Here’s the Financial Times:

A trip to Jerusalem has become almost compulsory for today’s ‘strongman’ leaders . . .

Israel is benefiting from the rise of a new generation of nationalist-populist political leaders — from Washington to Delhi, and from Budapest to Brasília — who ardently admire the Jewish state. This change in the international political atmosphere has created new breathing space for a country that has long feared international isolation and trade boycotts.

In one sense this is not surprising, as Israel’s current leader is highly unpatriotic, in a fashion similar to that of other leading nationalists. Just as Orban has a low opinion of Hungarian Roma, and Modi doesn’t like Muslim and Christian Indians, and Trump doesn’t like Americans from “shithole countries”, Netanyuhu doesn’t like Israelis who happen to be Arabs. Indeed his coalition government relies on the support of the Jewish Power group, who want to encourage Israeli Arabs to leave their own country. (Sort of like the way Trump himself doesn’t say and do the worst stuff, but frequently praises those who do. The art of the “dog whistle”.)

In another sense, however, this is all rather jarring, as one important theme of Jewish history is opposition to nationalism and support of liberal internationalism. Again, this long proud tradition is not surprising, given that throughout most of history Jews have been a minority targeted by nationalist politicians. That’s why these modern trends make my head spin:

Another leader who loves to stress his friendship with Mr Netanyahu is Jair Bolsonaro, the new president of Brazil, who is currently visiting Israel. . . .

Indeed, a trip to Israel has become almost a compulsory stop for a new generation of “strongman” leaders, who revel in defying liberal opinion. Last September, Rodrigo Duterte, the leader of the Philippines, came to Jerusalem and told Mr Netanyahu: “We have the same passion for human beings” — a double-edged compliment, given that Mr Duterte is under investigation by the International Criminal Court for encouraging extrajudicial killings.

Another strongman cultivated by Mr Netanyahu is Viktor Orban, the prime minister of Hungary and champion of “illiberal democracy”, who visited Jerusalem last year. This relationship is controversial in Israel because Mr Orban launched a poster campaign in 2017 that used anti-Semitic imagery portraying George Soros, a Jewish philanthropist, as a puppet master intent on flooding Hungary with refugees. 

Today’s Israeli leaders pal around with foreign leaders who embrace torture, mass murder, and traditional anti-Semitic tropes.

Perhaps this shouldn’t surprise me. Progressives used to encourage white artists to add black characters to their work, they used to favor a color blind society, they used to oppose the prudery of the Victorian era, they used to favor free speech. Now they tell artists to stick to their own race, they oppose free speech, they consider advocacy of a color blind society to be racist, and they are the worst sort of prudes.

I guess we all just have to accept that, “the times they are a’changing”

But I don’t plan to change; I’ll go to my grave opposing identity politics.

PS. I wouldn’t vote for him, but in fairness to Netanyahu he is far better than Trump on economic policy–as I explain in this new Econlog post.

PPS. The FT has another story suggesting that British patriotism is being replaced with English nationalism.

PPPS. Just when we need a sound Democratic Party to defeat Trump in 2020, they begin to self-destruct:

Former President Barack Obama warned on Saturday that progressives risk creating a “circular firing squad” at a time when prospective presidential candidates are competing fiercely against one another to run against President Trump.

I hope I’m wrong, but right now the party looks like a slow motion traffic accident, playing out right before our eyes. Once again, Trump will benefit from the unpopularity of his opponents.

PPPPS. Don’t forget to order Bryan Caplan’s new book advocating open borders:

https://www.amazon.com/gp/product/1250316960/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=1250316960&linkCode=as2&tag=bryacaplwebp-20&linkId=1ed2cdfe4a1c0cd2a62e942a39f87b9d

George Selgin was interviewed on the BBC today and did an excellent job of explaining the unrealistic assumptions being made by proponents of the Green New Deal (GND). I encourage readers to listen to the interview (which also includes two other pundits.)

Here I’d like to put in my two cents worth, as proponents of this policy often muddle the issues with all sorts of distractions. First I’ll discuss paying for the GND in a financial sense and then in an opportunity cost sense.

In a financial sense, people often talk about paying for government spending with taxes, borrowing or money creation. They might as well talk about taxes, taxes, or taxes. After all, government debt is merely pushing taxes into the future, and money creation (seignorage) is a tax on money holders.

So let’s call seignorage “unconventional taxes” and all other taxes “conventional taxes”. In that case it’s a choice between current conventional taxes, future conventional taxes, and current and/or future unconventional taxes.

As a practical matter we can rule out unconventional taxes as a major source of funds for the GND. In the US we have a 2% inflation target, which doesn’t allow for much seignorage. Even if you doubled it to 4%—probably the highest sustainable rate that is politically feasible these days—the sums would still be far too small to make a difference, far below 1% of GDP.

This simplifies things. When you hear these debates and someone starts talking about the Fed monetizing the debt to pay for something big, you can just cover your ears and ignore everything being said until they get back to reality. That’s not to say the Fed cannot buy up lots of debt with interest bearing reserves. But interest bearing reserves are just another form of government debt, and don’t actually pay for anything. You only get significant seignorage from printing $100 bills—seignorage from the rest of high-powered money is trivial

So almost all of any major new program will be paid for with conventional taxes. A responsible government sets conventional tax rates at a level that minimizes deadweight losses over time. Since we already have a big deficit, and bad demographics will push spending even higher in the future, a responsible government will pay for any new spending program with higher current taxes (to minimize deadweight losses.) That’s not to say an irresponsible government (i.e. Trump) might not decide to pay for it with future taxes. But one way or another, new spending will be paid for with higher conventional taxes.

So what about the opportunity cost of extra spending? Might that be lower than expected due to slack in the economy? Might new spending boost economic growth and pay for itself? Unlikely, for three reasons. First, we are probably very close to the natural rate of output. Thus new spending on government programs will displace private spending (C+I).

Second, even if the economy still has slack, it’s very unlikely that it will still have slack two years from today, which is the soonest that the GND would be implemented. It’s already a decade since the Great Recession and wages and prices have probably adjusted by now. If a little bit of adjustment remains, then it’s likely to occur over the next two years.

And even if I’m wrong on both counts, there would still be very little multiplier effect, as the Fed also believes there is very little slack in the economy. They will offset any fiscal boost with tighter money, preventing any significant stimulative effect. (That’s true even if Moore and Cain are added to the FOMC—they are only 2 votes out of 12. And given their history, will they vote to bail out a bunch of socialists in 2021?)

Bottom line: Forget all the MMT hocus-pocus. Any major new spending program will be paid for with conventional taxes, preferably right now. And the opportunity cost will be lower private spending. That’s not to say that all proposals for new government spending are unjustified. But in the case of global warming we don’t need more spending; we need more carbon taxes. K.I.S.S.

. . . that the Fed was correct in raising rates this past December.

And that the Fed should cut interest rates later this year?

Most people have an agenda, hawkish or dovish. I’m not a hawk or a dove; I want stable monetary policy. But interest rates are not monetary policy; they are one of the effects of monetary policy. A stable monetary policy will feature interest rates following a path that looks fairly random, rising and falling with unexpected changes in inflation and growth.

The US economy was quite strong last year, and is widely expected to be a bit weaker this year. That suggests that the optimal interest rate at the end of last year might have been a bit higher than the optimal rate in 2017, but also a bit higher than the optimal rate in 2020. Rates should fluctuate while NGDP growth should be stable.

Of course the Fed actually targets both inflation and employment, not just inflation. Most private sector forecasts call for slightly below 2% inflation this year and slightly above normal employment rates this years (relative to the Fed’s estimate of the natural rate.) Overall, policy seems pretty close to being on target.

When the Fed raised rates in December, I did not criticize the decision. But I did criticize their December decision to signal several more rate increases this year. Since then, the Fed has come around to the market view that further rate increases are not needed.

You may wonder why I favor a rate cut later this year. It’s partly because the fed funds futures market forecasts a rate cut. But the market forecast is not enough, as MMs care about market forecasts of the goal variables more than market forecasts of the policy instrument. More precisely, MMs care about the market forecast of the instrument setting expected to lead to on-target policy goals (inflation, NGDP, etc.)

Because markets continue to forecast slightly below 2% inflation, even as the economy slows, the market forecast of an interest rate cut should be taken as evidence that a rate cut is probably needed at some point this year. If the market were forecasting a rate cut combined with 3% inflation, then I would not blindly adopt the market forecast as my own policy preference.

Again, interest rates are not monetary policy; NGDP growth expectations are monetary policy.

PS. Today’s new unemployment claims report is insanely low (202,000), underscoring that the labor market is still really strong. I doubt that there’ll be a recession this year.

Let’s assume that Jeb Bush wrapped up the 2016 GOP nomination after a spirited contest with Trump, who ran a campaign focused on ending the trade deficit and stopping illegal immigration. Jeb is elected in the fall and it is widely seen as George Bush’s 3rd term. Jeb goes on to repeat all the mistakes of his brother:

1.Like his brother, Jeb enacts a big tax cut that increases the budget deficit. Just as in the early 2000s, the deficit sucks in foreign savings, ballooning the trade deficit. But Jeb doesn’t care about trade deficits, he’s a supply-sider—a free trader, not a mercantilist.

2. Just as his brother botched Katrina, Jeb’s handling of the Puerto Rican hurricane is extraordinarily incompetent. Thousands die as a result, and the electrical system is down for months. Jeb benefits from media fatigue as, unlike with Katrina, the media mostly ignores the scandal.

3. The tax cuts spur faster economic growth, which creates a strong labor market. As in the late 1990s and 2004-06, the strong labor market draws in many more illegal immigrants. Congress offers to appropriate funds to build a wall on the border, if Bush is willing to compromise on immigration reform. But Bush doesn’t want a wall, and refuses to compromise with Congress. Hence no wall is built. The following graph shows arrests at the border, which white nationalists view as the best metric for the pace of illegal immigration:

By February 2019, illegal immigration was out of control with 76,103 detentions, twice the normal levels. Then it got even worse:

“This is the worst crisis the Border Patrol has ever faced in the history of the Border Patrol and we’re going back to 1924,” Judd told WMAL radio host Vince Coglianese.“In my 21-year career as a Border Patrol agent, I’ve never seen it like this and I’ve worked in the busiest locations. . . . In the history of the Border Patrol it’s never been like this before. This is the worst it’s ever been and if we don’t do something it’s going to continue to get worse.”

Judd’s comments come after the Department of Homeland Security announced that there were 100,000 apprehensions at the southern border in the month of March and 76,000 in February. The numbers for both months were the highest in ten years.

The 100,000 figure for March was literally “off the charts”, and suggested a catastrophic increase in illegal immigration. Jeb seemed unconcerned, assuring the public that this was a sign that his pro-growth policies were working—more and more people wanted to live in an America that was finally “great again”, after the sluggish Obama years.

But GOP voters were not placated by these bland assurances, and by 2020 the white nationalists had taken over the party, with their protectionist, anti-immigration policy agenda. They decide that they don’t want a “great America”, as a great America will be an increasingly populous and cosmopolitan America that is full of immigrants, and also an America that replaces manufacturing with services and high tech. The white nationalists that take over the GOP abandon their support for capitalism.

Of course this is just a fantasy. It didn’t happen.

Or did it?

PS. I recently noted that the Mueller report was a win for Trump. But I was laughed when I also mentioned that we might want to look at the full Mueller report before reaching a final conclusion. Now people on the Mueller team say Attorney General Barr misrepresented their findings. Why am I not surprised?

PPS. Watch commenters say that we can trust the Mueller report, but not anything that the Mueller team says about their report.

PPPS. The same commenters who told me “at least Trump is picking distinguished economists to serve on the Federal Reserve Board.” File the following under “not from The Onion“:

Trump plans to announce his selection very soon, said three people, who asked not be identified discussing the nomination because it hasn’t been announced. Cain would fill one of two open seats on the board; the president plans to name Stephen Moore, a visiting fellow at the Heritage Foundation and a long-time Trump supporter, for the other.

This is how banana republics operate, as I told you all two years ago.

John Cochrane has a very long and interesting post, which advocates that the Fed target interest rates. I respectfully disagree.

Here’s Cochrane:

But money has disappeared from more recent economic thinking. My preferred model of the world (fiscal theory of monetary policy)  has an interest rate target, which sets expected inflation, fiscal theory which sets unexpected inflation, and money is not needed.  Conventional academic wisdom uses new-Keynesian models with `active’ interest rate rules to produce determinacy. Older-school ISLM style models, which are still used by the Fed and capture  completely the verbal explanations Fed officials offer for monetary policy, also are based entirely on interest rate targets.

I recall that Cochrane favors a NeoFisherian model of interest rates and monetary policy, which suggests that a lower interest rate peg will lead to lower inflation. But central banks have the opposite view, that lowering interest rates will raise inflation.

That doesn’t reassure me. It’s as if the designer of a bus insists that turning the steering wheel to the right makes the bus go to the right, while the actual drivers of the bus believe that turning the wheel to the right makes the bus go left. What could go wrong?

Even worse, I believe that turning the wheel to the right sometimes makes the bus go right and sometimes makes the bus go left. I’d prefer a different steering mechanism—one that wouldn’t be misused, causing NGDP to plunge 8% below trend in 2008-09.

I don’t think Friedman would be happy, as he might say inflation happens with long and variable lags, and the money demand shift happens before you can see the inflation. But Friedman is no longer with us, and doesn’t get the chance to modify his views with the evidence that inflation has ended under interest rate targets, and the amazing period of the zero bound, which turns on its head the experience of 1940s and 1950s interest rate pegs that so influenced him.

Friedman died in 2006. I don’t see anything that has happened in the past 13 years that would have surprised Friedman. He lived through long periods of the US being at the zero bound in the 1930s and 1940s, and also the Japanese experience of the late 1990s and early 2000s. We know his views on Japan. Our recent experience offers nothing new.

Monetarists always talked about how velocity is interest elastic in the short run it was “stable” in the long run. But it’s not. Money demand — reserve demand especially — has exploded by a factor of 300 at i−imi−im, and it’s not ever coming back as long as that is the case.

Monetarists did not favor targeting reserves, or even the monetary base. They favored targeting a broad aggregate such as M1 or M2. Just to be clear, I don’t favor targeting any sort of M, but recent moves in M2 velocity are nothing like recent moves in reserve velocity. Since 1959, M2 velocity has stayed within a range of 1.4 to 2.2. Again, reserve demand rose sharply during 1930s and more recently in Japan. It’s a predictable response to the zero bound, made worse by the payment of interest on bank reserves. (A contractionary policy that Friedman would have opposed in late 2008, even if he supported the general concept in normal times.)

In sum, the screaming lesson of the last 10 years in the US, and 25 in Japan, is that a “liquidity trap” with arbitrary reserves does not cause any inflation. 

And what was the lesson of 1932-51 (when short-term rates were near zero?) I’d say the lesson was that near-zero rates and large reserve holdings don’t cause inflation when the natural rate of interest is low, and do cause inflation when the natural rate of interest raises above the policy rate. Have we learned anything new from the recent zero bound episodes? I’d say no.

Instead of targeting interest rates, we should target NGDP futures prices.