Here’s Trump:

Is Trump getting even worse? Is that even possible?

Three of the four Congresswomen attacked by Trump are not even immigrants:

The nativist rhetoric, “go back to your country,” is often used in racist, Xenophobic and Islamophobic attacks, including a recent hate crime in New York City last week where a Hispanic woman was attacked and told, “You’re here taking jobs from Americans.” . . .

The four progressives included Alexandria Ocasio-Cortez of New York, Ayanna Pressley of Massachusetts, Rashida Tlaib of Michigan and Ilhan Omar of Minnesota. The women of color were born in the United States, except for Omar who became a refugee in 1991 when a brutal civil war devastated Somalia, a predominantly Muslim country in East Africa, where at least one American among the 27 died in a terrorist attack Saturday.

It’s true that millions of Trump supporters are not racist. But it’s also true that those Americans who do hate Muslims and Mexicans and other immigrants absolutely love Trump. They adore him. Why is that?

Perhaps these racists misunderstand Trump when he tells women of color who were born in America to go back to their own country. Perhaps it’s all just a terrible misunderstanding.

I generally don’t like bullies, but I’ll make an exception for market bullies. Here’s the FT, from a few weeks back:

“I just don’t see the case for rate cuts, but [the June Fed meeting] was the most dovish outcome we could have had [without] an actual rate cut,” said Gregory Peters, a senior portfolio manager at PGIM Fixed Income. “Markets are bullying the Fed, and the Fed is responding.”. . . 

And assuming the central bank does trim rates, will this be a precautionary move to bolster growth at a time of passing weakness, or will it solidify concerns over the slowing economy, leading markets into browbeating the Fed into a full rate-cutting cycle?

Translation of first paragraph:  The markets are signaling a fall in the natural rate of interest, and the Fed is responding. 

Translation of the second paragraph:  If the Fed cuts rates more slowly than the natural rate is declining, the resulting economic slowdown may trigger more rate cuts. 

And from yesterday’s FT:

While some investors see the Fed’s move as unjustified given stronger US economic data, the rosiest data points have been overshadowed by tumbling bond yields and a yield curve that has been inverted since the end of May.

“There is really no good excuse for cutting rates at all,” said David Kelly, chief global strategist at JPMorgan Asset Management. “They’re doing so to avoid a market meltdown.”

Seema Shah at Principal Global Advisors said: “The Fed is cutting rates not in response to the economy, but in order to avoid a market fallout . . . The Fed put itself in a corner. We’ve had a run of stronger data which at any other time would not have led them to cut rates.”

Translation: The Fed has rejected the conventional wisdom that they should respond to actual economic data and accepted the market monetarist argument that market forecasts are the most reliable guide to policy.

Is this what winning feels like?

We still have a long way to go. The Fed is increasingly willing to use market forecasts, but is doing so in an inefficient fashion. As time goes by, they’ll look for better ways to incorporate market forecasts into the policymaking process. And when they look around for better options, they’ll discover that market monetarists have been thinking about these issues for more than 30 years. Most likely, however, they’ll start with the guardrails approach.

Most news articles on the Fed are focused on the wrong issue. They look at a strong economy and see no need to ease monetary policy. Maybe that’s correct. But in order to keep monetary policy stable in a world where the natural rate of interest is falling rapidly, the Fed needs to cut rates. So don’t ease policy; cut interest rates to avoid tightening policy. How many times does it need to be said that interest rates are not monetary policy?

Based on this blog, I’d say, “apparently a lot”.

I often see misconceptions about Taiwan:

1. People sometimes suggest that the majority of the population is native Taiwanese, and that a small group of “Chinese” who came over after the 1949 communist revolution ruled over this Taiwanese majority for decades.

2. People sometimes suggest that Taiwan claims to be an independent country, but China won’t recognize that claim.

Neither assertion is true.

Let’s start with the term ‘Chinese’. This could be defined in several ways. One definition is “residents of China”. By that definition, all Taiwanese residents are technically Chinese, as both China and Taiwan technically regard Taiwan as being part of China. At least that’s their official position.

But most people around the world, both Chinese and non-Chinese, use the term ‘Chinese’ in a different way. The term generally refers to an ethnic group called the “Han”. Thus people contrast “Chinese” residents of Malaysia with Malay or Indian residents of Malaysia. Or they contrast “Chinese” with “Tibetan” or “Uyghar” residents of the PRC. In everyday speech, “Chinese” generally means Han.

Using this definition, Taiwan is more “Chinese” than the PRC. Taiwan is over 95% Han, whereas the mainland is about 91% Han. Only a tiny portion of Taiwanese are native people.  As an analogy, East and West Germany were separate countries, but both places were mostly German. Residents of both North and South Korea are Korean. If there is an argument for Taiwanese independence, it should not be based on the myth that the “native Taiwanese” are somehow ruled over by “Chinese”. That would be as absurd as saying “Fujianese” people are ruled over by the Chinese.

On the second point, the Taiwanese constitution says there is only one China, and it includes both Taiwan and the mainland. (Also Mongolia, BTW, which is a rather silly claim.)

I’m a pragmatist, and thus I’m perfectly happy with the current arrangement. Taiwan is much richer and freer than the mainland, so it’s no surprise that they don’t want to unify at the moment. It would be a horrific mistake for the PRC to suddenly force the issue with an invasion. But it also makes sense to view re-unification as a long run goal, to be achieved peacefully after the mainland has achieved levels of prosperity and freedom that are roughly on par with Taiwan. Just as East and West Germany eventually reunified peacefully, and North and South Korea will likely eventually unify peacefully.

Maintaining the aspiration of eventual reunification will have the advantage of minimizing the risk of a ruinous war, which might be triggered by a rash decision of Taiwan to declare independence.

PS. Of course you can make the argument that Taiwanese are now a separate ethnic group, having lived apart for so long. But in that case you must make the same argument about Korea, which split in two at almost exactly the same time. Koreans have lived under vastly different conditions, even more different than the two groups of Han Chinese. And yet I see very few people denying that both North and South Koreans are indeed “Korean”.

The Trump administration recently announced a change in policy regarding organ donations. Henceforth, donors will be compensated for lost wages and some other expenses. There are some other organizational changes in organ transplant management that should also boost transplants. This is probably the best thing the Trump administration has done since taking office, and it will likely save many lives.

But it’s just a start. The government needs to compensate organ donors at a level sufficient to eliminate the shortage of transplant kidneys and livers. This would save tens of thousands of American lives each year, and would also save billions of dollars in tax money. Learn from Iran!

It’s appalling that no previous administration did what the Trump administration did this week. And a future generation of Americans will be appalled that we did not go even further in deregulating organ transplant markets. Still, it’s a very nice first step.

PS.  Steve Hanke agrees:

President Trump’s actions go near the edge of what current law allows. As I wrote in a December 2018 Forbes column, the federal government should go further. It should allow compensation to donors in addition to the payment of lost wages and expenses. Reasonable levels of compensation should be enough to eliminate the shortages of kidneys and livers entirely. This would require action by the Congress to reform the National Organ Transplant Act.

HT:  Frank McCormick

In a recent Bridge post, I suggested that Congress should ask Jay Powell the following questions:

1. Do Fed officials believe that the Federal Reserve currently has adequate tools to achieve their mandate at the zero lower bound, without assistance from fiscal policy?

2. Would the Fed be more confident in its ability to achieve the dual mandate of stable prices and high employment if it were authorized to buy a wider range of assets at the zero lower bound?

3. Suppose the Fed were allowed to boost its capital by retaining several years’ worth of profits. Would this make the Fed more willing to provide adequate liquidity at zero interest rates, knowing that it is less likely to become insolvent if the assets on its balance sheet declined in value?

Yesterday, Rep. Tlaib asked Powell the following question:

What additional tools or authority do you need to prevent another downturn?

Great question!!  Unfortunately, Powell didn’t provide a good answer:

I think we have the tools that we need.  I think what we would hope for is support from fiscal policy.

If you are hoping for support from fiscal policy, then you most certainly do not have the tools that you need.  There is no reason to expect any significant support from fiscal policy during the next downturn.  The deficit has soared to nearly a trillion dollars during a boom period—does anyone seriously think Congress will run a $2 trillion deficit in the next recession?  And does anyone think that a Congress where the two parties barely speak to each other will suddenly come together and agree on a tax cut during the next recession.  (I’m not even considering government output, as there are basically no shovel ready projects in the modern world of infrastructure.)

And even if we did run a $2 trillion deficit, it would have little impact on GDP.  Remember 2009?  How about 2013?

Here’s what Powell should have said:

It would help if Congress gave us additional tools, or at the very least clarified that we were authorized to use current tools as aggressively as necessary to prevent a recession, even if that means buying unconventional assets, and even if it runs a small risk of capital losses for the Fed.

If Congress doesn’t want us to do whatever it takes to prevent the next recession at the zero lower bound, and would prefer to handle more of the load with fiscal policy, it would help if they clearly spelled out what they did expect from us.  But I have to be honest with you, given the current budget deficit it’s very unlikely that fiscal policy will be effective in the next recession.

Powell did a good job discussing monetary policy, explaining why a rate cut is now appropriate.

The NYT reports that Powell is increasingly skeptical of the Phillips Curve:

Representative Alexandria Ocasio-Cortez, Democrat of New York, later asked, “Do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?”

“Absolutely,” Mr. Powell replied, adding that the Phillips curve, the statistical relationship between low joblessness and higher inflation that has been central to Fed policymaking for decades, is showing itself as but a “faint heartbeat.”

This is good news.  Like all “reasoning from a price change” models, the P.C. is not reliable enough for policy purposes.  The Fed needs to focus on NGDP growth, not unemployment, when looking for indicators of overheating.

I’ve been arguing that now is a perfect time for the Fed to ask for more power, as both parties would be on board with giving the Fed the tools to prevent a recession.  Here’s the NYT:

It probably also helps that the Fed is now under pressure, from both conservatives and liberals, to increase economic growth.

The Fed needs to wake up.

HT: JW Mason