed to completely discredit neoliberalism.  All the most fashionable intellectuals on the left and the right say so.  Entire governments on the left (Syriza), center (Five Star), and right (Trump) are elected to replace neoliberalism with something better.  Socialism, nationalism, whatever.  The British vote to leave the EU.

But neoliberalism is like the zombie that cannot be killed.  Syriza can’t do much of anything, and Trump’s only major achievement is an ultra-neoliberal corporate tax cut.  Here’s today’s FT:

In practice, Mr Grieve himself has said another referendum is the “only” route to stopping Brexit.  What the advocate-general’s opinion does is open the legal path. Indeed, on Tuesday analysts at JPMorgan doubled their estimate of the possibility of “no Brexit” to 40 per cent — while halving the probability of “no-deal” in early 2019 to 10 per cent.

Are hardline Brexiters worried that no-deal is off the table?

Not outwardly. “It’s full steam ahead,” said one pro-Brexit Tory, who predicted the government would lose Tuesday’s meaningful vote by a margin of 40.

However, supporters of Mrs May’s deal argue that Brexiters have trapped themselves and that parliament, in which a majority favours soft Brexit or no Brexit, is now in control.

“They’ve completely messed it up,” said one Tory MP. “I’m coming to the conclusion that they wanted the [2016 Brexit] referendum only as a way of protesting.”

What!?!?!  There’s still a 40% chance that Bryan will win his bet?  That’s crazy.  It’s as if NIMBYism also applies to entire policy regimes.  No new economic policy regimes in my backyard!  The British public is like that accountant in the Monty Python routine.  They wanted DRAMATIC CHANGE, just so long as nothing in their life actually, you know, changes.  “We want to be like Singapore!” . . .  “Well, maybe not, perhaps we could first try Norway.” . . .  “Er, don’t rush me.”

I never got the Trump phenomenon until I figured this out.  Re-read the last six words of the FT quotation.

I’m a neoliberal, and thus am thrilled with this state of affairs.  But I’m uneasy because I don’t understand why I’m winning.  So what gives—why is neoliberalism so hard to kill?  I await an explanation from my commenters.

PS.  Here’s what happened in 1968, fifty years ago.  First men to orbit the moon.  The Tet offensive in Vietnam.  Two assassinations of US political leaders.  Revolutionary activity in countries all over the world (Mexico, China, Czechoslovakia, France, Germany, etc., etc.) Race riots and student riots in the US. The 747 airplane launched.  Two thousand miles of interstate highway are built—in one year.  Friedman’s natural rate hypothesis. The ATM, 911 lines, and air bags invented. Kubrick’s “2001” released. The White album and Beggar’s Banquet. Fifty years later we have what?  What happened this year? The stupid fight over Kavanaugh?  You might argue that there are all sorts of cool technological developments occurring now.  OK, but consider this:

[Engelbart] went on to considerably more significant accomplishments, including the computer mouse, the graphical computer interface, text editing, hypertext, networked computers, e-mail, and videoconferencing, all of which he demonstrated in a legendary “mother of all demos” in San Francisco in 1968.

That’s from a book entitled “How to Change Your Mind”.  Which modern equivalent of Doug Engelbart came up with that many neat ideas this year?

I miss 1968.

I’m bored.