Archive for January 2020


Greetings from the middle of nowhere

I am 12 days into 19-day trip to New Zealand. Everything here is upside down. They drive on the left and celebrate Christmas on a hot summer day. Even the moon is upside down, with the brighter portion at the top. (Orion’s sword hangs upward.)

I don’t have much to say about the NZ economy, other than that everything seems fine. This country doesn’t seem to have any serious problems, at least that are apparent to tourists. (I imagine that the locals would find plenty to complain about.)

Astronomers tell us that no one place is the center of the universe, or perhaps that each place is equally in the center. That’s not true of Earth, where London is near the center and New Zealand is in the middle of nowhere. It might help to examine the “land hemisphere” and the “water hemisphere”, defined as the hemispheres that contain the most and least amount of land:

Notice that New Zealand is near the center of the water hemisphere. Its closest significant neighbors are Australia, which has fewer people than metro Tokyo, and Antartica, which has some penguins. North of the 38th parallel, the northern hemisphere is full of big cities like Beijing, Rome, London and New York. South of the 38th in the southern hemisphere you have Wellington and Christchurch. That’s it. It’s lonely down here.

Some random observations:

1. Prices seem lower here (compared to the US), except for gasoline. Houses are also expensive. Living standards seem a bit lower, but there are many intangibles in favor of New Zealand (weather, informal culture, trust, lack of congestion, personal freedom, etc.)

2. There seem to be more cows and fewer sheep than during my previous trip (in 1991).

3. Auckland seems like a smaller Sydney. It has a new district along the waterfront that is similar to San Francisco’s SoMa and Boston’s South Seaport. There is good art deco architecture throughout New Zealand.

4. Domestic flights are convenient and very cheap.

5. Wellington seems like a small big city. The national capital area is utterly unpretentious, with a child’s playground right in front of the Parliament building, and an ordinary suburban residential area right behind it. I wish America behaved more like New Zealand.

6. Lots of stuff is free (museums, national parks, etc.) Much less security than in the US, and much, much, much less than in China. In many ways, New Zealand seems almost the exact opposite of China. BTW, New Zealand is about 5% Chinese and 5% Indian, much higher percentages than in the US.

7. The drinking age is 18, and smoking is allowed in more places than in the US. Prostitution is legal. There are far fewer frivolous lawsuits and hence people are freer to do fun things that are risky. There are fewer walls than in the US, and much, much much fewer than in China. You can pretty much roam around wherever you wish. It is number 3 in both the Fraser and Heritage Economic Freedom Indices, and when you add in politics it may well be the freest country on Earth.

8. Pound for pound, it might be the most scenic country in the world, at least the developed world. There is an enormous variety of interesting scenery. It’s also very easy to get around. The roads are not crowded (outside a few cities) and parking is not an issue. Unfortunately, the glaciers are receding fast.

9. They have the sort of agricultural productivity that was very valuable throughout most of human history. Unfortunately, it’s Australia that has the resources that are valuable today (iron, coal, gas, etc.) This is one reason why Australia is richer. They also lack economies of scale. Americans wrongly think the rest of the world is hurting us with unfair trade practices, but New Zealand really is hurt badly by the unfair trade practices of others (which protect farmers in rich countries.)

10. They have fewer than 5 million people in a country 10% bigger than the UK and 30% smaller than Japan. (Physically speaking, New Zealand is a bit like Japan.) Their population has recently been growing at 2%, which is perhaps the fastest rate for any developed country? Their bigger cities seem to have the same restrictive zoning problem as in Australia and Canada, keeping house prices high.

People often think of paradise in terms of tropical islands in the South Pacific, such as Tahiti and Bora Bora. Perhaps temperate New Zealand is the the real paradise.

Is China becoming a nation of hamburger flippers?

Here’s Bloomberg:

Ma computes that between 2014 and 2018, China lost 17 million industrial jobs while adding 46 million service jobs. Some 13.52 million jobs were created last year.

When this happened in the US we were told that it was a disaster.  Will the decline in industrial jobs create a meth epidemic in China?  Does China need to launch a trade war to get those industrial jobs back?

Of course I’m being sarcastic, but this is one more data point indicating that the “real problem” (if it is a problem) is automation, not trade.

Over at The Hill I have a new column explaining why Trump lost the trade war with China.  The basic problem was that the US didn’t have any important demands that were both coherent and achievable.  If you go into negotiations not knowing exactly what you are trying to achieve, it’s pretty hard to come out ahead.  Trump was smart to cut his losses and agree to a meaningless “phase one” deal.

Fed policy: The Golden Age begins

Michael Rulle directed me to a WSJ article by Greg Ip on the decline in central bank effectiveness:

The Era of Fed Power Is Over. Prepare for a More Perilous Road Ahead.

The Federal Reserve and other central banks have long been the unchallenged drivers of financial markets and the business cycle. “Don’t fight the Fed,” goes one Wall Street adage.

That era is drawing to a close. In many countries, interest rates are so low, even negative, that central banks can’t lower them further. Tepid economic growth and low inflation mean they can’t raise rates, either.

Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation.

But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. . . .

It’s not just the WSJ, you see this sort of thing all over the place.  Bloomberg reports that Larry Summers is making the same sort of claim:

Summers Calls Bernanke Speech ‘Last Hurrah’ for Central Bankers

Fortunately, this pessimism is 100% wrong. We are entering a golden age of central banking, where the Fed will become more effective and come closer to hitting its targets than at any other time in history. Over the next few decades, inflation will stay close to 2% and the unemployment rate will generally be relatively low and stable. And this certainly won’t be due to fiscal policy, which is currently the most recklessly pro-cyclical in American history.

The conventional wisdom on monetary policy has been pretty consistently wrong, mostly because of the widespread tendency to conflate “monetary policy” with “interest rate path”. At the time, most people incorrectly thought money was not too tight in the 1930s, and not too easy in the 1970s, and not too tight in 2008-09. Today they look at low interest rates and wrongly conclude that the Fed is nearly out of ammo. Ignore the conventional wisdom.

In fact, Fed policy is becoming more effective because it is edging gradually in a market monetarist direction, with more focus on:

1. NGDP growth

2. Level targeting

3. Market forecasts of aggregate demand growth

If they continue moving in this direction, then NGDP growth will continue to become more stable, the business cycle will continue to moderate, inflation will stay in the low single digits, and unemployment will stay relatively low and stable.

It won’t be perfect; the business cycle is not quite dead. There will be an occasional recession. But the business cycle is definitely on life support.

We had 4 recessions during 1920-30, 4 recessions during 1949-60, and 4 recessions during 1970-82. My younger readers will never experience that sort of actual “business cycle”, with one recession right after another.

As an analogy, when I was young I would frequently read about airliners crashing in the US. One crashed a few miles from my apartment during the late 1970s. My daughter is a junior in college and doesn’t recall a single major airline crash in the US, excluding a couple of small commuter planes in the 2000s (she was only 2 during 2001). After each crash, problems were fixed and planes got a bit safer.

Recessions and airline crashes: They are getting less frequent, and for the exact same reason.


This Bloomberg article by former New York Fed President Bill Dudley caught my eye:

In the fall of 2008, the Fed needed to supply large amounts of liquidity to support the ailing economy and unfreeze gridlocked financial markets. These liquidity provisions blew up the Fed’s balance sheet and the amount of reserves in the financial system. Fortunately, because the legislation for the Troubled Asset Relief Program gave the Fed the immediate authority to pay interest on reserves, the Fed could maintain control of short-term interest rates even with a lot of excess reserves and an enormous balance sheet.

Yes, and “fortunately” Congress gave President Bush the authority to invade Iraq if he felt it were in the national interest.  And “fortunately” Congress gave President Trump the authority to set tariff rates.  And “fortunately” Congress gave President Nixon the authority to set nationwide wage and price controls.  And “fortunately” Congress gave President Johnson the authority to send 500,000 troops to Vietnam.

HT:  David Beckworth

Tax reform is now boosting measured GDP

The Financial Times reports that the recent corporate tax reform is beginning to encourage companies to bring intellectual capital back to the US:

Google has overhauled its global tax structure and consolidated all of its intellectual property holdings back to the US, signalling the winding down of a tax loophole estimated to have saved American companies hundreds of billions of dollars.

The internet search company said on Tuesday the move was designed to simplify its corporate tax arrangements and was in line with OECD efforts to limit international tax avoidance, as well as recent changes to US and Irish laws.

Google’s actions came ahead of the close of the so-called “double Irish” tax loophole, which has been used by US companies to channel international profits through Ireland and on to tax havens like Bermuda — putting them outside the US tax net. That led American companies to amass more than $1tn offshore as of the end of 2017, when President Donald Trump’s tax reform changed the treatment of overseas profits.

This action does not impact the actual GDP of the US, as even profits supposedly “held overseas” are in fact owned by US multinationals. It’s an accounting gimmick to avoid taxes, which has no implications for variables such as national income, productivity, exports, etc. But these tax shifting activities do impact measured levels of national income, productivity, exports, etc.

A paper by Fatih Guvenen, Raymond J. Mataloni Jr. Dylan J. Rassier and Kim J. Ruhl provides an example:

Consider the iPhone, which is developed and designed in California but assembled by an unrelated company in China, with components manufactured in various (mostly Asian) countries. Taking some hypothetical ballpark figures, suppose the bill of materials and labor costs of assembly amount to $250 per iPhone and the average selling price is $750, for a gross profit of $500 per phone. For simplicity, assume that there are no further costs of retailing and that all iPhones are sold to customers outside of the United States. 

Two important questions arise from this simple scenario: First, defining GDP as total domestic value added, how much should each iPhone contribute to U.S. GDP? Second, given the profit-shifting practices described above, how much of each iPhone’s gross profit is actually included in U.S. GDP? 

To answer the first question, note that the $250 paid to contract manufacturers and suppliers in Asia is not part of U.S. GDP, whereas how much of the $500 gross profit should be attributed to U.S. GDP depends on where that value is created. If consumers are willing to pay a $500 premium over the production cost for an iPhone, it is because they value the design, software, brand name, and customer service embedded in the product. If we assume these intangibles were developed by managers, engineers, and designers at Apple headquarters in California (Apple, U.S.), then the entire $500 should be included in U.S. GDP. In the national accounts, the $500 would be a net export under charges for the use of intellectual property in expenditure-based GDP, matched by an increase in Apple’s earnings in income-based GDP.

They suggest that much of this output is actually attributed to tax havens such as Ireland:

Suppose that Apple generates intangible assets in the United States and legally transfers them to a foreign affiliate (e.g., one in Ireland). Payments for the use of intellectual property will accrue in Ireland rather than in the United States, which means that the returns to Apple U.S.’s intangible assets are attributed to an Apple affiliate outside the United States and not included in U.S. GDP.

Productivity in the US, especially in high tech industries, is higher than the reported figures. Until the recent tax reform, this problem had been getting worse over time. They report that the practice of US multinationals parking money in tax havens tends to inflate reported GDP in countries like Ireland and Netherlands by 9% to 13%. In the US, the reduction in measured GDP is closer to 1%.

So far, the effects of the recent tax reform on measured US GDP are relatively small. But if the Google decision is copied by lots of other companies, it has the potential to raise reported GDP, productivity, and exports in the US, without affecting actual GDP, productivity and exports.

This process could disrupt a NGDP targeting regime. Fortunately, the impact would be too small and too gradual to lead to a significant business cycle. More likely the unwinding of overseas IP investments would add a few tenths of a percent per year to reported GDP in the US, at most.

As far as Ireland is concerned, if they ever abandon the euro I strongly suggest they target domestic labor income, not GDP.