Ramesh Ponnuru sent me a WSJ article by Greg Ip:

If workers lose their jobs to imports and central banks can’t bolster domestic spending enough to re-employ them, a country may be worse off, and keeping those imports out can make it better off.

This occurs only in certain conditions, says a new paper by Harvard University’s Larry Summers and two co-authors, but those conditions may now be present.

Mr. Summers, a former Treasury secretary, is no protectionist and no fan of Mr. Trump, whose election, he warns, could lead to recession in the U.S. and financial crisis abroad. But he does worry that chronically weak demand could make protectionism both respectable and irresistible.

Others, such as New York Times columnist Paul Krugman and Michael Pettis at Peking University have already noted how in a world with too little demand, one country’s trade surplus inflicts unemployment on the country with a deficit.

Even if Summers, Krugman and Pettis are correct (and I think they are wrong) the argument does not apply to the world we live in today.  Thus Greg Ip is mistaken when he says “but those conditions may now be present.”  They are not.

Let’s start with the US.  The US is not at the zero bound, and the Fed is expected to raise rates in a few days because they think that failing to do so would result in excessive AD.  So if protectionism somehow miraculously boosted AD in the US, the Fed would simply raise rates even faster to prevent any stimulative effect on AD.

Now it’s true that the Eurozone and Japan are both at the zero bound.  But both economies have very large current account surpluses, so obviously trade deficits are not depressing output in those two regions.  Even very depressed areas such as Italy run surpluses.

In fact, unemployment has almost nothing to do with trade “imbalances” (a term I hate).

Update:  Dilip sent me the following, from Jared Bernstein and Dean Baker:

In this context, the trade deficit was subtracting from demand in the domestic economy. Spending that could have employed people who needed jobs in the U.S. was instead employing people in Germany, China, and other countries from which America imports goods and services. In principle, the U.S. government could have looked to spur other channels of demand to offset the trade deficit, but as a practical matter this is often not easy to do: The most straightforward way to generate demand is through additional government spending, but there are major political obstacles to running large budget deficits even at times when it would be beneficial to the economy.

No, the most straightforward way to boost demand is to adopt a more stimulative monetary policy.  But that won’t happen because the Fed currently thinks it’s better to slow the growth in demand by raising its target interest rate.  (And they may well be correct.  The consensus of private sector forecasters was that we were roughly on target for 2% inflation, even before the recent bump up in TIPS spreads):

Most people will think this post is sour grapes on my part, but I’ve never cared what most people think.  I simply offer my honest opinion.  I was skeptical of Kuroda’s plan to peg bond yields.  (In this post I suggested that it was a positive step, but likely to have only a very small impact.)  But as of today the policy seems to be working.  The yen has lost about half of the ground gained over the last year. Recall it moved from about 125/dollar a year ago to 100 in late summer.  Now it’s plunged to 112.8.

So was I wrong?  I still don’t think so; rather I think that Kuroda got lucky.  Just after the policy shift, US bond yields started rising, in both real and nominal terms. Rates in some other important countries also started increasing.  This made the pegged 0% yield on 10-year JGBs look increasingly unattractive.  The yen depreciated.  If that change in global debt markets had not occurred, I doubt the policy would have had much impact.  Still, give Kuroda credit, as he was right and I was wrong.  (The markets were also wrong, and I’m a market monetarist.  Hence my incorrect prediction.)

If there’s a silver lining, it’s that I was less wrong than NeoFisherians who think a policy of lowering bond yields is disinflationary (I say never reason from a bond yield).  Keynesians who thought the BOJ was out of ammo were also wrong.  I always thought they had plenty of ammo, I just saw other tools as being more promising.

I’m not going to totally change my views based on this one data point, but I’ll file it away as one argument in favor of Ben Bernanke’s view of monetary policy.  (He’s the one who suggested this idea to Kuroda.)

PS.  If Japan were to hold the yen at around this level, then in the long run Japan would have about the same 2% inflation as the US is likely to have.  Markets currently don’t think the Japanese will do so, and thus they expect lower inflation in Japan.  But it’s entirely up to the Japanese where they want to set the exchange rate, and their inflation rate.  That’s a lesson I hope we can all agree on, except Noah Smith.

PPS.  Here’s another way of explaining my “lucky” argument.  The yen has fallen only slightly against the euro.  Europe also got lucky.

Here’s the Los Angeles Times:

Winston Yan stood atop the largest real estate project of its kind in downtown Los Angeles, a monstrous patchwork of glass and concrete next to the 110 Freeway, and marveled at the bustle of workers, construction vehicles and cranes 38 stories below.

The scope of development in this mixed-use project, called Metropolis, is unprecedented for L.A. but quite familiar to Yan. As an architect and executive for Chinese real estate giant Greenland, he’s witnessed firsthand China’s dramatic urbanization in recent decades.

“It reminds me of what’s happening in Beijing and Shanghai,” said Yan, chief technical officer for Greenland’s U.S. subsidiary. “Now it’s happening here.” . . .

Chinese developers such as Greenland, Oceanwide and Shenzhen Hazens are pouring billions into the neighborhood, adding thousands of new residential units in soaring skyscrapers that will fundamentally change the city’s skyline. Since 2014, Chinese developers have been involved in at least seven of 18 land deals downtown in excess of $19 million, according to real estate firm Transwestern.

“When all these megaprojects are finished, they’re going to have to reshoot the postcard picture of downtown L.A.,” said Mark Tarczynski, executive vice president for Colliers International’s L.A. office.

This is the flip side of America’s CA deficit with China.  When countries like China runs a CA surplus, their domestic saving exceeds their domestic investment.  This excess saving flows overseas to finance investment projects in countries like America and Australia, where saving falls short of investment.  Hence Chinese money is rebuilding America.

As you might expect, Trump is horribly confused on this point.  Here’s Matt Yglesias, discussing the recent debate:

• He also said the Chinese “are using our country as a piggy bank to rebuild China,” which isn’t even how piggy banks work, much less the US-Chinese economic relationship.

Trump has it exactly backwards.  Over at Econlog, I discuss the economist who has been feeding Trump this sort of misinformation about basic economic identities.  Yglesias also points to lots of Trump lies.  The phony stats are perhaps to be expected, but the bald faced denials of saying things that he actually did say, sets a new (low) bar for American politics:

• “Donald thinks that climate change is a hoax perpetrated by the Chinese,” Clinton said. He protested. “I did not. I do not say that.” But it turns out he did.

• “You even at one time suggested that you would try to negotiate down the national debt of the United States,” Clinton charged, to which Trump flatly replied, “Wrong.” But it turns out he did.

I actually recall him saying the second point, just a few months ago.  As with his public support for the Iraq War, truth means absolutely nothing to Trump.  In fairness, Clinton is also somewhat dishonest–Trump nailed her on the TPP.

As for Trump’s bizarre conspiracy theories on all sort of issues, I don’t even know what to say. (Chinese hoax?  Seriously?)  This sort of mental illness in a normal person might be viewed as amusing.  When the man with his finger on the nuclear triggers suffers from bizarre irrational delusions that foreign countries are trying to hurt us  . . . well that can’t be good, can it?

PS.  It’s kind of sad that wealthy Americans cannot seem to put aside the savings required to finance our investment spending, and instead we need to rely on the savings of poor Chinese.

PPS.  I didn’t watch the debate, because I find them unwatchable (and not just this one.)  Let me give you an example.  The press thought Trump did a mediocre job, but most agree that he was pretty strong during the first 15 minutes or so.  But if you look at the transcript, his first 15 minutes were just appalling, one lie after another, one inane statement about trade after another.  The piggy bank quote above.  The claim that Mexico’s VAT is a trade barrier, etc., etc.  Almost nothing he said was true, almost everything showed a complete lack of understanding of basic economics.  And this is what the press considers a “strong” performance.  It’s clear to me that the press is either too dumb to understand content, or cares only about style when making these judgments.  And maybe style is all that matters.  But in that case, why waste 90 minutes watching a debate?  There are much more entertaining ways to pass one’s time, like watching paint dry.

PPPS.  This caught my eye:

The Conference Board says that its consumer confidence index rose to 104.1, up from 101.8 in August. It was the strongest reading since the index stood at 105.6 in August 2007, four months before the beginning of the Great Recession of 2007-2009.

Not bad, for a country where “some great economists” think the unemployment rate is as high as 42%.

Seriously, we really need to stop talking like the US economy is still in “recession” and needs “stimulus”.  We do need a new monetary policy regime, but not because the current unemployment rate is too high.  We need a STABLE monetary regime. And supply-side policy reform (which neither candidate is advocating.)

In Washington DC, all the best and the brightest in both parties are horrified by the prospects of a Trump Presidency.  But perhaps we owe Trump an apology, as in some respects he already controls our trade policy.  Here’s a report from 4 months ago:

The U.S. government is sending a message to countries it believes are manipulating their currencies: We’re watching you.

A Treasury report targets five countries in particular: China, Japan, Korea, Taiwan and Germany. Each meets at least two of the three criteria that “determine whether an economy may be pursuing foreign exchange policies that could give it an unfair competitive advantage against the United States.”

At a time when currency devaluation has become a major tool used by multiple countries to stimulate growth, the U.S. is looking to protect its own interests. The report is an outgrowth of the Trade Facilitation and Trade Enforcement Act of 2015, a bipartisan effort aimed at stemming the global race to the bottom.

The criteria to determine whether a country should be on the “Monitoring List” of countries using unfair currency practices are: a trade surplus of larger than $20 billion, or 0.1 percent of U.S. GDP; a trade surplus with the U.S. that is more than 3 percent of that country’s GDP; “persistent one-sided intervention,” defined as purchases of foreign currency amounting to more than 2 percent of the country’s GDP in a one-year period.

No country meets all three criteria, according to the report, though the five on the list meet at least two.

For those not familiar with open economy macroeconomics, those criteria reach almost Trumpian levels of ignorance.  Where to begin:

1.  If you worry about this sort of thing (and a few respectable economists do) then you would look at a completely different set of criteria.  For instance, the trade deficit is a meaningless data point, if anything, you’d look at current account deficits.

2.  Bilateral deficits with the US are stupidity squared, a data point of no conceivable relevance, even to the most mercantilist economist on Earth.  All that “matters” is overall surpluses or deficits, not bilateral.

3.  If you are looking for “villains”, you would certainly not look at overall surpluses; rather you’d focus on surpluses as a share of GDP, or some similar metric.  Otherwise you’d be biased against large countries.  The current account surplus for China is about $170 per capita, for Switzerland it’s over $8000 per capita.  Even as a share of GDP the Swiss surplus is far higher.

4.  “Intervention” should not be defined as purchases of foreign assets, but rather as high government saving rates.  All government saving tends to have the same effect on the CA balance, whether it is used to buy domestic or foreign assets.

5.  The Treasury singles out Asian countries in a Trumpian fashion, for no apparent reason.  Switzerland has a $71 billion CA surplus, and engages in massive purchases of foreign assets to hold down the value of the SF.  There’s two criteria right there.  Why did it not make the list?  I have no idea, its trade surplus is also well above $20 billion.  Lots of other northern European countries also have massive CA surpluses, and spend lots of money holding down the value of their currencies.  In contrast, China’s recently been trying to hold up the value of its currency.

6.  If you were an American mercantilist, I’d think that you’d be much more worried about Germany’s $300 billion CA surplus, than China’s $250 billion CA surplus.  Germany exports lots of capital goods that might otherwise be bought from America, whereas China tends to export less sophisticated goods, which might otherwise be produced in other Asian countries, or Mexico.  Norway, Sweden, the Netherlands and even Italy have CA surpluses far in excess of $20 billion.  Notice that the Treasury follows in the proud tradition Pat Buchanan and Donald Trump in pointing fingers mostly at Asian countries, even though the logic of their mercantilist argument would suggest we should target the northwest Europeans.  Perhaps Germany was put on the list to try to make the racism appear a bit less blatant.

PS.  I forgot to shed a few tears for the “victims” of all this evil currency manipulation.  There’s Australia, with its $62 billion deficit, and no recessions in 25 years.  The UK, with its $162 billion deficit and the US, with its $473 billion deficit.  Both countries have a 4.9% unemployment rate.  In contrast, those sneaky eurozone members with their $394 billion CA surplus keep stealing our jobs, which probably explains their 10.1% unemployment rate.

PPS.  I don’t put all this on the Treasury; it’s Congress that forces them to engage in this sort of nonsense.

PPPS.  Speaking of Trump, last May I had commenters earnestly informing me that I should support Trump because he favored low interest rates.  Now Trump is slamming Yellen for her low interest rate policy.  Trump reminds me of that anecdote about 100 monkeys typing away.  Yes, there’s a tiny chance they might randomly type out Hamlet, but I’d put my money on something far worse.  There are many more ways to screw up than there are ways to succeed.

And no, this is not “normal” in politics.  Normal politicians lie and change their views on occasion.  Hillary’s not much worse than average (although she is certainly worse.)  But Trump’s just completely off the charts in terms of policy ignorance and personal dishonesty.  I’ve never seen anything close to this in my life, and I’ve been following politics since the late 1960s.  Nixon might have been closest on the honesty criterion, but of course was far more knowledgeable.  And even Nixon tried to avoid statements that were obvious lies. He was a devious liar.  Trump just doesn’t care.  He’ll look you in the eye and tell you that he opposed the Iraq War.  And the reporter who asked the question will be too cowardly to call him a liar to his face.  I almost hope Trump wins.  We deserve him.

I said “almost”, I’m not quite there yet.  🙂

I see many biased stories on China, so it’s nice to read something sensible.  Here’s Alex Frew McMillan:

Write off China at your peril.

That’s the message coming out of Tuesday’s economic data, which were considerably stronger than expected. The data show that the second half of 2016 will produce growth similar to that of the first six months of the year.

Just as the sun is shining on China’s east coast today, the numbers dispel the gloom cast over China’s economy last year, when the most-pessimistic of pundits predicted a crash landing.

August industrial output rose 6.3% year on year, beating a 6.2% estimate and up from 6.0% the previous month. Retail sales were the real shock, rising to 10.6% from 10.2% the previous month, a number economists had anticipated would be repeated. Infrastructure investment was also strong, after a sharp drop in July.

People’s reactions to such numbers are all over the place. I just received a report in response to the figures from SocGen: “Concerns over bubbles, not growth.” Some people are just never happy!

Longer term, growth is slowing—which is appropriate:

Yes, China is growing at its slowest annual pace since 1990. But a $9 trillion economy is not going to continue producing double-digit gains, as it did from 2003 through 2010. The economy missed an 8% growth rate only twice between 1990 and 2012, but may never hit such a pace again.

China has grown up. Or it is at least in adolescence. The sunniest outcome of this set of figures is that it likely gives Beijing the boost necessary to pick up the pace in overhauling its overproducing, underperforming, bloated state-owned enterprises.

China’s economy grew 6.9% last year, and is on track to hit around 6.5% to 7% in 2016. That’s the figure Beijing “predicted” in March — and China’s leaders are rarely (let’s say never!) wrong when they can turn the stimulus tap at will. Failing that, they’ll “massage” the numbers anyway, as I explained in April.

CLSA says in response to the latest numbers that China is on pace for 6.7% this year. “Overall, China’s August activity data were reassuring for investors,” the brokerage said, one that I think has some of the most sensible research on Asia.

And a sober reminder that there is still a lot at stake:

But it is far from all roses in China’s garden. The vast divergence between China’s humming, and wealthy, east coast and the rest of the country was only reinforced by the recent tragic tale of a woman in rural northwestern China.

Yang Gailan, 28, had been farming wheat, peas and potatoes in Agu Shan Village in Gansu province, as outlined in this story from The New York Times. She supported her four children, all under 7, on the $500 per year that her husband sent home from his migrant job in a nearby town.

Since welfare benefits are only granted in China to people living on $350 per year, local officials removed her payments. One day, the young mother told relatives she was taking her children to go tend the family’s sheep. Then she poisoned them with pesticide, attacked them with an axe, killed them, and killed herself by drinking the pesticide. This month, her husband came back from work and killed himself with poison.

The Chuck Schumers and Donald Trumps of the world favor policies that would lead to more of these sad stories (which thank God are far less frequent than a few decades ago–due to economic growth.)

The story has gained prominence in China, and has rammed home the vast gap in wealth between China’s haves — the country’s GDP per capita is $6,471 while the United Nations defines poverty as living on less than $1 per day — and rural have-nots. Many families are ripped apart by economic forces that drive parents into migrant jobs where they lack the hukou residence permit that grants them rights as a local citizen. . . .

That’s in strong contrast to the young bucks and hinds foraging for tech jobs amid the gleaming office towers of Shenzhen, just across the border from me here in Hong Kong. It’s the city with the highest per-capita income in China. Although it is a former fishing village with one of China’s last stretches of mangroves, and it is Cantonese given its location in Guangdong province, you will struggle to find someone who understands the dialect. Mandarin-speaking, motivated youngsters head there for top-paying jobs from all around China. . . .

The estimate is that China needs to sustain growth above 5% to create enough jobs and wealth to avoid unrest and demonstrations. And if China can continue along that line, making the transition from an agrarian straight into a post-tech world, ripping through its industrial revolution at record pace, I will be happy.

So will 1.4 billion people.

All over the world, politics is becoming increasingly stupid.  How much longer before these xenophobic trends impact rapid growth in Asia?  Let’s hope that we can hold back the barbarians for a few more electoral cycles, until the poor in China don’t feel a need to kill the children that they cannot support.

PS.  I have new posts at Econlog on Fed officials struggling with the concept of “struggle”, and another on our latest failed fiscal experiment.