Archive for the Category Australia


The Republican Party’s future

Here’s the state of Britain’s right wing party, supposedly being torn apart by Brexit:

Alan Duncan, a junior minister in the Foreign Office, said of the Tory MPs who had triggered the confidence vote: “This is an act of irresponsibility, foolishness and national vandalism.”

“Any attempt to replace the prime minister in the middle of all this is utterly reckless and brainless. Anyone who has done this should be ashamed of themselves. They are not acting in the national interest.”

If Mrs May lost a vote of confidence or decided to resign, it would plunge the party into a formal leadership contest; there is no clear frontrunner to replace her and any contest would be highly divisive and could take weeks to play out.

Now let’s look at the condition of the right wing party in an English-speaking nation facing no Brexit crisis, which has a healthy economy that has been growing for 27 straight years, and no immigration crisis:

Mr Morrison owes his current eminence (if, again, that is the right word) to a cabal of what a senior Liberal calls a bunch of “crazy, right-wing nutjobs”. In August they defenestrated the man, Malcolm Turnbull, who had called and won the previous election, and had attempted to govern as a pro-business and socially liberal centrist. One of the cabal, Peter Dutton, a vituperative populist, failed to secure Mr Turnbull’s crown. In the ensuing scrimmage, which did few of its participants credit, Mr Morrison won it almost by accident. The most competent moderate, Julie Bishop, was swiftly trampled. . . .

In politics, says one senior party member, you used to make progress through compromise. “Now, it’s, ‘If you don’t give me something I want, I’ll blow the place up.’” Perhaps Mr Abbott and his like really do have a death wish. Perhaps they fancy that defeat by the Labor Party will have a wonderfully purgative effect, clearing the wets out of the Liberal Party and allowing their faction to enjoy unadulterated rule. What is nearly certain is that a grand old party faces a whipping next year. The question is whether it can survive at all.

As I keep telling you, there’s something in the water. (Or the internet?) I’m sure that some commenters will say that politics is always like this.  Actually, this is much worse than usual.  I predict that the US Republican party will be torn apart by a similar crisis, at some point in the next few years.

PS.  This also caught my eye in the Australia article:

As if in support, the women’s minister, Kelly O’Dwyer, said in a leaked discussion with colleagues that the party’s leaders were seen as “homophobic, anti-women, climate-change deniers”.

Anti-women? So it’s not just Brazil, the Philippines, the US, Italy, and Russia.  Add Australia to the list of countries featuring increasingly misogynistic leadership.  Is that enough to count as a trend?  Maybe Time’s “Man of the Year” should have been, “The angry, homophobic, misogynist, authoritarian, gas guzzling, macho male.”

PPS.  This made me smile:

“Now, it’s, ‘If you don’t give me something I want, I’ll blow the place up.’”

Trump has said that if Congress doesn’t give him the new Nafta, which is quite similar to the old one, he destroy Nafta entirely.

What should the Dems do?  Feed the beast, or see if Trump is bluffing?


The increasing populism of the new right

India’s Modi shares some similarities with other populists in places like Turkey, Italy and the US.  Here’s a recent FT story:

Tensions between the RBI and Mr Modi have been mounting for months over the central bank’s hawkish monetary policy, use of its mounting reserves and the tough measures taken to clean up bad loans at India’s state-run banks.

Mr Modi has been accused of demanding that the RBI ease back on its crackdown out of fear it will hit economic growth during his drive for re-election, particularly as liquidity in non-bank lenders has dried up after a series of defaults at IL&FS, a high-profile finance and infrastructure group.

At a 10-hour board meeting last month, Mr Patel made a number of concessions under heavy pressure from government nominees, including promising to review restrictions on fresh lending by banks that already have high levels of bad debt. Pressure on the RBI was expected to continue at Friday’s meeting.

Fresh lending from banks that already have high levels of bad debt?  What could go wrong?

As a result of the pressure, Patel announced his resignation today.  (Recall that Raghuram Rajan was let go two years ago, for similar reasons):

“By forcing Mr Patel’s hand, the government has now made it clear who runs the show,” said Eswar Prasad, a professor at Cornell University, adding that the move marks “the culmination of the government’s taking the hammer to a cherished and widely respected institution”.

The Indian rupee fell more than 1.8 per cent against the dollar in the immediate aftermath of Mr Patel’s resignation.

If you look around the world, there is more and more evidence that the left and right are switching position on a wide range of issues:

1.  The populist right is increasingly supportive of monetary stimulus and opposed to central bank independence. (Easy money)

2.  The right is increasingly supportive of protectionist trade policies. (Mercantilism)

3.  The right is increasingly supportive of ramping up “moral hazard” in the financial system. (Easy credit)

4.  The right is increasingly supportive of deficit spending, including entitlements.

Those used to be left-wing positions.  Of course there are plenty of Republican politicians and pundits in the US that still oppose this populism, but this is the way that politics are evolving, all over the world.

I predict this process will continue, with local variations. Many other left wing ideas will flip to the right. The right will advocate a higher minimum wage and more government spending on infrastructure.  Right wing populists will increasingly oppose Silicon Valley type companies.    But this switch on tech firms will be less noticeable in the US, as it conflicts with the desire of nationalists to extract rents from the rest of the world.  In contrast, populists in the other English speaking nations will be less protectionist than in the US, as the costs of protection are more obvious in those smaller trading nations (Canada, the UK, Australia, New Zealand, Ireland, etc.)

Nonetheless, at a deep psychological level, the forces reshaping politics are obviously global.  The Economist has a fascinating article on the recent dramatic changes in Australia’s (conservative) Liberal Party, in which a Trumpian wing is suddenly becoming far more powerful.  Interestingly, the factors that supposedly led to the rise of Trump in America (opposition to imports, the Great Recession, low-skilled immigration, etc.) are largely absent in Australia.  This suggests that the psychological cause of this phenomenon is far deeper that the shallow explanations offered by media pundits.  I have no idea what those causes are, but imagine they will become clearer over time.  Why is misogyny usually a part of the package, for instance?

The Conservative Party in the UK is going through turmoil very similar to what’s reshaping Australia’s Liberal Party.  Unlike in Australia, however, it stays afloat because its opposition is even more loony.  The Australian Liberal Party doesn’t benefit from such a weak opposition, and thus faces a disaster at the next election.

The good news is that all of this turmoil may eventually lead to a US political party that is socially liberal and economically liberal.  I fear, however, that in the short run we’ll have two economically illiberal parties.


Is China a threat?

Tyler Cowen responded to my recent post, arguing that China is a threat to the liberal world order:

If you are the global hegemon, and another country, largely hostile to your political values and geopolitical desires, engages in widespread subversion of your power and influence, you must in some way hit back.  Otherwise you will not be global hegemon for much longer.  And unlike India or the EU, China desires to build an international political and economic order which would destroy liberalism as we know it.  Imagine a world where autocracy is a much more widespread norm, the Xinjiang detentions and North Korean nuclear weapons are considered entirely appropriate behavior, Taiwan is a vassal state, and few Asian countries could allow their media to print criticism of the Chinese government, for fear of retaliation.  Institutions such as the WTO would persist only insofar as they created loopholes which gave China the benefits of membership without most of the obligations.

Did I mention that politics in Australia and New Zealand are subverted regularly and blatantly by Chinese influence and money?  Very likely the same is underway in the United States (and other countries) right now.

You can put aside trade practices altogether, and simply look at the extreme and still under-reported degree of espionage and spying conducted by China, aimed at major U.S. corporations.  It’s not quite an act of war, but it is not the classical model of trade either (“Mercantilism is bad…what’s wrong if they send us goods and we just send them back paper dollars?”).  China is violating U.S. laws on a massive scale, and yes, I am sorry to say, trade is our main way of “reaching” them and sending a message.

First I’ll explain why I mostly don’t agree, and then I’ll also briefly describe how Tyler might be correct:

1. I don’t believe that China is trying to destroy the liberal world order.  Here’s what I think they are actually trying to do.  China accepts that the liberal world order will remain in place.  The most developed countries will continue to be free market democracies.  China likes to trade with those countries, and China respects their achievements.  China doesn’t like or respect places like North Korea and Turkmenistan.  Rather, China wants a free hand to continue being an authoritarian country, with a crackdown in places like Xinjiang. Unlike the Soviet Union, they are not trying to instill communism in other places.  Their support for autocracies in the developing world is simply a marriage of convenience; they know that (in the UN) these countries will also oppose American attempts to force human rights on China.  I believe that many Westerners wrongly apply the Soviet model, which doesn’t fit China at all.  As an aside, Trump loves autocracies and views countries like Canada as enough of an enemy that we must stop buying their steel for national security reasons.  (Of course, Tyler would not defend Trump on those points.)

2. The Xinjiang detentions are a gross human rights violation, but Trump is making no attempt to do anything about it.

3.  China is probably unhappy with North Korea’s nukes, but doesn’t know what to do about it.  Neither do we.  Unlike the US, China also wants to avoid the collapse of North Korea, for geopolitical reasons.  That’s the actual reason that China deserves criticism on North Korea; a collapse of their regime would be a good thing.

4.  “Vassal state”?  Taiwan is part of China.  At least that’s the official view of Mainland China, the US, and the Taiwan constitution.  According to international law, accepted by the US, regions like Taiwan, Crimea, Catalonia, etc., do not have the right to unilaterally secede, without permission from the central government.  That doesn’t mean I oppose independence for certain regions—the Czech divorce seemed to work fine; I’m just describing the rules of the game. China is not claiming any inhabited land, anywhere in the world, that the US does not consider a part of China.  China is not a Soviet style expansionist power, and for the past 2000 years has been the least expansionist great power in all of world history.  They have 1.4 billion people at home to worry about; the last thing China wants to do is run other countries.  Rather they like regimes who won’t criticize their human rights and are open to doing business with them.

5.  I’m skeptical of Tyler’s argument that Asian media outlets are especially afraid to criticize China.  The only one I read frequently is the SCMP, and it’s full of criticism of China (albeit perhaps less harsh than if China didn’t control Hong Kong.) How about the media in Japan?  South Korea?  Taiwan?  India? I don’t doubt that a few pull their punches in order to have better business opportunities with China, but that’s their decision.

6.  Like many developing countries, China is allowed more trade restrictions than the developed world.  As China gets richer, it will adhere more closely to WTO rules. Indeed China has recently been reducing trade and investment barriers, and it’s in China’s interest to continue doing so.

7.  I follow Australian politics pretty closely, and I see no evidence that Chinese influence is a major problem.  When cases of bribes are discovered, the politicians are punished.    For those who have a more conspiratorial mindset than me, tell me why I shouldn’t regard Trump as Putin’s puppet?  I’ve criticized Trump on that basis, but even I don’t think Russia controls the US to any significant extent.  The Russia sanctions remain in place, even though Russia almost certainly has information that could be used to blackmail Trump, who appeared to lie about his business dealings there. That’s not to say that Australia isn’t a bit friendlier to China than it would be if a huge portion of its exports weren’t going there.  But that influence does not require the bribery of local politicians, it’s economic self-interest.  Australia just banned Huawei, over the objections of China (HT:Ray Lopez.)

8.  This is hard to respond to:

You can put aside trade practices altogether, and simply look at the extreme and still under-reported degree of espionage and spying conducted by China, aimed at major U.S. corporations.

Like most bloggers, all I know is what I read.  So if China’s doing all sorts of bad things that are not being adequately reported, I can’t comment.  Nor can I comment on US espionage, something that I know little about.  I’m certainly not going to defend espionage, but in this case I’d guess the actual damage from China stealing intellectual property (in global utility terms) is very small.

Tyler is very polite and often lets others have the last word, so let me try to take the other side of this issue for a moment, in case he doesn’t respond.  Where might I be wrong?  The best argument is that I myself am too much a product of the Cold War.  I don’t see the China threat because I expect it to manifest itself in the way that the Soviets behaved after WWII; taking actual control of countries in places like Eastern Europe, or supporting guerrilla groups in the third world.  Perhaps I’m missing that there is a new form of international competition, involving high tech espionage, fake news, bribing local politicians, economic support for friendly autocrats, etc.  In other words, China’s doing a lot of the “softer” stuff the US did during the Cold War.  That’s not a defense of China on my part, as the US was wrong to support autocrats and wrong to try to change foreign election results.

Here are a few final thoughts.  Yes, the Soviet Union really was a nuclear threat, and we were lucky that there was no accidental escalation into outright war.  But otherwise we Americans were wrong about the Soviets. Its collapse was pre-ordained by the relentless rise of neoliberalism after the 1970s, which continues to this very day.  While I liked Reagan, in retrospect he had little to do with the collapse of Soviet communism.  Similarly, we overestimate the threat posed by China, which is still poorer than Mexico.  Unlike places like Mexico and Brazil, China has a strong desire to be a rich country, and will likely eventually become one.  But it will only be able to do so by continuing to reform its economy.

If the US wants to continue to be a global hegemon, it’s most useful role is in enforcing the international norms against one country invading and taking territory from another country.  (A norm China strongly supports!) And on that issue, there’s another great power that is a much greater threat than China.  Like Tyler, I find NATO to be a very useful organization.

I also wonder if there is a sort of instinctive suspicion of powerful Asian economies, which don’t share our values in some respects. Trump has assigned Robert Lighthizer the responsibility of negotiating with China, despite that fact that he was one of those who warned about the Japanese threat during the 1980s, a threat now almost universally viewed as a false alarm.  That doesn’t mean he’s wrong this time, but it should give us pause.

In any case, it’s all a moot point.  Trump’s not skilled enough to win this game.

Australia and China keep chugging along

The Economist has a very good essay on the Australia miracle.  It’s not just that Australia’s avoided a recession since 1991, they’ve also done better than other developed countries on a wide range of indicators, such as GDP growth, median wages and public finances (i.e. a small national debt.)  Italy would do well to study Australia.

When I started blogging, some claimed that Australia’s success was due to luck.  They had a mining boom when China began growing rapidly.  But mining has gone into a slump since 2013, with mining investment plunging from 9% of GDP to only 3%.  That’s much worse than the 2006-09 US housing slump:

Yet the collapse in commodity prices was not the end for Townsville or Australia. In fact, it was a fillip for other industries, whose growth helped to make up for mining’s troubles. The plunge in investment allowed the central bank to lower interest rates, lifting the housing business. The sinking currency, which lost 40% of its value against the greenback between 2011 and 2015, caused the number of foreign tourists and students to surge. It also encouraged foreigners to snap up flats in Sydney and Melbourne, giving construction even more impetus.

Building work had reached a nadir in the first quarter of 2012, when construction firms completed projects worth A$20bn. In the last quarter of 2017, that reached A$29bn.

Screen Shot 2018-11-24 at 2.13.17 PMAnd yet Aussie RGDP keeps chugging along at a 3% growth rate.  How have they done it?  The RBA keeps NGDP increasing:

Screen Shot 2018-11-24 at 1.34.32 PMSo the secret of Australia’s success was not the mining boom, it was sound monetary policy.  BTW, Australia has a much higher rate of immigration than the US.  Keep that in mind when you consider the amazing rise in Australian median wages:

Screen Shot 2018-11-24 at 2.40.19 PM

China’s another country that almost everyone got wrong. The NYT has a long article entitled The Land That Failed to Fail.  Here’s the subtitle:

The West was sure the Chinese approach would
not work. It just had to wait. It’s still waiting.

There are lots of experts who know much more about China than I do, and indeed my commenters often suggest that I read those experts every time I do a post on China.  Unfortunately, most of those experts have been wrong, repeatedly predicting the China bubble would soon burst.

Two experts that got it right were Ning Wang and Ronald Coase, who wrote an excellent book explaining the reforms that led to the China boom.

Many experts now insist that China is not a market economy, but I’d put more weight on those who got it right.  Wang and Coase argued that China is much more market-oriented than it appears to outsiders, and so far they’ve been right about the effectiveness of China’s reforms.

That’s not to say China won’t have a recession at some point, most likely they will.  But as we saw in South Korea after 1998, even a severe recession doesn’t prevent an East Asian country from getting rich.

PS.  I wonder if younger readers will find this as hilarious as I do:

In October Mike Pompeo, the American secretary of state, accused Chinese state-owned firms of “predatory economic activity” in the region. Mr Pompeo’s predecessor, Rex Tillerson, had urged Latin Americans to reject “new imperial powers” like China, bent on extracting natural resources while issuing unpayable loans.

By all means, Latin America should avoid imperial powers.

Monetary policy is boring. That’s good.

You’ve probably noticed that I no longer do as many posts on monetary policy.  That’s partly because I put my better posts over at Econlog and partly because there’s currently not much to talk about.  NGDP growth has been in the 3% to 5% range for 9 years, and I see no sign of anything changing in the near future (except perhaps a bit slower NGDP growth after this year, which is currently featuring above 4% growth.)  While boring is bad for me, it’s good for the economy.

Today, interest has turned to the question of when the next recession will occur.  The short answer is the same as always—no one can predict recessions.  But I’d like to talk about the issue anyway, since everyone seems interested in the question.

I’ve recently been catching up on David Beckworth’s podcasts, and listened to a very interesting discussion he had with Michael Darda.  Michael is a market monetarist who works in the investment area, and is known for having an excellent grasp of macroeconomics.  He knows the data quite well and he has a rare ability to interpret macro data correctly.  Lots of people are good at one, but he’s extremely good at both—no doubt partly due to his upbringing in Madison, Wisconsin.
Screen Shot 2018-08-25 at 3.48.02 PMAt one point they began discussing the yield spread, which has been one of the better recession forecasting tools.  I’d like to put in my two cents worth.

As you can see from the following graph, the yield curve often inverts before a recession.  Here it’s important not to over interpret the correlation, as US expansions never last more than 10 years, and yield curves typically don’t invert until well into an expansion, and the lag between inversion and recession varies somewhat over time.  Furthermore, yield curves did not invert before recessions in the 1933-58 period.  Still it’s one of our most reliable forecasting tools.

Screen Shot 2018-08-25 at 2.34.50 PMHere are a few observations:

1.  Over at Econlog, I argued that while the yield spread is pretty good at predicting recessions, it’s much less good at indicating when money is too tight.

2.  It’s possible that the yield spread is reacting to changes in the unemployment rate.  Consider the following hypothesis.  The yield spread gets relatively flat whenever the unemployment rate falls to a level close to the natural rate of unemployment.  Let’s also assume that the unemployment rate falling close to the natural rate is a good predictor of recessions:

Screen Shot 2018-08-25 at 2.32.30 PMIn that case we should be worried, as the unemployment rate has recently fallen to a level that is probably close to the natural rate.

Interestingly, there is one notable case when unemployment falling close to the natural rate did not lead to a recession.  In 1966, unemployment fell to 3.8% and there was no recession until 1970.  But that false signal is equally true of the yield spread, which also inverted in 1966.  Coincidence?

[On the other hand, the natural rate of unemployment is time varying (higher during 1975-95) and hard to measure, which makes the yield spread a better forecasting tool.]

When the unemployment rate is trending lower, it’s rational to expect the expansion to continue.  It may not always continue (consider 1981) but it’s a rational forecast.  And when unemployment is trending lower, the yield spread tends to be positive.  That’s because investors expect the future economy to be stronger than the current economy, and interest rates are highly correlated with the strength of the economy.

Conversely, when unemployment has fallen close to the natural rate, it’s no longer rational to expect lower unemployment in the future.  Indeed it’s quite likely that we’ll soon enter a recession.  That’s why the yield curve gets flat, and sometimes inverts.  In plain English, we never seem to achieve soft landings.  But Australia frequently does, and thus it’s not impossible.  The UK achieved a soft landing in 2001, and hence their 1990s expansion lasted until 2008.  If they can do it, so can we.

Memo to Jerome Powell:  Your mission, should you decide to accept it, is to avoid the hard landings that so often occur, but also avoid the 1966 scenario, where the Fed pulled up too soon, never landed at all, and instead soared off into the Great Inflation.  To do this, you need to avoid an excessively expansionary policy, which sometime triggers the inflation that later causes overly tight policy, and also avoid overly tight policy, which can directly cause a recession.  Let’s see . . . how about 4% expected NGDP growth?

Given that we’ve never had an expansion last for more that 10 years, you might wonder why I expect this one to go beyond a decade.  Well, until 2006-12 we’d never had a housing crash.  Until 2016, we’d never elected a lunatic as President.  Until 2018, we’d never adopted a wildly expansionary fiscal policy during a period of peace and prosperity.  None of those examples have any bearing on how long this expansion will last, rather they show that it’s really common for things to happen that have never happened before in the US.  And notice that other countries have had housing crashes before 2006, and lunatic presidents, and reckless fiscal policies during peace and prosperity.  That’s why I mentioned Australia and the UK (and there are many other such examples.) They provide an important clue that there is no inherent age limit on expansions.

Inductive reasoning can be useful, but must be handled with care.

PS.  The Hypermind NGDP prediction market is currently forecasting 4.8% NGDP growth from 2018:Q1 to 2019:Q1.  However, since the 2nd quarter is already in and growth was quite strong, this implies (annualized) 3.9% NGDP growth from 2018:Q2 to 2019:Q1.  Monetary policy is right on course.

PPS.  Because money is now boring, and my Trump posts are always stupid, please feel free to recommend other topics.  On the other hand, money is the only topic on which I have anything interesting to say.