Archive for November 2020

 
 

Something I never thought possible

Here’s the Washington Post:

But on Sunday, Guiliani and Ellis distanced themselves from Powell.

“Sidney Powell is practicing law on her own,” Giuliani and Ellis said in their statement. “She is not a member of the Trump Legal Team. She is also not a lawyer for the President in his personal capacity.”

Two advisers to Trump, who spoke on the condition of anonymity to discuss private conversations, said that the president disliked the coverage Powell was receiving from Tucker Carlson and others, and that several allies had reached out to say she had gone too far. The advisers also said that she fought with Giuliani and others in recent days.

The president believed she was causing more harm than help. “She was too crazy even for the president,” a campaign official said.

Too crazy for Trump? How is that even possible?

PS. Matt Yglesias describes the Trump legal team.

Dear God! I haven’t had this much fun since I was back in college. Every night I pray that Trump delays conceding a bit longer.

PPS. On a more serious note, Alex Tabarrok explains how America is becoming a banana republic.

Never reason from a quantity change

David Beckworth has a graph showing the relationship between inflation and the size of central bank balance sheets, as a share of GDP:

(You get roughly the same result with either NGDP growth or nominal interest rates on the vertical axis.)

So why is this line downward sloping? Shouldn’t printing lots of money lead to higher inflation?

Just as one should never reason from a price change, you also need to avoid reasoning from a quantity change. When expected inflation falls to extremely low levels, the opportunity cost of holding base money declines and the demand for base money rises sharply.

At this point the central bank faces a choice. They can do nothing, in which case you’ll end up with the sort of severe deflation that we saw in the early 1930s, or they can inject enough base money into the economy to keep prices roughly stable. The BOJ and the SNB decided to avoid severe deflation by accommodating the increased demand for base money.

People often ask whether QE “works”? That’s as nonsensical as asking whether lower interest rates work. It depends on whether the QE is temporary or permanent, and also whether the QE is creating excess cash balances, or merely accommodating an increased demand for base money. Similarly, it depends whether lower interest rates are caused by a tight money policy or an easy money policy.

What “works” is a level targeting regime combined with a whatever it takes commitment to increase the base (or decrease the base) enough so that market expectations of inflation equal the policy target.

Suppose I am wrong, and the graph above somehow proves that increasing the money supply doesn’t “work”. What then? Does that mean we should forget about the money supply and target interest rates? Not at all.

You could construct an alternative graph showing the relationship between inflation and nominal interest rates. That graph would have a positive correlation. And how should we interpret that positive correlation? Would it imply that lower interest rates lead to lower inflation?

If you think the graph above shows that QE doesn’t “work”, you’d be forced to conclude that reductions in interest rates also don’t “work”. But those economists who are skeptical of the efficacy of changes in the money supply are often big believers in the efficacy of changes in interest rates. Unfortunately, in the realm of macroeconomics most economists either reason from a price change or they reason from a quantity change.

The graph shown above merely reflects the fact that inflation is a proxy for the opportunity cost of holding money, and thus it’s merely telling us that demand curves slope downward. That’s not surprising!

The positive relationship between inflation and nominal interest rates reflects the Fisher effect, the fact that lenders and borrowers care about real interest rates. Because money is neutral in the long run, the nominal interest rate will tend to rise with inflation. That’s also not surprising.

Lots of things that seem strange from one perspective look perfectly normal if you avoid reasoning from a price change, or a quantity change.

PS. My favorite part of David’s post shows a graph comparing population growth rates and real interest rates. It seems clear to me that the global slowdown in population growth is one factor in the long run downward trend in real interest rates.

Thank God that there’s a great deal of ruin in a nation

In a post I wrote right before the election, I made this prediction about what would happen if Biden won:

Are we facing a bad interregnum, as during 1932-33? Perhaps, especially if Trump becomes bitter and blames the American people, much as Hitler blamed the Germans for letting him down.

And now we see this:

Trump strips US Fed of emergency credit powers in latest scorched-earth move . . .

“The most obvious interpretation is that the Trump administration is seeking to debilitate the economic recovery as much as possible on the way out of the door,” said David Wilcox, the Fed’s former chief economist, now at the Peterson Institute.

Fortunately, the Fed has other tools, and thus it’s not at all clear that Trump will succeed in destroying the US economy out of spite. But you can’t accuse him of not trying!

HT: XVO

Update: It just occurred to me that this is sort of good news, as it clearly indicates that Trump understands that he has lost.

About that Italian study

My recent post on the Italian study of early Covid spread was criticized for highlighting the interpretation of the Daily Mail, a disreputable paper.

Here’s Business Insider:

The new coronavirus was circulating in Italy since September 2019, a study by the National Cancer Institute (INT) of the Italian city of Milan shows, signaling that COVID-19 might have spread beyond China earlier than previously thought.

Actually, the study doesn’t show that Covid “spread beyond China”; it provides evidence that Covid existed outside of China well before the first known case in China. Word choice matters.

Now the media (and China’s government) is waking up to the startling implications of this study, if true:

If those findings are correct, scientists said it could change the history of the origin of pandemic, raising questions about when and where the virus first emerged.

The novel coronavirus was first identified in the central Chinese city of Wuhan in December. Italy’s first COVID-19 patient was detected on Feb. 21 in a small town near Milan, in the northern region of Lombardy.

The Chinese government said on Tuesday it believed the study showed that tracing the origin of the virus was an ongoing process that may involve many countries.

I can see why the Chinese government would wish to suggest that no one knows where the virus came from. My own view is that it doesn’t much matter where it started, but many Westerners blame China for the pandemic, mostly because the first known cases occurred there.

The Italian researchers seem reluctant to conclude that the pandemic began in Italy, instead they point the finger at China:

But the Italian researchers said that’s not necessarily their conclusion.

“These findings simply document that the epidemic in China was not detected in time,” Giovanni Apolone, scientific director of National Cancer Institute (INT) and a co-author of the study, told a news conference in Milan.

“These finding simply document”? Really? This study does not provide any evidence for the virus being in China last September, it merely shows that it was in Italy at that time.

In my earlier post, I expressed doubt as to whether the Italian claims were true. I still believe that the virus originated in China. Many scientists now seem to be skeptical of the study:

The study has also sparked doubts among some Western scientists who called for further tests.

Much of the scepticism was focused on the so-called specificity of the antibody tests, that, if not perfect, might reveal the presence of antibodies to other diseases.

PS. And can we please count the votes? Georgia’s already counted their votes twice. What is the problem?


Ross Douthat on Trumpism

I wish I could write sentences like this:

For the center, the revelations of 2016 were about policy failures that had been mostly invisible until Trump came along — above all, the way that center-left and center-right visions of post-Cold War “openness,” to free trade or low-skilled immigration or ever-greater-integration with the People’s Republic of China, simultaneously failed to achieve their geopolitical goals and hollowed out communities across the American heartland, creating a deadly, demagogy-ready vacuum where work and church and family used to be.

While I tip my hat to Douthat’s skill as a writer, I have nagging doubts about the content of his message. Let’s start from the rhetorical flourish that ends the sentence:

creating a deadly, demagogy-ready vacuum where work and church and family used to be

Yes, you could argue that there’s been a sort of decline in these three areas. But is this actually what fueled the recent demagoguery? Consider:

1. In the US, evangelical Christians are generally regarded as the most fervently religious of 21st century Protestants, and yet they voted overwhelmingly in favor of Trump. So where’s the evidence that a decline in “church” is fueling demagoguery?

2. I suspect that people with jobs are more likely to vote for Trump than those without jobs, but I can’t prove that. Nonetheless, I’ll call the “work” claim half correct, as those who lost industrial jobs and had to take lower paying jobs were probably sympathetic to Trump.

3. Polls suggest that married people (i.e. “families”) are much more likely to vote for Trump than are single people.

So while Douthat writes in a very persuasive style, I’d say he’s mostly wrong in his diagnosis of the roots of demagoguery.

What about his claim that “free trade” was an important factor? I use scare quotes as Trump was lying when he said America adopted free trade and our trading partners did not. Our trade policies featured many barriers, pretty typical for a developed country (and China’s barriers were not unusual for a middle income country.) It’s also not clear why other high wage countries with equally free trade, such as Germany, were not hurt by globalization. Might the problem lie elsewhere?

But let’s say Douthat is right and free trade is a major problem. What’s his solution? I continued reading, looking for suggestions as to what we should be doing differently. Presumably if free trade is the problem, then less free trade is the solution. But Douthat doesn’t go there, and I think the reasons are pretty obvious. Trump tried an alternative to globalization and failed miserably. Just as free trade economists predicted, Trump’s economic policies made the trade deficit even bigger. Good intentions are not enough—you need to understand economics. Peter Navarro does not.

I suspect that Douthat understood this point, which is why when he gets to his policy recommendations he looks elsewhere:

Of course, all the lost opportunities I’m describing owe a great deal to Trump’s own presidential conduct. Had he governed as he campaigned, had he dropped into Washington trying to cut infrastructure deals with purple-state senators instead of letting Paul Ryan run domestic policy for the first two years, it might have forced real policy adaptation on both parties. 

In American politics, talking about building infrastructure is about as meaningful as talking about “ending waste, fraud and abuse in government”—it’s an empty cliche that I’ve been hearing for almost my entire adult life. We need to “rebuild” our “crumbling” infrastructure. Wake me up when that happens.

Talking about infrastructure is a way for a politician to sound serious, non-ideological and centrist, in contrast to the ideologues at either extreme, of which Douthat is pretty dismissive:

After so much failure and derangement, there are worse things than a reset. But it’s still the case that too many of the figures, Republican and Democrat, who are poised to be restored to their prior positions on the chessboard resemble the restored Bourbons after Napoleon, having “learned nothing and forgotten nothing” across the last four years. Which suggests that what we’ve lost above all in the Trump years is the chance not to repeat the experience soon enough.

Actually, there is no “third way” in economic policy. Douthat dreams of a non-left wing economic policy that is pro-worker and rejects free market ideology. But where is this model? Sure, you can boost the child tax credit and build a few bridges and airport terminals, but neither Democrats nor Republicans are strongly opposed to those initiatives. That’s not a meaningful third way. Neither side of the spectrum will abandon globalization, nor should they.

(You may argue that the GOP is opposed to spending money on infrastructure, but my impression is that places like Texas build more infrastructure than California.)

Ross Douthat really is one of our finest pundits, but his strength is not in proposing new economic policy regimes, rather his forte lies in describing the zeitgeist of our society. Douthat writes as beautifully as Mencken, but with a sensibility that is 180 degrees removed from the cynical infidel that wrote for the Smart Set.

I’m with Mencken.