Archive for December 2022


I don’t do unconditional forecasts

In any case, I find conditional forecasts to be far more interesting.

This tweet caught my eye:

Yikes? I say “yeah!”. I’d be thrilled with 0.5% RGDP growth in 2023. That would probably represent something close to a soft landing, particularly if overall NGDP growth were around 4% (as implicitly forecast by the Fed.)

Keep in mind that the Fed is also forecasting 0.5% RGDP growth in 2022, and with most of the data already in we are likely to come very close to that figure (because these are Q4 over Q4 figures.) And that likely 0.5% RGDP growth was accompanied by extremely low unemployment, indeed the most overheated job market in my entire life.

Of course, we would not necessarily get the same result in 2023, and along with its 0.5% RGDP forecast the Fed forecasts unemployment rising to 4.6%. I disagree.

So here’s my conditional forecast. I don’t know what RGDP growth will look like, but I predict the labor market will do much better than predicted by Okun’s Law. Thus if we do get 0.5% RGDP growth, I predict unemployment will only edge up to about 4.0% (not 4.6%), which is not a recession by any reasonable definition.

The bad news is that RGDP might do much worse than 0.5%, in which case unemployment would rise sharply. But given the overheated nature of the current job market, with severe worker shortages in many industries, I’m predicting that 0.5% RGDP growth would be associated with a pretty decent job market.

If we get 0.5% RGDP growth and 4.0% NGDP growth then that’s basically a soft landing and the Fed should celebrate. The Fed may blow it, but at least they are smart enough to target the correct forecast.

Real aggregate demand?

As I’ve pointed out in numerous previous posts, there is no more nonsensical concept in all of macroeconomics than “real aggregate demand”. What does that even mean? Aggregate demand is a nominal concept.

David Beckworth directed me to a tweet from the Roosevelt Institute:

Oh, just higher prices? Is that all? By that criterion, back in 2008 “demand” was below trend in Zimbabwe. Real spending was declining even as nominal spending was rising by billions of percent per year.

Macroeconomics is truly in a new dark age.

PS. If you still don’t see the point, just draw an AS/AD diagram and start shifting the lines. Look at P, Y and nominal GDP. This is Macro 101.

Sixteen random articles

1. More signs that Brexit isn’t working out as intended:

These were perhaps the most depressing few days in a crisis that has evolved from a curiosity into a political nightmare. Since the start of the year, 38,000 people have made the trip across the world’s busiest shipping lane, the maritime equivalent of sprinting across a motorway. Small boats pose an intractable problem for every part of the political spectrum. They reveal a miserable tale of incompetence, cruelty and complacency.

The crisis is most humiliating for the government. Politicians such as Ms Braverman have repeatedly pledged an era of stronger borders, lower immigration and more sovereignty. They have achieved the opposite. As a member of the eu, Britain had the right to deport asylum-seekers if they had previously been registered in another of the bloc’s member states. But Britain left the scheme when it left the club. Instead it tried to recreate a harebrained version, paying Rwanda to accept asylum-seekers on its behalf. The courts have so far stymied this idea. In short, the government replaced a scheme that was practical, moral and legal with one that is impractical, immoral and probably illegal.

2. Don’t call it containment:

For their part, American officials deny that export controls are a bid to contain China. Their denials refer to specific, cold-war definitions of containment, recalling George Kennan’s strategy of countering all forms of Soviet influence worldwide. In reality, America has come to see domination of high-end semiconductor manufacturing as vital to national security, says Gregory Allen, a former Pentagon official specialising in ai, now at the Centre for Strategic and International Studies, a think-tank in Washington. America aims to slow China’s technological progress not wreck its economy, he says. But an unspoken goal is “to preserve our ability to destroy their economy at a later time, should we need that tool.”

3. Putin’s trying to turn Ukrainians into Russians. It seems he’s doing the opposite:

In the very country where Mr Putin’s soldiers are killing Russian-speakers on a daily basis, the trauma has led Ukrainians, even those brought up in Russian, to switch languages en masse. Friendship groups are increasingly opting to converse in Ukrainian. Poets and academics have changed the language they use professionally. Refugee children in Russian-speaking families are making the extra effort to play in Ukrainian. Companies are changing, too. Oleg Gorokhovsky, a co-founder of Monobank, announced that the app would be switching to Ukrainian, saying: “The Russian language is associated with those who murder, rape, steal.”

4. Funny how nationalism never seems to work out as intended:

Like their counterparts in China and Europe, politicians in America want to lessen their country’s dependence on foreign chipmakers, in particular tsmc, which manufactures 90% of the world’s leading-edge chips. In response, America, China, the eu, Japan, South Korea and Taiwan together plan to subsidise domestic chipmaking to the tune of $85bn annually over the next three years, calculates Mark Lipacis of Jefferies, an investment bank. That would buy a fair bit of extra capacity globally.

At the same time, prospects for offloading the resulting chips are darkening as a result of America’s restrictions on exports to China. Many American firms count the Asian giant, which imported $400bn-worth of semiconductors in 2021, as their biggest market. Intel’s Chinese sales made up $21bn of its total revenues of $79bn last year. Nvidia said that an earlier round of restrictions, which curbed sales of advanced data-centre chips to Chinese customers and to Russia after its invasion of Ukraine, would cost it $400m in third-quarter sales, equivalent to 6% of its total revenues.

The new controls, which target Chinese supercomputing and artificial-intelligence efforts, are a particular concern for manufacturers of chipmaking tools. Three of the five biggest such firms—Applied Materials, kla and Lam Research—are American. The share of the trio’s sales going to China has shot up in recent years, to a third.

This is an odd way to help our chip industry.

5. The Economist says we should legalize cocaine:

Half-measures, such as not prosecuting cocaine users, are not enough. If producing the stuff is still illegal, it will be criminals who produce it, and decriminalisation of consumption will probably increase demand and boost their profits. The real answer is full legalisation, allowing non-criminals to supply a strictly regulated, highly taxed product, just as whisky- and cigarette-makers do. (Advertising it should be banned.)

Legal cocaine would be less dangerous, since legitimate producers would not adulterate it with other white powders and dosage would be clearly labelled, as it is on whisky bottles. Cocaine-related deaths have risen fivefold in America since 2010, mostly because gangs are cutting it with fentanyl, a cheaper and more lethal drug.

Legalisation would defang the gangs. Obviously, some would find other revenues but the loss of cocaine profits would help curb their power to recruit, buy top-end weapons and corrupt officials. This would reduce drug-related violence everywhere, but most of all in the worst-affected region, Latin America.

What would happen if Colombia were to legalize cocaine? Perhaps that big bully Russia would stop them? Or maybe illiberal China? They are always trying to bully other countries. According to The Economist, the real danger lies elsewhere:

In a paper in 2016 Dr Caulkins, the Carnegie Mellon professor, examined what might happen were cocaine to be legalised in Latin America. He concluded that, although it might generate a legal cocaine market worth “somewhere between hundreds of millions and low single-digit billions per year,” the price would be that the country in question would become an “international pariah”. Dr Caulkins reckons America and others would impose sanctions in retaliation.

It’s not enough to screw up our own country; the US seems determined to create chaos everywhere.

6. New Zealand was the first country to allow women the right to vote, and in 2020 voted almost 2 to 1 to legalized assisted suicide in 2020. But an initiative to legalize pot was narrowly rejected:

Yet when it came to another, non-binding, question on their ballots, about whether to legalise cannabis, Kiwis curiously found limits to their open-mindedness: just over half appear to have voted against the proposition. That might seem strange. New Zealand is one of the easiest places in the world to get a toke, and Ms Ardern’s admission of having smoked weed elicited little more than a national shrug. More than half of those aged between 15 and 45 say they’ve done the same. . . .

Such arguments are understandable. But they miss a point that Maori community workers and others make: Maori are far more likely than pakeha to be charged with possession and cultivation of marijuana. And the disproportionate number of Maori banged up for small-fry drug offences feeds into the pathology of Maori gangs that blight indigenous life. Even the most progressive societies have their blind spots.

7. India continues its downward spiral into Hindu nationalism:

At the most extreme end of the Hindu-nationalist spectrum, speakers at public rallies across northern India in recent years have launched bidding wars of threats against Muslims, from mass rape to mass expulsion. On May 7th Hari bhushan Thakur Bachaul, a bjp politician in Bihar, in eastern India, declared that Muslims should be burned alive just like effigies of the Hindu demon Ravana.

All but a tiny portion of Hindus regard such talk as madly over the top. Yet in part because of the reluctance of either Mr Modi or his rss mothership to intervene, the demonising tone has become commonplace, and not just regarding the Muslims minority. Other groups such as Dalits, leftist activists (dismissed as “urban Naxalites”) and liberal do-gooders (smeared as “libtards” and “pseudo-seculars”) have become the targets of digital troll armies and, dismayingly often, of the law.

The large Christian (35m) and Sikh (25m) minorities are not spared, either.

8. China has its own version of the alt-right:

Sai Lei, a blogger behind some of the loudest recent campaigns, declared China House’s founder an er guizi, a contemptuous term for collaborators with Japanese occupiers in the 1930s and 1940s. Reposted by the Communist Youth League, his video has to date been viewed 5m times.

A veteran of the ngo world calls this the worst time for Chinese civil society since 1989. Yet this atmosphere of fear was not triggered by new government policies, or by a wave of arrests. Instead, disconcertingly, some of the most damaging attacks came from previously little-known social-media entrepreneurs. Still more shockingly, the secret weapon of these bloggers is to make anti-foreign bigotry fun. Their core audience is young men aged 18-25. If followers are initially hooked by videos denouncing “anti-China traitors”, their attention is kept with nationalist memes, conspiracy theories and dark in-jokes.

9. The Economist discusses a natural experiment in Indonesia showing the effect of criminalizing prostitution:

Even as Malang embarked on its crackdown on prostitution, brothels in two nearby districts remained open. That presented researchers with a control group. Comparing indicators from Malang and its neighbours, Lisa Cameron of the University of Melbourne, Jennifer Seager of George Washington University and Manisha Shah of the University of California, Los Angeles found that within six months of criminalisation, sexually transmitted infections (stis) among sex workers in Malang had risen by 58%, even as they remained stable in the control group. Nor was the policy effective at reducing prostitution: though the sex market initially shrank, it grew back to its original size after five years.

Public-health measures suffered as a result of the ban. Many prostitutes in Malang lost access to the sti checks and cheap condoms that non-profits and local health officials used to provide. Some organisations stopped administering services to sex workers because they were wary of aiding a criminalised trade. Those that continued have had a harder time locating sex workers because they are no longer centralised in brothels. Condom prices tripled as subsidised ones disappeared. As sex workers’ earnings fell, some compensated by offering clients unprotected sex, for which they can charge more.

The findings fit into an existing body of evidence that suggests criminalising sex work leads to bad outcomes. 

10. People often ask me to define wokeness. The Economist has as good a definition as any:

This credo still lacks a definitive name: it is variously known as left-liberal identity politics, social-justice activism or, simply, wokeness. But it has a clear common thread: a belief that any disparities between racial groups are evidence of structural racism; that the norms of free speech, individualism and universalism which pretend to be progressive are really camouflage for this discrimination; and that injustice will persist until systems of language and privilege are dismantled.

11. The new FT interview of Brad DeLong has some good quotes:

The US is now an anti-globalisation outlier. And this is a bad thing for the dominant economic power to be.

But this observation really caught my eye:

The transformation of China from oligarchical collectivism into monarchical collectivism is unlikely to work. Xi Jinping may well live for a very long time and I do not think his judgment is terribly good on a huge number of questions. . . . I look at my Republican no-longer friends here in the US. Nearly all of them are desperate to somehow get Donald Trump out of the picture as the great helmsman. And that’s precisely because they’re hoping to benefit massively from the positions they will have when he does depart, all of them being essentially in the position of the rest of the Chinese elite during the Cultural Revolution. “This is a crazy man who’s doing enormous damage, but we cannot move against him. If only we hang on and frantically do his bidding as long as we can, we’ll get through it all right, at least personally.” Never mind that it’s a disaster for the cause we supposedly all espouse.

12. One of the saddest aspects of the modern world is the decline of free range kids (in the US, other countries remain much freer than the US.) Here’s Reason:

Heather Wallace’s oldest son, 8-year-old Aiden, was driving his two brothers crazy in the car as they all returned from karate one afternoon in October 2021. Wallace asked Aiden to walk the rest of the way home—half a mile in quiet, suburban Waco, Texas—so that he could calm down.

For this she was arrested, handcuffed, and thrown in jail.

She was charged with endangering a child, a felony carrying a mandatory minimum of two years in prison.

When I was young, I never knew that my mom was an evil criminal.

13. Tyler Cowen recently argued that the biggest difference between classical liberals and the New Right is their attitude toward the “elites”. In a recent Reason magazine article, Ilya Somin points out that the New Right is fine with elites, as long as they implement right-wing policies. He then suggests that the real difference is attitudes toward nationalism:

If anti-elitism is not the main factor dividing libertarians from the New Right, what is? I would suggest it is the conflict between the cosmopolitanism of the former and the nationalism of the latter. As Cowen notes libertarianism (or classical liberalism) is a cosmopolitan worldview committed to liberty and equal rights for all, regardless of background. That includes a commitment to free trade and free migration, among other things. By contrast, the New Right—especially in its “national conservative” manifestation—are exactly the opposite. They are European-style ethno-nationalists who view foreign cultures and people with suspicion, often descending into xenophobia.

14. Another Reason article discusses how one elite member of the New Right is imposing his views on a local government:

The administration of Florida Gov. Ron DeSantis (R) is suing the city of Gainesville to stop its legalization of new small apartment buildings in all residential areas. Allowing more housing in existing neighborhoods will worsen housing affordability, the state argues, while straining infrastructure and upending established neighborhood character.

More supply raises prices? The new GOP combines socialism with stupidity.

15. This tweet caught my eye:

The death rate from alcoholism is more than 20 times higher in Belarus than in Bulgaria or Georgia. It’s also more than 20 times higher in Denmark than in Italy or Greece. That’s a lot! There’s something to be said for having a culture that has been drinking wine for thousands of years.

16. And finally, Nancy Qian has a brilliant article pointing to the (ironic) fact that the youth in China are both the most pro-government cohort, and the most likely to protest:

The Covid protests showed that the full effects of two decades of propaganda and censorship are much more complex. The relative innocence of young Chinese insulates them from fear of extreme reprisals. Having little appreciation for just how violent the Party can be, some may underestimate the risks of speaking out. They know that they may be arrested briefly, or perhaps they or their family members might lose their jobs. But the type of violence demonstrated by the Party in the past is a foreign and abstract notion.

Similarly, the sincerity of their belief in Party ideology may actually encourage some young Chinese to protest. Many are truly convinced that the Party exists to “serve the people,” a slogan promoted by Chairman Mao that’s still popular in schools. So the young feel particularly betrayed by the way officials have implemented Xi’s Covid Zero policies — locking up families in their homes without food, blocking the ill from reaching hospitals, perhaps even leaving people to die in fires such as the one in Urumqi.

Read the whole thing.

About that Trump hysteria

Back in 2016, I was accused of being hysterical about Trump’s authoritarian rhetoric. Three of the four items in the following list occurred just in the past week:

In the weeks immediately surrounding the midterm elections, Donald Trump called for the “termination” of constitutional rule, openly embraced the conspiratorial QAnon movement, pledged support for the Jan. 6 rioters and hosted, over dinner at Mar-a-Lago, the white supremacist Nicholas Fuentes and Ye (once known as Kanye West), both of whom are prominent antisemites.

I knew Trump wouldn’t let me down.

Hot, hot, hot

Today’s jobs report shows another big employment gain and rapidly rising nominal wages. Here’s Bloomberg quoting Seema Shah:

To have 263,000 jobs added even after policy rates have been raised by some 350 basis points is no joke. The labor market is hot, hot, hot, heaping pressure on the Fed to continue raising policy rates. It will not have gone unnoticed by Fed officials that average hourly earnings have steadily strengthened over the past three months, exceeding all expectations, and the absolute wrong direction to what they are hoping for. 

And here they quote Peter Tchir:

The big news is earnings! Last month was up 0.5% instead of original 0.4% and this month was up a whopping 0.6% (versus 0.3% expected). Fed will not like that.

bUt hiGH iNtERst rATes MeAn mOnEY is tIGht

Seriously, this is why we need level targeting.