This is from the WSJ:

WSJ: Has the Fed done enough work to explain to the public why low inflation is actually a problem? Most people hear “inflation’s low” and they say, “Great. Good job.” They hear you say, “Well, we want it to be a little bit high.” Have people done enough work to explain to people why actually this is a problem?

MR. KAPLAN [Dallas Fed President]: Well, the answer is I don’t think it is well understood out there. And this is why when I talk about low inflation, I prefer to talk about in the context of nominal GDP. People understand if nominal GDP is too low, why that’s an issue. They understand higher nominal GDP is better. I think I prefer to talk about lagging inflation in the context of nominal GDP. It is what pays the debt service on the U.S. debt. And we want to grow nominal GDP even though we, the published GDP numbers are [adjusted for inflation]. Nominal GDP is ultimately where it gives you the cash flow to service your debt and to spend on other priorities of the country. And so talking about low inflation in isolation, yes, it may be a challenge for us to do more communication to explain why that’s an issue. The way I’ve tried to explain it when I talk to people in my district and throughout the country is in the context of GDP. It’s important to have higher nominal GDP.

HT: Alex Schibuola, David Beckworth

As I expected, many people missed the point of my previous post. Some people used examples like modern dentistry to make the argument for progress. That completely misses my point. I may be wrong, but not because I don’t understand that modern dentistry reduces teeth pain.  Unfortunately, it makes broken fingernails hurt even more.

If you went back to the Stone Age, or if you visited a primitive tribe today, you’d meet people who would brush off ailments that you’d be crying and whining about to your doctor. They were much tougher than us. Indeed when I do construction, or spend a week camping, I become more impervious to pain than when I have a cushy office job.

Pain is nature’s way of encouraging us to avoid trouble. But while Americans of 2019 objectively experience less “pain” than those of 1919 or 1819, we subjectively suffer just as much from pain.  The pain “thermostat” adjusts to the conditions in which you live.  And that’s not just true of pain; it’s true of many things.  You might be programmed to be angry during 4.3% of your life.  If there’s nothing bad happening to you, then you’ll start getting angry over trivial things.

Similarly, having all these nice gadgets is great, but they devalue the previous gadgets we bought and hence don’t make us happier. That seems obvious to me.

So why do I advocate utilitarian public policies? Two reasons:

1. I might be wrong about progress and happiness.
2. The public policies I advocate make us happier for reasons having nothing to do with “progress” as usually defined. That requires some explanation.

Let’s take rent control. The primary reason why I oppose rent control, minimum wages and similar laws has little to do with the standard pros and cons in an econ textbook. Rather these restrictive controls encourage landlords and bosses to act like jerks.

I suspect that people in Stone Age tribes treated each other with a certain degree of respect. (Albeit only within the tribe).  As population boomed, humanity developed political structures that caused people to be mean to each other. Feudalism, slavery, communism, fascism, etc., encourage people to act like jerks.

I see liberalism as a way of returning to the Stone Age, where we treat each other with some respect. When people are free and transactions are voluntary, then people will be incentivized to treat each other well.

One side effect of classical liberalism is that it makes societies richer.  But that’s not the main point.

So you could argue that political liberalism is a sort of “progress”, making us progress back to where we were in the Stone Age.  But I hope we can advance beyond cavemen in one respect.  Get rid of tribes, get rid of nationalism, and treat everyone on Earth as belonging to a single global tribe.

PS.  My view of the Stone Age may be factually incorrect, but that has no bearing on my current political views.

I’m an agnostic on the question of whether we are making progress, and I’d like to start by considering one type of progress, the war against dirt and germs. Over the course of my life, I’ve seen society put non-trivial resources into making our world cleaner and more germ-free. That sounds good! But I’m not entirely convinced, for numerous reasons:

1. When I go to another region, like East Asia, I see lots of examples that seem slightly unhinged. Lots of people wearing surgical masks in public. Waiters with plastic face guards. People forced to take off shoes every single time they enter a house. (Actually, my house is the same, as I defer to my wife.)

2. Intertemporal comparisons also seem dubious. Younger people (which is most people for a 64-year old like me) seem excessively fastidious. If I tell my daughter stories about how my dad used to take me to the “dump” when I was a kid, to search for useful stuff that people had thrown away, she’d be horrified. Ewww! Or that people didn’t pick up after their dogs in the 1960s. Indeed, I’m still a trash collector; the office chair I’m sitting in as I type this post was out at the curb of a neighbor’s house on Newton.  It looked useful so I grabbed it.

I’m self-aware enough to understand the “OK boomer” absurdity of what I’m doing here. I’m horrified when I read about how in the 1800s the streets of NYC were full of horse manure. Or the drinking water situation in London in 1840. Ewww!  It’s all relative.

If you put a gun to my head and forced me to defend the 1960s level of dirt and germs as optimal, I’d say the 1800s really did involve heath risks, but the recent improvements are mostly psychological. And I’d argue that due to the “hedonic treadmill” we are no longer getting better off, because we keep getting pickier about what we consider disgustingly dirty. Even worse, there are theories that too much cleanliness might actually make kids more susceptible to asthma.

But I’m not going to end up trying to defend the boomer generation, who I regard as just as irrational as any other. I plan to question All Progress.  So let’s take some examples:

1.  We obviously have better stuff, like iPhones.  But that’s not the issue. Just having iPhones makes us more impatient, less able to enjoy life’s simpler pleasures.  New York City has recently added a number of 100 story skyscrapers for billionaires to live in.  But that hasn’t made New York’s skyline any more impressive, as it diminishes the more beautiful art deco masterpieces from the 1920s.  It’s all relative.

2.  Suicide rates are rising.  Even worse, many deaths of despair (from drugs) are quasi-suicides.  The standard view is that this is due to hard times in Middle America.  But life expectancy only began declining after 2014, and has continued declining even as the labor market has improved dramatically (especially for low income groups.)  Hispanic life expectancy is nearly 82, far above whites and far above countries like Denmark.  And yet the economic situation of Hispanics supposedly approximates what caused all these deaths of despair—lots of low wage jobs.  If we are making so much progress, why do deaths of despair keep rising?

3.  What about progress made by formerly oppressed groups like blacks and women, and more recently gays and lesbians?  I consider this the single strongest argument for progress.  But even on the cultural front there are setbacks.  Some businesses now ban office romances.  Previous generations would be horrified by these modern killjoys.  Some of the most modern countries, such as Finland and Japan, are seeing a big drop in sex.  That’s a big deal given that we are talking about one of life’s most important pleasures.  Social media brings pleasure to some, but bullying to others.  People 18, 19, and 20 have lost the right to drink a beer.  Our legal system has removed many of life’s pleasures, as when public swimming pools are closed down due to liability issues.  People (including me) used to date people with differing political views—now we are far more intolerant of others.

4.  The Inuit of Canada were brought into the modern world, and it was a complete disaster.  They were a fairly happy group when they lived in their traditional societies, but are miserable today, despite all the “progress” that Canada gave them.

5.  Better health and longevity.  This is the strongest argument for progress, isn’t it?  But I’m one of those rare people who don’t believe in personal identity, just a flow of mental states.  Suppose we go from a society where families have 4 kids than live to 40, to one with two kids that live to 80.  The total number of “man-years” experienced by the family is the same, but recall that the first 40 years are far more enjoyable than the next 40.  So the flow of pleasure is greater in the society with shorter lives.  Once I hit 55, I got an ever increasing number of annoying ailments (fortunately all minor).  More importantly, you lose some of the youthful zest for an adventuresome life.

6.  Novelists are some of the keenest observers of life as it is actually lived.  Are people in 21st century novels experiencing a happier life than those in 20th or 19th century novels?  Most bizarrely, modern characters don’t even seem to suffer from less physical pain, even though we have all these new technologies like novocain.  In my own life, I subjectively “experience” just as much physical pain when I’m sitting around my office as when I do construction work, even though the latter job is objectively far more painful (as when I hit my thumb with a hammer.)  More hedonic treadmills.

7.  I experienced a brief rise in utility as the Milwaukee Bucks went from a 40-win team to a 60-win team.  But now that I’ve internalized their new level, I don’t enjoy games any more than before.  Today, a mere 9-point win over Atlanta is actually slightly annoying.

If you reply that you love your iPhone and would hate to live in the 1960s, then you’ve completely missed the point.  I agree that it would be annoying for a millennial living in 2019 not to have an iPhone.  That’s not the issue.  The issue is whether you would have enjoyed life in the 1960s, or the 1860s, when no one had iPhones, and no one even knew they existed.

There’s a reason why old people are annoyingly reactionary.  They recall a previous time when people were happy despite not having modern tech.  As for moral progress, they recall really nice sweet people who used to spank their children, and thus they don’t consider spanking to be a monstrous form of child abuse.  If you weren’t there you’ll never understand (just as I’ll never understand how dueling was once considered acceptable.)

Because I’m agnostic, I’ll continue working for Progress.  If there’s only a 15% chance that it’s good for us, that’s better than the 5% chance that it’s bad for us.  Pascal’s wager.

Let me conclude with a couple of anecdotes that drive home my skepticism about progress.  In April, my wife and I celebrated our 25th anniversary with a once-in-a-lifetime trip to Bora Bora, staying in two different “over water” hotels on stilts that cost three times more than any other hotel I’ve ever stayed in.  We also had the roof on our house redone this year, a major project as it’s a complicated house with Tuscan tiles and flat (leaky) aluminum sections.  There were lots of workers for three weeks, lots of pounding of nails, lots of mess.  Also the stress of cost overruns.

If you met me during the roof project, I would have told you that I couldn’t wait until it was over.  Bull****!  Deep down I never wanted it to end.  At the end of each workday I’d get up on the roof and chat with Isidro, the project manager, who was from Michoacan, Mexico.  I spent some time in Michoacan as a teenager, and we talked a lot about places we both knew.  He seemed to enjoy chatting to me; most (affluent) people he worked for probably ignored him.  He was also clearly proud of his work, and liked explaining how he solved each technical problem.  I used to do construction for my dad, so I was very interested and at least somewhat informed about his work.  We’d spend an hour or two at the end of each workday, up on the roof chatting as the sun went down over Lake Mission Viejo.  I enjoyed talking with him far more than I’d enjoy talking with an intellectual about public policy.

The Bora Bora trip?  I was sick the entire time, bundled up on the hot sunny beach in long pants and a sweatshirt, watching the young people in swimsuits enjoying life.

Have a nice Thanksgiving!

There’s a new Hypermind NGDP prediction market, which you should definitely check out. It’s still early, but right now the mean forecast for growth from 2020:Q1 to 2021:Q1 is 3.05%. That suggests that money is a bit too tight.

In contrast, the consensus forecast of economists, which is published by the Philadelphia Fed, shows monetary policy is right on course.  They don’t provide NGDP forecasts, but they do have RGDP growth and PCE inflation:

If you combine the 1.8% RGDP growth with the 1.95% PCE inflation, it looks like the consensus forecast for NGDP growth is about 3.75% (albeit for 2019:Q4 to 2020:Q4).  Thus Hypermind forecasters expect nominal growth to be significantly lower than the consensus forecast of economists.

Let’s revisit this post in about 18 months.

PS.  Each forecaster at Hypermind provides a distribution in their new set-up.  So those long tails are not point estimates of individual forecasters. 

Hypermind is actually much easier to use than you’d think.  I encourage people to participate.  You will help to move the economics profession out of the Stone Age and also win free money.

PPS.  The 5-year TIPS spread is 1.55%.  That’s for the CPI, and implies about 1.3% for the PCE.  If you add 1.3% to the Philly Fed’s 1.8% RGDP forecast you get 3.1%.  Interesting.  (I expect inflation to be higher than that.)

PPPS.  FWIW, I predict 3.4% NGDP growth (which includes 1.6% RGDP growth).  That’s midpoint between Hypermind and the Philly Fed.  I believe money’s a bit too tight.

Over at Econlog, I have a post discussing China’s recent decision to beef up the enforcement of intellectual property rights.  Check it out.

In other news, China is about to roll out a major land reform:

“This is the first time I’ve owned an industrial property,” said Mr Shi, 48, who had rented in seven locations before settling down in Dongheng. “I don’t have to worry about getting kicked out by landlords any more.”

Mr Shi’s good fortune is the result of an experiment in land reform that has been rolled out in 33 counties across China. It allows semi-autonomous collectives to sell certain types of rural land to third parties and to keep the bulk of the proceeds.

The model, which will be extended to the rest of the country at the beginning of next year, has been lauded as a means of bringing prosperity to rural businesses and communities and stimulating China’s flagging economy.

The article also points to some downsides with the plan, and I don’t know enough to comment on the specifics.  In the past, however, real estate reform has been a big deal in China.  In the late 1970s, they began giving farmers more property rights, and a couple decades later they allowed urban residents to own their own home.  Both changes had a massive (positive) impact on the Chinese economy.

China is loosening rules on foreign investment:

BASF has broken ground on a $10bn petrochemical complex in southern China, becoming the latest foreign company to increase its presence in the country as Beijing gradually relaxes restrictions on overseas investment. . . .

Beijing loosened restrictions that excluded foreign companies from investing or taking ownership stakes in industrial and financial sectors after the pace of growth of foreign direct investment into China slowed to just 3 per cent last year. 

Foreign companies have long been excluded from several high-growth sectors or forced to form joint ventures with Chinese companies. US and European chambers of commerce have called on Beijing to accelerate access for foreign investment. 

The BASF facility, in the city of Zhanjiang, is the first of its kind in China that will be fully owned by the company after Beijing allowed full foreign ownership of chemical “cracking” facilities used to produce plastics. 

Global stocks are up today, partly due to expectations of a phase one trade deal with China.  Another factor was the Hong Kong elections:

The Stoxx Europe 600 Index advanced, with all 19 industry sectors in the green. Equities climbed across Asia, led by those in Hong Kong, where local elections brought a landslide victory to pro-democracy candidates. 

It seems like the markets hope that this leads to fewer protests:

A record turnout helped pro-democracy parties win a majority in 17 of 18 district councils. [Stock market] Bulls hope the poll result will inspire disaffected Hong Kongers to focus on conventional politics rather than street protests.

In my view, Hong Kongers would be wise to continue the street protests, but in a non-violent fashion. Unfortunately, the recent escalation of violence plays right into Beijing’s hands. The Chinese government would prefer not to intervene in Hong Kong, and strangely enough the violence might actual make them less likely to do so.

Some people predicted blood in the streets, similar to Tiananmen Square in 1989. That may still happen, but Beijing may also be content for there to be blood in the streets from clashes between protesters and police. Recall that China doesn’t want to give democratic rights to Hong Kong because they fear it would cause urban Chinese on the mainland to demand similar rights. As long as there is “blood in the streets”, then mainland Chinese will not be attracted to the Hong Kong model.

A better option would be to adopt a two track strategy. Continue the street protests and have their newly elected officials (who admittedly have little power) do as much as they can to improve the economic situation in Hong Kong, especially housing. That should be combined with non-violent street protests to keep the pressure on.

I strongly recommend this Bloomberg article, which points out that violent protests can lead to a counterproductive rise in nationalism:

I, for one, do not mind the fact that my hometown Shanghai has doubled in size, or that my local dialect is no longer the only one heard on the streets. In exchange, I’m exposed to more diverse cuisines when I visit and meet more interesting people. And thanks to the wonderful, hard-working “little brothers” — almost always migrants — I can get bubble tea delivered to my doorstep within half an hour. 

In that sense, the most cosmopolitan Chinese cities now resemble New York. It doesn’t matter where you’re from; as long as you live there, you can call yourself a New Yorker. Hong Kong, on the other hand, has grown bitterly divided into tribal camps — locals, expats, mainlanders and domestic helpers. . . .

If the central government had qualms about taking a hard line against the protesters before, it surely doesn’t now that they enjoy negligible support from mainland Chinese. An even simpler strategy would be to let Hong Kong decline slowly. Neighboring Shenzhen, home to local champions such as Huawei Technologies Co Ltd. and Tencent Holdings Ltd., is already keen to steal away high-tech firms. Corporate tax rates at the Qianhai free trade zone, for instance, are lower than Hong Kong’s.

And this is not just a question of money. I am not the only liberal mainlander living in Hong Kong. We naturally root for the city’s democratic advances. After all, why did we leave China in the first place? Why shouldn’t Hong Kong, one of the world’s wealthiest and most global metropolises, be governed by its people?

Yet, our support for the protests is rapidly dwindling because we suspect that the anger on the streets has less and less to do with the city’s political system, and more to do with a nativist dislike of mainlanders and immigrants — not unlike the anger driving populist protests in the U.S. and Europe.

Of course, mainland China is to blame for Hong Kong’s divisions, but nonetheless the local Hong Kongers should avoid playing into China’s hand. Beijing wants it to look like self government in Hong Kong has failed.

Actually, it’s never been tried.