Archive for September 2019


In praise of Pelosi

I’ve never been a fan of Nancy Pelosi, and did not agree with her reluctance to impeach Trump.  So today I need to grudgingly give her credit. By waiting for a smoking gun, she made the process seem less partisan.

The impeachment won’t lead to conviction in the Senate; Trump could murder someone in the middle of Times Square and his Republican supporters would stick with him.  (The only Trump claim I’ve ever agreed with.)  But the House should do its job.

Gotta love this:

The White House accidentally sent its anti-impeachment talking points intended for allies in Congress to House Democrats.

So how do the “talking points” explain away an obvious abuse of power?

The talking points urge allies to reiterate that Trump made no promises to Zelensky and that he didn’t bring up his personal lawyer, Rudy Giuliani, until his Ukrainian counterpart brought him up.

The White House memo summarizing the conversation, released to the public a few hours before, shows that Trump sought Zelensky’s cooperation as a “favor,” but does not contain a specific offer of a quid pro quo. At the time, much-needed American military aid for Ukraine had been held up for unexplained reasons, reportedly at the request of the White House.

A “favor”?  Well, OK then!  I hope defendants in future mafia or Wall Street corruption cases remember this memo when federal prosecutors present surveillance tapes of them asking for various “favors”.

And won’t the new Ukrainian president be pleased that Trump just threw him under the bus.  I thought he was going to clean up corruption in the Ukraine.  After all, he did in the TV show that his campaign was based on.

PS.  Don’t forget that as we saw with the Mueller report, the initial White House edited version likely understates how bad things were.  And there are multiple phone calls.  There’s much worse information out there.

And there’s this:

Separately, the Justice Department released a revised version of a memo by its office of legal counsel that declared that it was lawful to withhold that complaint from Congress, notwithstanding an inspector general’s determination that the complaint was credible and raised an “urgent concern” of the sort that a statute says must be shown to lawmakers.

The deep state?  Trump appointed the Inspector General.  And so what if a “statute” says the report “must” be shown to Congress.  Does anyone still think this banana republic relies on the rule of law?

PPS.  Last month when I lamented the dictatorial approach of Boris Johnson I was accused by commenters of being hysterical. Nothing to see here, prorogation is completely normal. Actually, this specific type of prorogation is not at all normal. Nor is it normal for the Prime Minister to lie to the Queen about the reasons for prorogation. Nor is it normal for a party to expel 21 of its MPs, including previous top officials.

Fortunately, the British system seems strong enough to survive all of this. The Supreme Court ruled 11-0 that Johnson’s actions were illegal. Before that, Parliament voted to stop a hard Brexit. Of course the Brexiteers insist that the “will of the people” is being thwarted, even though they were the ones who stopped Theresa May’s Brexit proposal, and even though the proponents of Brexit promised a Brexit as soft as a goose down pillow, with the EU meekly agreeing to good terms with the UK, and even though the voters never said exactly what sort of Brexit they wanted. (Given that only 52% voted for Brexit, it seems overwhelmingly likely that “soft Brexit” was the median vote, unless you think that less than 2% of the 52% favored a soft Brexit.)

Hong Kong doesn’t prove what you think it proves

Conservatives often make the following argument:

Both democracy and freedom are important, but freedom is more important. Look at Hong Kong. It has freedom but is not democratic. It does much better than many other places that have democracy but lack freedom (or lack the rule of law.)

That’s certainly a defensible argument, but it’s weaker than it looks.

I’m going to compare Hong Kong with the city that is most similar—Singapore. Both are city-states (although of course HK is technically a part of China.) Both have populations in the 5-7 million range, and very high per capita GDPs. Both are mostly ethnic Chinese. Both are financial and trading centers. They are #1 and #2 in every single index of economic freedom. But both have heavy government involvement in the housing sector.

However, there are key differences. While Singapore is far from being a perfect democracy, it’s certainly more democratic than Hong Kong. And while Hong Kong doesn’t have a perfect record on civil liberties, it’s freer than Singapore.

I’d like to suggest that Hong Kong’s current problems would not exist if it were even as democratic as Singapore. Singapore does tilt the playing field in favor of the ruling party, but the Singapore electorate is perfectly capable of voting them out if office if they get sufficiently angry. Importantly, the Singapore government knows this, and makes sure that the electorate doesn’t get sufficiently angry.

You may wonder why the Hong Kong protestors remain so angry, even as the Lam government has completely given in on their initial demand to abandon the extradition treaty with Mainland China. The anger seems fueled by many issues, but two stand out:

1. The lack of democracy in Hong Kong.
2. HK government policies that intentionally keep housing extremely expensive, and which dramatically reduce living standards for residents of Hong Kong.

In Singapore, the government allows elections as a sort of safety valve, and also as a way of gauging public sentiment. As the share of votes for the opposition party gets closer to 50%, they take steps that will be politically popular. They have much more pro-development housing policies:

Since the handover the [HK] tycoons have come to dominate not just the economy but also government, opposing calls for more democratic representation, a more generous welfare state and, of course, a programme to build mass, cheap housing of the kind that Singapore has long promoted (and used to keep voters quiescent). Part of the tycoons’ clout comes from their contribution to Hong Kong’s finances: 27% of government revenues come from land sales. Since the start of the crisis Hong Kong’s chief executive, Carrie Lam, has not met any democracy activists, but she has consulted with several plutocrats.

If Hong Kong were even as democratic as Singapore, the Lam government would have been forced to adopt a more expansionary housing policy, freeing up lots of new land for development. Although Hong Kong may seem crowded to tourists, there is actually plenty of land to house its population of 7 million, if the government were not artificially holding back development to boost the profits of property development firms.

Of course there are lots of other democracy comparisons one can make. The two Koreas. China vs. India. China vs. Taiwan. Etc. But if you want to use the example of Hong Kong to form your views on the relative importance of democracy and liberty (as many pundits have done), the actual lesson is that democracy is more important, more fundamental. Hong Kong’s closest comparison country, by far, is Singapore, which is somewhat less free and somewhat more democratic. And Singapore is also more successful than Hong Kong in providing a decent quality of life for its residents.

Look at the following picture.  Can you guess which part of the picture is Hong Kong and which part is Mainland China?

Some thoughts on PPP in China, the US, and Japan

One thing I got wrong about China was their exchange rate. In the early 2010s, I expected their real exchange rate to appreciate strongly against the dollar, due to the Balassa-Samuelson effect. It hasn’t. And even after visiting China, I’m not quite sure why. FWIW, here I’ll report some things I noticed on my trip.

BTW, a quick reminder that a prediction that the Chinese yuan would appreciate in real terms is identical to a prediction that China would get much less cheap.

1. China is still really cheap. And it doesn’t just seem to related to wages. Subways in Beijing are roughly 55 cents, only about 1/5th the level of NYC. That means that if you priced the 4 billion annual subway trips in Beijing at NYC subway prices, revenue would rise from about $2 billion to $10 billion. That’s why comparisons of US and Chinese GDPs at market exchange rates are utterly meaningless. America is much richer, even in PPP terms, but the market price gap wildly overstates the actual difference. China’s total GDP in terms of actual output is obviously higher than the US.  (BTW, Beijing’s subways are also far nicer than in New York.)

2. What’s true of subways is also true of buses, taxis and intercity rail. They are all ridiculously cheap by American standards, maybe 1/5th as expensive. The “output” of China’s transit system at American prices would be huge. The difference is smaller for air travel, where the cost is mostly the airplane and jet fuel.

3. Wages have risen sharply. In the early 2000s, a lady who cleaned and cooked for households in Beijing earned about 70 cents an hour. Now she earns $3.50 an hour. In PPP terms that’s close to America’s minimum wage. But this sort of worker in New York or LA earns far more than the national minimum wage, so unskilled workers in China have much lower living standards than in the US.

4. Haircuts are very labor intensive. I paid $1.20 in 2001, $4 in 2012, and $6.90 on my most recent trip, all in the same place. There’s no tipping, so prices are a bit less than half what I pay in America.  Nonetheless, nominal wages in China are rising fast; the government is not lying about that fact.

5. Because nominal wages are rising fast (and we know this without resorting to questionable government data), we also know that China’s nominal GDP is rising fast. Debates about RGDP growth then revolve around the issue of inflation.

6. I have no reason to question China’s inflation data. Other than haircuts, most things don’t seem much more expensive than I recall from previous trips. Restaurant meals are still dirt-cheap, although compared to the US there’s much more price variation on an individual menu. That’s because labor is a much smaller part of the total cost than in the US. A stir-fried veggie dish might be $2.50, a meat dish $5, and a nice seafood dish $10. Prices include tax and there’s no tipping.

7. In 2009, a high-speed train to Tianjin cost $8. Today it’s about the same, which surprised me.  China’s clearly had only modest inflation.  The biggest constraint on urban Chinese living standards is housing, and ironically that is even truer in capitalist Hong Kong, where housing is the one socialist sector.

If we combine China’s modest inflation with the rapid nominal wage growth, it’s obvious that their real GDP has risen sharply.  We don’t need to rely on government data to know that.  But then anyone just looking around the cities (or even the countryside) would know that—the country looks much more developed.

So why didn’t the Balassa–Samuelson effect have the impact I predicted?  I’m still not sure, but over at Econlog I have a new post explaining why PPP comparisons are so important.  In the post, I point out that the real foreign exchange value of the Japanese yen has plummeted since 1994, so much so that if you believe in market exchange rates you’d be forced to conclude that Japan has experienced one of the worst depressions in global history.  Actually, Japan’s doing OK, but only in PPP terms.

We tend to think of China’s currency vis-a-vis the US dollar.  But China’s economy is more like Japan’s, another East Asian exporter of manufactured goods.  If we look at the yuan vs. the yen, then there’s been a huge Balassa-Samuelson effect since 1994.  The Chinese currency has appreciated very strongly in real terms against the Japanese yen.  So at least there’s that.

Thus it seems that part of my mistake was not anticipating the strength of the US dollar.  In 1994, I did not anticipate that countries like Japan would become much cheaper for American tourists.  At the time, Japan was quite expensive.

Perhaps the way the US dominates the global high tech industries (which also causes our stock market to outperform foreign markets) is part of the story.  In any case, I was wrong about the Chinese exchange rate.  (Lars Christensen was right.)

For me, the two biggest surprises were that the air pollution in Beijing wasn’t bad, and that the level of authoritarianism was much worse than I expected.  The air pollution may have been a fluke; perhaps factories were shut down to clear the air for the big October 1 celebration.  Air is gradually getting cleaner in Beijing, but not as dramatically as it seemed on my trip.

The authoritarianism is no fluke, although even that was probably ramped up a bit for October 1.  It’s not so much what they do (which is often the same as we do here—pointless security checks, CCTVs, etc.) rather it’s the overwhelming scale of the security apparatus.  I found it extremely annoying.  (Of course this is in eastern China, Xinjiang is far, far worse.)

Mental health bleg

Ramesh Ponnuru has a new piece in the National Review, which begins by quoting Alan Blinder:

The Federal Open Market Committee has now cut interest rates twice, by 0.25 percentage point each time, as “insurance” against a downturn. But there are no serious signs of recession; most forecasters see growth continuing near 2%. Nor can monetary policy undo the damage from tariffs. Nor does half a percentage point buy you much insurance.

There are reasonable arguments for and against cutting rates. So, unsurprisingly, the FOMC is divided. History may prove Mr. Powell and the Fed’s doves right—or wrong. For myself, I’d prefer that the Fed save its limited ammunition until they see at least a few whites of a downturn’s eyes. Then, by all means, fire away.

Ponnuru quite rightly points out that Blinder has things backwards.  Other things equal, cutting the policy rate tends to boost the neutral interest rate, thus giving the Fed more ammunition (here I mean ammunition in the conventional Keynesian sense—they actually have almost unlimited ammunition).  Indeed many of Blinder’s fellow Keynesians have called for a more expansionary monetary policy specifically for the purpose of giving the Fed more ammunition.  So there seems to be a split even within the Keynesian community.

Obviously Blinder is a much more accomplished economist than I am, so I wonder if I am missing something.  More broadly, I see more and more examples of prominent economists making seemingly absurd claims, such that low interest rates represent easy money.  What’s going on here?  Am I going crazy?

Productivity bleg

Marcus Nunes directed me to a Project Syndicate post by Ernest Liu, Atif Mian, and Amir Sufi, with a nonsensical headline:

Could Ultra-Low Interest Rates Be Contractionary?

That’s not even a question.  I won’t blame the authors, as headlines are usually written by editors.  But this confused me:

The traditional view holds that when long-term rates fall, the net present value of future cash flows increases, making it more attractive for firms to invest in productivity-enhancing technologies. Low interest rates therefore have an expansionary effect on the economy through stronger productivity growth.

This is a basic EC101 error—reasoning from a price change.  Actually, productivity growth tends to be lower when interest rates fall.

Now some will argue that they obviously meant something different, that lower interest rates caused by a more expansionary monetary policy will tend to boost productivity.  OK, but the article is about recent events, and lower interest rates worldwide are certainly not being caused by a more expansionary monetary policy.  More importantly, I don’t ever recall a “traditional” model of the economy making that claim.  Indeed isn’t this the traditional view:

A view deeply entrenched in mainstream macroeconomics is that trend productivity growth is the outcome of technological and institutional factors and can be treated essentially as an exogenous force, unresponsive to business cycles or monetary policy actions. The workhorse macroeconomic models used by international organizations and central banks are built upon this notion.

So here’s my request.  Please direct me to the “traditional” models that claim low interest rates cause faster productivity growth.  I don’t doubt that heterodox models exist that make that claim, but I’m looking for traditional models that make that claim.  Where are they?

More broadly, the tendency of economists to equate low interest rates and easy money is becoming a major embarrassment for the profession.  We really are going back to the Stone Age.