Here’s Tyler Cowen in Bloomberg:

What about trade and immigration, two issues dear to the heart of President Donald Trump? In those areas I expect to see surprisingly few changes. Fears about China are bipartisan, and with his quest for a market-boosting trade agreement with China, Trump is turning out to be a trade dove, relatively speaking. Meanwhile, on NAFTA, the Democratic-controlled House of Representatives is holding up the renegotiated agreement.

Most important, I don’t see the major Democratic presidential candidates making a big public push for Trans-Pacific Partnership, the World Trade Organization or any other trade agreements. The era of greater skepticism about trade and globalization is probably here to stay, and it counts as one of Trump’s ideological triumphs.

And immigration? Well, I don’t expect our next president to separate arriving children from their parents. But neither do I expect a big breakthrough on immigration policy. Are any of the leading Democratic candidates putting forward a grand immigration plan for public debate? No, even though in other areas they are quite willing to think big. They realize that in terms of intensity, America is moving to the right on immigration — as it did a century ago, leading up to the 1920s restrictions. Count that as at least a half-triumph for Trump.

I don’t think this is right; I don’t believe Trump’s had any ideological triumph’s—just losses. Although I don’t intend to contest the view that Trump personally has been successful with these topics as issues. He won in 2016 and might win in 2020. But in two other areas, one obvious and one less obvious, I think he’s failed. Start with the obvious; this is from today’s news:

“But illegal immigration is simply spiraling out of control and threatening public safety and national security.”

Someone suffering TDS? No, the official in charge of Trump’s immigration enforcement program. Trump’s more than half way through his term, and he’s completely failed to do anything about the single most important issue in his campaign.

I also disagree with Tyler’s comparison of the mood in America today with the 1920s, where there was fairly broad support for restricting immigration. I get that Tyler notes the “intensity” of the anti-immigration crowd. Indeed he has to, as the polls clearly show increasing support for immigration. (I doubt that was the case in the 1920s.) But I think it’s more complicated than that, with three groups involved, not just two.

You have 3% to 5% of the US population directly impacted by immigration crackdowns, and they intensely oppose Trump. Another 30% are fairly strongly opposed to immigration, for nationalistic or economic reasons. And then there are about 65% of people who don’t pay a lot of attention to the issue, but are becoming increasingly sympathetic to immigrants. Importantly for the future, the young are especially strongly moving in favor of immigration.

Does this sound familiar? How about 3% to 5% of Americans are gays who intensely support gay marriage, 30% strongly oppose it for religious/cultural reasons, and 65% who don’t give it much thought, but are increasingly in favor? How’d that issue play out over time? Gays benefited from a media that increasingly portrayed them sympathetically as real people, not caricatures. Isn’t the same beginning to occur with illegal immigrants?

Where Trump may win is the politics of immigration, even while losing on policy. While he ran in 2016 as a dealmaker who could get things done, a man who would force Congress to do his bidding, we’ve discovered he’s actually an appallingly incompetent dealmaker. Now he portrays himself as a victim of faceless “elites”. His supporters lap this up, so it may not matter if Trump fails to enact Trumpism; he’s not really the President, just the “Troll in Chief”. He might be re-elected on that basis, with the help of the hapless Dems. (I think it’s a toss-up.)

Trump is also losing badly on the single most important trade issue in his campaign–the deficit. Here’s a set of Bloomberg stories that appeared side by side, and caught my eye:

Hmmm, I wonder if there is any relationship? The trade deficit article had this observation:

The strong dollar matters because it has led to near-record deficits in manufactured goods and non-oil goods that are being masked by increases in exports of oil and services, [Robert] Scott said. To his mind that means the U.S.’s trade balance is worse than even the official data reflects. “There’s a lot going on below the surface here,’’ he said.

It is rather striking that the trade deficit is getting larger just as the fracking boom is dramatically improving our net export position in oil.

Tyler argues that the establishment has adopted Trump’s trade skepticism, while simultaneously arguing that Trump is actually somewhat of a trade dove. I suspect this is an example of Tyler using a bit of hyperbole to be provocative and contrarian. OK, I’ll take the bait.

The establishment has always held a “pragmatic” view of trade, where free trade was good as long as other countries played fair. (In contrast, economists believe free trade is the best policy even when other countries don’t play fair.) So I don’t think the establishment has moved in Trump’s direction, it’s always been right where it is now. It’s been hard to sell the Dems on free trade ever since the 1960s.

On the other hand, Democratic voters are moving very strongly in the free trade direction. You might argue that a steelworker in Ohio who votes for Sherrod Brown has more “intense” views on trade than a barista in San Francisco who likes imported coffee. But there’s one big problem with that. Steelworkers in Ohio are no longer Democrats, and the future of the Democratic Party is obviously not people like Sherrod Brown. Heck, I remember lots of Dems like him when I was a teenager. He’s a dinosaur. The barista in San Francisco is the future of the Democrats, which will eventually become the pro-immigration, pro-trade party.

[In the UK, the older Labour leaders (Corbyn) are skeptical of free trade, but the younger voters are super supportive of the EU. BTW, watch the Brexit end-game closely; just as Thatcher predicted Reagan, Brexit predicted Trump.]

I’m not at all optimistic about the politics of America. The 2020 election is likely to feature an awful Democrat and an even worse Republican. The budget situation is bad and will get worse. But I am pretty optimistic about trade and immigration, as I think Trump’s clearly lost on both issues and things will soon swing our way. I expect the Trump people to eventually admit that the trade deficit doesn’t matter, and indeed is often a sign of a prosperous economy. Trump cares about “winning ” more than he cares about ideology. That’s why he’s tough on Iran and soft on N. Korea; he wants to undo whatever Obama did. If Obama had done the deal with Korea, not Iran, Trump’s positions would be reversed.

I recently happened to overhear some of the most moronic talk radio I’ve ever encountered. I used to occasionally listen to Rush in the early 1990s, and he often sounded fairly intelligent, at least compared to the current right wing nuts on the radio. One tirade that caught my attention was a guy saying something like “how dare they impeach Trump, he’s been so successful”, and then cited his trade deals. No, I’m not making that up—his trade deals were cited as a policy success. (It may have been Sean Hannity, I’m not sure.) So while in substantive terms Trump has failed on trade, his supporters seem happy to accept hollow trade deals that entrench the neoliberal leviathan ever more deeply into the global economy.

And that’s really good news. Imagine if his supporters actually cared about seeing the alt-right agenda put into place. Steve Bannon must be feeling pretty lonely right now.

There are lots of macro models out there: old monetarism, market monetarism, old Keynesianism, new Keynesianism, supply-side economics, Fiscal Theory of the Price Level, NeoFisherism, Austrian, Real Business Cycle, etc., etc. People who believe in one tend to view the others as being at least partly wrong. But where they disagree, it’s usually possible to pin down some specific points of disagreement.

MMT is not like that.

In his Twitter account, Paul Krugman again tries to show what’s wrong with MMT, by pointing to a specific example of how very little of the national debt is financed by printing money.

I’ve made similar arguments on a number of occasions, as has Nick Rowe and many other people. But I’m increasingly coming to the view that none of this will work. MMT has constructed such a bizarre, illogical, convoluted way of thinking about macro that it’s almost impervious to attack. Krugman’s right that a reasonable person would view his evidence as demolishing their claims about fiscal policy—but it won’t be seen that way.

As far as I can tell, MMT created this monster by combining the following:

1. Bizarre (and unconventional) definitions of terms.
2. The tendency to confuse accounting relationships with causal relationships.
3. Being wrong about basic questions of causality.

If it was just one problem, it would be easy to figure out how to attack the model. Thus Krugman is trying to present evidence that they are wrong about certain causal relationships. But because they define terms differently than the rest of us, this evidence will have no effect on their views.

For instance, normal economists would think about government spending being financed by a mixture of taxes, debt and money creation. AFAIK, MMTers think spending is paid for with money creation. When they describe their views in detail, however, it looks like they believe that spending is paid for with taxes, debt and money creation, not just money creation. They simply characterize that fact differently. So how to attack this view?

If you say, “You’re wrong, spending is paid for with some mix of money creation, debt and taxes,” they’ll respond, “no, it’s just paid for by money creation.”

If you bring to bear all sorts of evidence that implies that spending is paid for by all three, they’ll respond, “We know all that, it’s in our model. Taxes are used to drain money from the system to prevent inflation.”

I’m struggling to think of an analogy from everyday life—perhaps someone can help me. But try this:

I ask my friend, “Did you pay for that new car out of your savings, or did you have to borrow the money? And your friend responds, “Neither, I paid for it with a check”. You say, “I get that, but where did the money for the check come from?” And the conversation keeps going around in circles.

So one problem is their weird definitions, insisting that government spending creates money that pays for the spending, which is based (AFAIK) on a misinterpretation of the implications of an accounting relationship involving the Treasury account on the Fed’s balance sheet.

But there are substantive problems too. They seem to not understand that when nominal rates are positive, high-powered money is several orders of magnitude more inflationary than T-securities. (High-powered money is zero interest base money in a positive interest rate environment). They don’t seem to understand the Fisher effect, and instead assume that flooding the economy with base money drives interest rates to zero. While it’s true that you can flood the economy with high-powered money when the equilibrium nominal rate is zero, if it isn’t zero then you’ll create lots of inflation and thus much higher interest rates—as the UK discovered in the 1970s. Thus here is Stephanie Kelton, ignoring the Fisher effect:

It helps to break the argument into a two-part thought experiment. First, think about what happens if the government is running huge budget deficits. As I explained, these deficits would result in a massive injection of reserves into the banking system. Unless something is done to prevent it, banks will scramble to offload the excess funds in the overnight market. But with massive supply and no demand for these balances, the overnight bid heads toward zero.

If you foolishly follow the “As I explained” link, you will find no explanation at all, merely a repetition of the bizarre claim that deficits lead to a massive injection of new reserves. (I think she is assuming a money financed deficit, but who knows?) And here is Kelton misrepresenting the views of Krugman:

He called our nation’s finances “a fiscal train wreck” and confessed, “I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.”

He insisted that the U.S. faces, “a looming fiscal crisis,” adding, “the only question now is when foreign investors, who have financed our deficits so far, will decide to pull the plug.”

He mused about the potential for accelerating inflation under quantitative easing, writing that the Fed is, “printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so!”

He asked, “couldn’t America still end up like Greece?” answering, “Yes, of course. If investors decide we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.”

And he puzzled over the different interest rate environments in Japan and Italy, asking, “Why are the interest rates on Italian and Japanese debt so different?” confessing, “I actually don’t have a firm view. But it seems to be an important puzzle to solve.”

No economist is going to get everything right. But the odds of getting things right improve dramatically when you’re working with a macro framework that doesn’t lead you astray. 

I have often criticized Krugman, but I don’t think I have ever misrepresented his views so egregiously. Look how the QE quotation is taken out of context. Implying that Krugman was a QE/inflation scaremonger doesn’t even pass the laugh test. He’s probably the world’s most famous QE skeptic. He was merely pointing out that inflation was the goal of QE. Perhaps he thought it would produce a tiny amount of inflation, but it did!

So don’t tell me she’s just quoting Krugman. Her snarky “No economist is going to get everything right” tips her hand. She’s accusing Krugman of making lots of false predictions, in areas where MMT is “correct”.

MMTers would say that Krugman doesn’t understand the distinction between Italy using the euro and Japan having its own currency (with zero default risk.) In fact, it’s the MMTers that don’t understand that having your own currency doesn’t guarantee low rates if investors believe that the only way you’ll be able to handle your debt is via inflation.

FWIW, I suspect one difference is that Japan has far lower government spending than Italy, and thus more room (fiscal space) to raise taxes before relying on money creation. And Japan has less to worry about in terms of their best people moving to better run eurozone countries. But having fiat money is no cure-all. The UK discovered this in the late 1970s, when the IMF bailed them out. So Krugman’s puzzlement was not completely unjustified.

The quotes provided by Kelton don’t provide specific dates, and thus one can’t really say that Krugman was “wrong”. In fairness to Kelton, Krugman probably did think the day of reckoning was coming sooner than it has, but then during the 1990s very few people predicted the super low interest rates of the post-2008 period. That sort of mistake is hardly indicative of a flawed model.

PS. In the US, I expect the day of reckoning to take the form of higher taxes, not high interest rates/high inflation.

Arnold Kling has a new post discussing the issue of wages and productivity. He argues that productivity is increasingly difficult to measure:

We are not in a GDP factory. As the share of GDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where real output and the quality of labor input are extremely difficult to measure.

This is also my view, if GDP means RGDP (which, in context, it clearly does.) Indeed Kling and I are probably out on the extreme, in terms of being especially skeptical (relative to other economists) of the usefulness of measures of RGDP, real productivity, the price level, etc.

Over at Econlog, I argue that while the problem of measuring real productivity is very real, it’s largely unrelated to the so-called “wage decoupling issue—which is mostly about the gap between nominal wages and nominal productivity. Fortunately, errors in measuring real productivity have no impact on measures of nominal productivity.

So while I entirely agree with the Kling quotation above, I also strongly believe the following to be true (please read carefully):

We are in an NGDP factory. As the share of NGDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where nominal output and the quantity of labor input are relatively easy to measure.

So why is this second claim so different from the Kling quotation? Because RGDP and NGDP are radically different concepts, almost unrelated. Thus we can say with some confidence that the nominal health care industry has expanded from (say) $36 billion to $3.6 trillion since the mid-1960s, but I have absolutely no idea how much real health care output has grown, as I don’t even know what the output of the health care industry is. What are they trying to produce? (Recall that Robin Hanson says that health care is not about health.)

And even if health care is about health, how much of the improvement in health is due to health care, and how much is due to less smoking, better nutrition, better sanitation, etc.

In many ways, NGDP is not a very interesting variable (think Zimbabwe), except when it shows short run volatility. In that case, it destabilizes labor and financial markets, because there are lots of nominal wage and debt contracts. In those situations the “NGDP factory” is a useful concept, even though NGDP is also measured imperfectly. But NGDP is at least an order of magnitude more clearly defined and more easily measured than RGDP.

I do occasionally refer to RGDP, as despite its flaws it tells us something about business cycles and international comparisons. A sudden drop in RGDP usually indicates a recession, as all those imponderables associated with measuring “real heath care” don’t change much from one year to the next. Think “law of large numbers in BEA errors”. The BEA bureaucrats are making similar errors, one year after another. Thus it’s a problem if measured RGDP suddenly falls by 5%, despite the many flaws in RGDP data.

As far as international comparisons, a country with a $50,000 per capita GDP is not necessarily richer than one with a $45,000 per capita GDP, but it is almost certainly richer than a country with a $5000 per capita GDP. So RGDP has some value, if used with care.

Most importantly, don’t ask any statistic to do more than it can.

Over at Econlog, I have a new post pushing back against the view that inflation is caused by “global factors” such as economic slack. I point out that the UK and Switzerland have faced the same global factors since 1971, but have had vastly different inflation rates, due to vastly different monetary policies.

This confusion is actually a symptom of a deeper problem, the tendency of many economists and other pundits to view inflation as a sort of “real phenomenon.” At a fundamental level, inflation is nothing more than a change in the value of the medium of account, sort of like switching from using feet to using meters. It doesn’t change the size of objects being measured. People in Turkey and Argentina have adjusted to inflation that is higher than in India, and Indians have adjusted to inflation that is higher than in the UK, and the Brits have adjusted to inflation that is higher than in Switzerland.

In the 1980s, Americans easily adjusted to 4% inflation, as their wages rose faster than today. The economy was not “overheating”.

In the short run, unexpected changes in inflation can have real effects on output due to wage/price stickiness, nominal debt contracts, money illusion, etc. (It’s as if the size of the objects being measured changed as a result of switching from feet to meters.) The mistake many people make is to work backwards from these short run real effects and assume they actually cause the inflation (or deflation)!

No, no, no, a thousand times no! An overheating economy does not cause inflation. Economic growth is deflationary. Rather, higher than expected inflation can cause an economy to overheat. But you can also have high inflation without any overheating at all, indeed even with lots of “slack”.

Inflation is caused by monetary policy, and that monetary inflation might or might not have a wide range of real effects associated with it, depending on all sorts of contingencies. If I read that Argentina has 20% inflation, I don’t immediately think “overheating”, I think “printing money to pay the bills.”

Many New Keynesians rely on models where inflation is associated with some sort of overheating. In fairness, those models generally have some sort of natural rate component, and include expectations of inflation. They are still “reasoning from a price change”, and thus highly flawed, but at least they understand that money is neutral in the long run and that economic slack doesn’t explain long run changes in inflation.

Old Keynesian models are even worse (and AFAIK) this also applies to MMT. They simply assume that inflation is not a problem as along as there is economic slack. Milton Friedman once said that in 200 years we’d merely gone one derivative beyond Hume. Unlike the monetarists and New Keynesians, lots of pundits and economists still haven’t even incorporated the first derivative into their models.

And while looking at changes in inflation is better than looking at the absolute level of inflation, it’s still not good enough. It’s still reasoning from a price change. We need to focus on changes in NGDP growth, which may or may not have real effects, depending on all sorts of factors. But at least with a model of:

Monetary policy —> NGDP —> inflation/unemployment/RGDP

we are on the right track.

If you begin with:

Economic slack —> inflation/deflation

then you aren’t even on the right track.

PS. Consider the following scenario. During an economic recovery, RGDP grows as 3% as unemployment falls rapidly. Once full employment is reached, growth slows to 2% and unemployment stabilizes. A soft landing. Now assume NGDP grows at 5% throughout this entire period. What happens to inflation?

Inflation would rise from 2% to 3% once we had reach “full employment.” But this is NOT at case of strong growth pushing inflation higher, indeed in my example the rise in inflation was caused by a slowdown in economic growth (given the stable path of NGDP.)

This morning I read a post by noted MMTer Stephanie Kelton, which responded to some questions by Paul Krugman. I predicted that he’d be pulling out his hair, as her responses were a complete mess—as if she didn’t understand the simple questions he was asking. Here’s an excerpt from my Econlog post:

I can’t even imagine Krugman’s reaction to all this.  First of all, although she says “no” in answer to question #1, her explanation makes it quite clear that she is actually answering “yes”, especially when you combine the answers to questions #1 and #2.  Krugman is asking whether, assuming a given macroeconomic situation (including a given level of private spending), there is only one budget deficit consistent with full employment.  She clearly thinks the answer is yes.  So why does she answer “no”.  I suspect she doesn’t understand Krugman’s question (which is pretty straightforward.)

Now Krugman has responded and he’s every bit as frustrated as I expected. Here is his response to the first point I raised:

Her response to my first question totally misses the point; I was asking if *given private behavior* there’s a unique level of the deficit needed for full employment, and argued that there wasn’t. She just assumes that there is

And here’s how Krugman summarizes his twitter thread:

Sorry, but this is just a mess. Kelton’s response misrepresents standard macroeconomics, my own views, the effects of interest rates, and the process of money creation. Otherwise I guess it’s all fine. See what I mean about Calvinball? 6/

MMT desperately needs a spokesperson capable of conversing with economists like Paul Krugman, if they want to be taken seriously. When they give bizarre answers to serious questions from a highly respected economist on their side of the ideological spectrum, it’s a problem.

Not surprisingly, I think it’s perfectly fine to be heterodox, but first you need to understand orthodox.