You see a lot of recent talk about the message being sent by voters, especially in the US and Europe.  For instance, both the Trump phenomenon and Brexit are widely seen as a revolt of the struggling working class against the affluent elites. Like many generalizations, there is a grain of truth here. But I find the mountain of non-truth to be much more interesting.

For instance, Trump is likely to win a majority among affluent voters, while Brexit also did well affluent southern English counties, outside of London.  So it’s not just economics.  Each voter has their own reasons.

Ross Douthat has new piece discussing the blind spots of cosmopolitan liberals:

They can’t see that paeans to multicultural openness can sound like self-serving cant coming from open-borders Londoners who love Afghan restaurants but would never live near an immigrant housing project, or American liberals who hail the end of whiteness while doing everything possible to keep their kids out of majority-minority schools.

Douthat is a quite thoughtful and persuasive writer, but I believe things are much more complicated that he suggests.  Consider the issue of schools. Affluent American parents don’t want their kids going to public schools in poor (African-American) areas of Detroit or Cleveland.  But note that these are areas that have relatively few immigrants.  And immigration is supposed to be the big policy issue that is propelling nationalistic politics in the US and Europe.  I would add that white working class parents also don’t want their kids going to those schools.  On the other hand, most affluent parents and most working class parents would be happy to see their child get into (mostly non-white) UCLA:

So I don’t think it’s obvious whether the core issue here is diversity or income.  It’s quite likely that UCLA grads will tend to have fairly successful careers, and that there will be lots of intermarriage among those groups.  Here’s an analogy.  In the 1800s, there was lots of resentment against immigration of Irish, Italians and Jews. These groups were seen as a threat to the dominance of the “WASP tribe”.  Today there is very little concern about this issue, even among mainstream conservatives. The WASP tribe has been replaced by the “white tribe”.  And we can already look ahead a few decades and see the white tribe being replaced by a sort of beige tribe looking like UCLA students; composed of whites, Asians and the upper half of the Hispanic income distribution, which all intermarry quite frequently.

When I was young there was lots of anxiety about the Italian-American mafia. (Younger readers will have no idea what I’m talking about, but people my age will understand.)   The fear that Americans once had of the mafia has been replaced by a fear of terrorism.  Those who (in the 1960s) wanted to claim that organized crime was deeply embedded in southern Italian culture actually had a strong argument. After all, even today the mafia is deeply embedded in southern Italy.  But for some unknown reason those cultural traditions did not prevent southern Italian immigrants from successfully assimilating once they got to America.  They are now three times richer than their relatives who stayed in Naples or Sicily.

Should we be complacent that assimilation will continue to occur in the future?  I’m not very worried about Australia and Canada, rather I’m much more worried about Western Europe.  The US is somewhere in between these extremes.

Now I’ll take off my liberal hat and put on my conservative hat.  Here’s the problem that I see in Western Europe (Denmark in this case):

Yet many Danes I talked to are less concerned about terrorism than about the threat they see Muslims posing to their way of life. Though Muslims make up less than 5 percent of the population, there is growing evidence that many of the new arrivals fail to enter the workforce, are slow to learn Danish, and end up in high-crime immigrant neighborhoods where, while relying on extensive state handouts, they and their children are cut off from Danish society. In 2010, the Danish government introduced a “ghetto list” of such marginalized places with the goal of “reintegrating” them; the list now includes more than thirty neighborhoods.

Popular fears that the refugee crisis could overwhelm the Danish welfare state have sometimes surprised the country’s own leadership. On December 3, in a major defeat for the government, a clear majority of Danes—53 percent—rejected a referendum on closer security cooperation with the European Union. Until now, Denmark has been only a partial EU member—for example, it does not belong to the euro and has not joined EU protocols on citizenship and legal affairs. In view of the growing threat of jihadism, both the government and the opposition Social Democrats hoped to integrate the country fully into European policing and counterterrorism efforts. But the “no” vote, which was supported by the Danish People’s Party, was driven by fears that such a move could also give Brussels influence over Denmark’s refugee and immigration policies.

Hmm, 53% voting against a referendum that would “give Brussels influence over Denmark’s refugee and immigration policies.”  I vaguely recall something similar occurring recently in another EU country.

From an economic perspective, the government’s embrace of the populist right was anomalous. With its unique combination of comprehensive welfare and a flexible labor market—known as flexicurity—Denmark has an efficient economy in which the rate of job turnover is one of the highest in Europe, yet almost 75 percent of working-age Danes are employed. At the same time, the country’s extraordinary social benefits, such as long-term education, retraining, and free child care, are based on integration in the workforce. Yet many of the qualities about the Danish system that work so well for those born into it have made it particularly hard for outsiders to penetrate. . . .

Yet the immigration overhaul also had strong foundations in the Liberal Party. In 1997, Bertel Haarder, a veteran Liberal politician and strategist, wrote an influential book called Soft Cynicism, which excoriated the Danish welfare system for creating, through excessive coddling, the very stigmatization of new arrivals to Denmark that it was ostensibly supposed to prevent. Haarder, who went on to become Fogh Rasmussen’s minister of immigration, told me, “The Danes wanted to be soft and nice. And we turned proud immigrants into social welfare addicts. It wasn’t their fault. It was our fault.”

I think this is the key.  Either bring in high skilled immigrants, as in Australia or Canada, or bring in low skilled immigrants, and push them into work via a meager welfare state, as in Texas.  Western Europe has not chosen either route, and is paying the price.

California has much more generous welfare than Texas, and there is a danger that California’s new $15 minimum wage will create an even larger Hispanic underclass than currently exists.  Some proponents of a higher minimum wage, like Ron Unz, hope that it will price potential low-income (Hispanic) immigrants out of the job market, and discourage immigration.  Maybe.  But another risk is that you end up like many third world countries, where official jobs pay far more than what workers could earn in the informal economy.  Peasants move to the big cities and queue up for these well paying jobs.  Even if you are only able to work 6 months out of the year at $15/hour, that’s better than full time at $7.25/hour.  At least better for the individual, I suspect it’s much worse for society to have a huge cohort of disgruntled immigrants, going in and out of unemployment.

To summarize, I don’t think recent events are a wake-up call that we need to be concerned about an “end to whiteness”.  Rather it suggests that we might want to nudge our immigration policy somewhat in the Australia/Canada direction (which would basically mean more immigrants from India and China, and fewer from Oaxaca and El Salvador).   The problem is not the prospect of an increasingly cosmopolitan society—because of intermarriage it will not seem cosmopolitan when we actually get there.  (BTW, the young in Britain are already there–voting 3-1 against Brexit.) Rather the problem is a society where large segments of the population are socially excluded because they don’t work.  In America, a big chuck of the excluded are Native American and black non-immigrants.

Nor is it obvious that voters are rebelling against neoliberalism.  Among developed countries, you often see the most extreme populism in the least neoliberal countries.  (Compare Australia and Hungary, or Sweden and Greece.)  In Latin America, there is currently a backlash against socialism and in favor of neoliberalism.  And yet I see one pundit after another pontificating that the voters are sending a message in favor of more Keynesian spending, or less neoliberalism, or whatever that pundit tends to favor.  Trump wants massive tax cuts for the hedge fund class–how’s that a backlash against neoliberal elites?  (Just to be clear, he says he wants them to pay more taxes, but his actual proposal calls for a top rate of 25%, which would sharply cut their taxes, even if the cap gains rate was bumped up to 25%.)

PS.  It’s ironic that many of my commenters obsess about the decline of America’s white population, which they see as being culturally superior.   They are the flip side of the campus PC nuts that obsess about “white privilege” and view talk of a “colorblind society” as covert racism.  These left and right-wingers share an obsession with race that I don’t have.  I am not horrified by the fact that Orange County, CA (or Texas) is no longer majority white–it still seems like a pretty good place to live; indeed I might live in “the OC” someday.

PPS.  I have a new Econlog post discussing a new Krugman post that endorses my February critique of Autor, Dorn and Hanson on China trade.

I am seeing more and more articles, even at respectable outlets such as the Economist and the Financial Times, suggesting that the rise of right-wing and left-wing populism shows that something is wrong with the neoliberal model. Nothing could be further from the truth. The past two decades have been by far the best two decades in human history, and that’s what really matters.

Naysayers will sometimes acknowledge that hundreds of millions of people have recently risen out of poverty, but then claim that living standards have stagnated in America. That’s also nonsense, as I explained in this post. The next fallback position is that while real incomes in America have risen, the gains of gone to corporations, not workers. That’s also nonsense, as I explained in this post. The share of national income going to workers today is the same as it was 50 years ago, the supposed heyday of the working class.

The next fallback position is that while wages have done fine, even in real terms, wage income is becoming less equal. Bingo! Finally we get to an accurate statement. Fifty years ago, blue-collar workers at General Motors often made more than college professors. People with short attention spans sometimes act like this period was “normal”, ignoring 10,000 years of human history. They seem to suggest that our most pressing problem is that young men who don’t study in school and just shoot rubber bands across classroom should be able to earn an income that (in relative terms) was never possible in any period of world history before the 1950s and has never been possible in any period of world history after the 1970s. It reminds me of when farmers used to set the “parity” of farm prices with other goods prices based on the relatively high levels of 1909-14, treating that ratio as normal for purposes of farm subsidies.

Don’t get me wrong;  I have nothing against blue-collar workers. I’m relatively intellectual, and even I found the public schools to be mind-numbingly boring. I could hardly stay awake. I can’t even imagine how students less interested in ideas than I am could’ve gotten through the day. Nor am I one of those conservatives that will trash low-income whites for their lifestyle choices. As far as blue-collar workers are concerned, I wish them well. But I wish everyone well (except Trump), and the unfortunate truth is that the set of economic policies that is best for the world right now is probably not optimal for a subset of American blue-collar workers.

When I point out that the most important factor in trade policy is the impact on the poor in developing countries, some of my commenters tell me that the US shouldn’t have to import from China or India, they have lots of other countries to sell to. As Marie Antoinette might’ve said “let them sell to Canada.” That’s right, progressives ease their conscience by claiming that other developed countries won’t follow the same evil trade policies that progressives like Sanders want the US to follow, so things won’t actually be that bad for poor people in Bangladesh.  More often, they entirely ignore the issue.

I know that progressives like to think of themselves as the good guys, but the honest truth is that on trade they are increasingly becoming the evil ones, right along with Trump.

And here’s what else people don’t get. Not all the problems in the world are caused by neoliberal economic theories, for the simple reason that not all economic policies reflect neoliberal economic theories. Even if everything people say about inequality quality is true, there’s nothing wrong with the neoliberal model, which allows for the EITC, progressive consumption taxes, and sensible reforms of intellectual property rights, occupational licensing, and zoning laws.

I can’t help it if Democratic politicians oppose reforms of intellectual property rights. I can’t help it if progressives that once favored progressive consumption taxes now oppose progressive consumption taxes. I can’t help it if Democrats voted to repeal the luxury tax on yachts soon after having enacted a luxury tax on yachts. I can’t help it if progressives suddenly feel that a $15 an hour minimum wage is not a loony idea.

The simple truth is that neoliberal economic policies work, as we’ve seen in Denmark and Switzerland and Singapore, and socialism doesn’t work, as we’ve seen in Venezuela. So I’m asking all those wavering neoliberals in the respectable press (Thatcher called them “wets“) to stop your handwringing and get out there and boldly defend the neoliberal model. It’s not just the best model; in the long run it’s the only model that really works.

PS.  And don’t anyone insult my intelligence by telling me that Sanders favors the Danish model.

PPS.  And don’t tell me the GOP is just as bad—I know that.  But right now they aren’t the biggest critics of neoliberalism (except for Trump, obviously).

PPPS.  The Huffington Post thinks Kasich will be the nominee.  In other words, they think the GOP is a non-insane political party.  Meanwhile the betting markets currently assign a 5.3% probability to the GOP being a non-insane political party.  (BTW, I don’t like Kasich; I want Ryan.)

Meanwhile, Drudge has linked to a copy of next year’s Boston Globe:

Progressives like to point out (correctly) that the GOP tax plans are sheer fantasy. But as I often point out, talking politics immediately lowers your IQ by 25 points. And I’m afraid that when progressives start talking about Bernie Sanders they completely lose touch with reality.  They say, “He’s not really a socialist, he just favors the Scandinavian economic model.”  But they don’t seem to know any thing about that model.

Let’s look at taxes, for instance.  Here are the top rates on income (plus payroll) taxes:

And then here’s an indicator of progressivity:

In Denmark the top rate kicks in at 1.2 times average income.  In the US that would be around $60,000.

And then there are the VATs:

Denmark collects about 9.6 percent of GDP through the VAT, Norway collects about 7.8 percent, and Sweden collections about 9 percent of GDP. All three countries have VAT rates of 25 percent. The United States does not have a national sales tax or VAT. Instead, states levy sales taxes. The average rate across the country is about 7 percent. The much lower rate only collects about 2 percent of U.S. GDP in revenue.

Bernie Sanders says he doesn’t want to raise taxes on the middle class, rather he wants the rich to pay more.  Later he grudgingly concedes the middle class would pay a higher payroll tax for the nationalized heath care, but still doesn’t mention the 25% VAT.  Nor does Bernie mention that the Scandinavian countries have far lower corporate tax rates than America:
Nor does he mention this:

Finally, it is worth noting that the only Scandinavian country with an estate or inheritance tax is Denmark.

So the only way to finance a Nordic economic model is with massive (and regressive) taxes on the middle class, because that’s where the money is.

What about those 90% tax rates from the Eisenhower era, that you often read about? There’s a reason the Nordics don’t use that policy, they collected very little revenue.

And I haven’t even mentioned that the Nordic countries are really big on privatization and deregulation.  How often do you hear progressives calling for those things?  When was the last time you heard a progressive advocating Sweden’s 100% nationawide school voucher program?

And it’s even worse.  Sanders doesn’t tell us whether he likes the Swedish model of 1990, or the Swedish model of today?  I’m pretty sure that back in 1990 he was telling people that he loved the Swedish model.  But that model failed, leading Sweden into economic crisis.  It responded by dramatically downsizing its government relative to 1990 (admittedly it’s still very big in absolute terms.)  But I never hear the Sanders supporters telling us whether they like the 1990 socialist Sweden, or the 2015 neoliberal version?  Ditto for Denmark.

And they never tell us how this European social welfare state is supposed to work in a big diverse continent like the US, when it doesn’t even work in a big diverse continent like Europe (especially not in Eastern and Southern Europe.)  Matt Yglesias says that places like Sicily are poor and dysfunctional because they have a bad culture.  I don’t know if that’s right, but let’s say the progressives are right to “blame the victims” of poverty in Europe.  Can we really be confident that our many diverse cultures are so superior to Sicily and Greece and Naples and Bulgaria and Romania?  Can we be sure that the poor Hispanics of East LA, the poor Native Americans of western South Dakota, the poor African Americans of Detroit and the poor whites of West Virginia have Nordic-style cultures, and not southern and/or Eastern European-type cultures. Seriously? The Latin American country that tried the high tax model is Brazil.  Does the US ethnic makeup remind you more of Brazil or Denmark?

Sorry, but I can’t take seriously anything progressives write about Sanders.  Those on the left are correct in ridiculing the tax ideas of Trump, and even the tax plans of the more “serious” GOP candidates do not raise enough revenue.  I get that.  But when evaluating their own side of the spectrum they lose all touch with reality. Here’s Paul Krugman:

So now we have candidates proposing “wildly unaffordable” tax cuts. Can we start by noting that this isn’t a bipartisan phenomenon, that it’s not true that everyone does it? Hillary Clinton isn’t proposing wildly unaffordable stuff; Bernie Sanders hasn’t offered details about how he’d pay for single-payer, but you can be sure that he would propose something.

Seriously?  Sanders says he wants a Scandinavian style welfare state, without raising taxes on the middle class?  And we are supposed to treat that seriously? Then the left wonders why working class blacks and Hispanics are not flocking to Sanders.  Maybe those minorities are smarter than then these puzzled pundits assume.  Maybe a Hispanic family with two people each making $30,000 to $35,000 doesn’t want to face a 60% income tax, plus a 25% VAT.  Maybe they moved from some place like Brazil, and know what happens to all that money once a non-Nordic government gets their hands on it.  Maybe they’d rather spend their own money.  Someone should go into working class black and Hispanic neighborhoods, with all the data on income and sales tax rates in Denmark, and ask people if they also want to pay those rates.  You might be surprised by what you find.

Matt Yglesias has a good post on Denmark.  He points out that Denmark has far higher taxes than the US, especially on the middle class.  He also points out that Denmark has much more efficient provision of public services.

Consider health care, which is almost 18% of US GDP, and more like 10% in Western Europe.  Now suppose the US moved to complete socialized medicine, without dramatically cutting the pay of doctors and nurses. Assume we also adopted the other aspects of the Danish social welfare model. Denmark’s government currently spends about 57% of GDP.  If the US tried to deliver the same services, without reducing costs from the current level, it would cost at least 65% of GDP.  It’s not possible to raise that much money without dramatically reducing total GDP—making us much poorer.

Matt points to some other examples of waste, such as the fact that transportation projects in America are far more expensive than in Denmark (or in the rest of Europe, for that matter).  So it might require even more than 65% of GDP. Democrats don’t tend to talk about this problem, because part of it is caused by their constituencies. And we know that when push comes to shove, they care more about public employees than social welfare programs (recall the education voucher debate.)

And of course Denmark is actually more capitalist than America, a point that Yglesias overlooked.

The fact that Bernie Sanders is being fundamentally dishonest about the nature of Scandinavian “socialism” does not mean that we shouldn’t try to emulate Danish policies.  I do view their system as superior to the US, because it’s more capitalist and more utilitarian.  But that’s a low bar—why not aim higher?

Matt shows a list of the happiest countries in the world, where Denmark comes in third.  It’s kind of a bizarre list (the US is at 15, squeezed between Mexico and Brazil.) But suppose you actually believe this stuff.  It’s worth noting that the US scores higher than every single large European country (over 40 million people); higher than Germany, France, Britain, Italy, Spain, Poland, Ukraine, Russia.  That suggests to me that the US policy regime is superior to the European policy regime.  Or any other large country regime, except . . . Mexico??

And let’s go one step further.  The very highest country in the happiness rankings is Switzerland.  Soon after Matt provides this ranking, he asks:

3) How did Denmark get to be so awesome?

Taxes. Denmark does it with really high taxes.

Taxes certainly explain the social benefits Matt discusses, but what about the happiness ranking?  Since the Swiss are much richer than the Danes and also seem happier, why not emulate Switzerland?  The Swiss have the smallest government in Western Europe (as a share of GDP), indeed even smaller than in the US.  So let’s shrink our government to be more like the Swiss.

When I mention this proposal to progressives they invariably say:

“Switzerland is a small homogenous country, its model is not applicable to the US.”

I then ask; so which model should the US copy?  And they respond:

“Denmark” or “Sweden”

I usually spend the next 10 minutes rolling on the floor laughing, before pointing out that at least Switzerland has four different languages.  They also have more immigrants than other European countries.

I wish we could have an honest debate.  The Dems could say, “We want to be more like Denmark.”  The GOP could say, “We want to be more like Switzerland.”  Then show American voters the taxes paid by the middle class in both countries, and the public services provided in both countries, and let them decide.

Unfortunately, the Dems don’t actually want us to be anything like Denmark, nor does the GOP want us to be anything like Switzerland.  Hence the debate over “big government” is all a sham.

HT:  TravisV

That’s a made up quote, and perhaps a bit of hyperbole.  But it illustrates something that really bugs me about the blogosphere.  People make all sorts of claims about monetary policy near the zero bound:

1.  QE has no effect

2.  Negative interest rates would be contractionary

3.  Central banks cannot depreciate their currencies at the zero bound

And then when the theories are actually tested and the results are in, they keep making the same claims, seemingly oblivious to the fact that their theories have been discredited.

Today I’d like to talk about negative interest rates on reserves (IOR).  There are two broad approaches to this topic.  There’s what I’d call the “finance approach”, which claims negative IOR would actually be contractionary, because . . . well I’m not quite sure why. Something about how it interacts with the banking system.  I used to see these articles in the Financial Times.

I tell people to ignore banking when studying monetary policy—focus on the supply and demand for the medium of account (base money).  Negative IOR causes a fall in the demand for base money, and thus is expansionary.  Period.  End of story.

But just to make sure, let’s look at reality.  The Telegraph has a nice story on negative rates on Sweden, which was the first country to adopt the policy I proposed in early 2009.  (I deserve zero credit for NGDP targeting (the idea’s been around forever), but surely at least a tiny bit of credit for negative IOR.)  Before getting to the Telegraph story, let’s look at how markets responded to a recent negative IOR shock:

Updated March 18, 2015 11:14 a.m. ET

STOCKHOLM””Sweden’s central bank has slashed its key policy rate deeper into negative territory and expanded its bond-buying program to prevent the recent appreciation of the Swedish krona from stifling a budding revival in inflation.

The Riksbank, the Swedish monetary authority, lowered its benchmark rate to minus 0.25% from minus 0.1% and said it would buy government bonds worth 30 billion Swedish kronor ($3.45 billion), an extension of bond purchases worth 10 billion kronor announced earlier. The repurchase rate had stood at minus 0.1% since February, the first time it was cut into negative territory.

.  .  .

The Swedish krona fell sharply against the euro, which gained about 1% against the krona in the minutes after the announcement, hitting a high of over 9.34 kroner. Sweden equity markets jumped to a record high with the OMX Stockholm 30 Index up 1.5% at 1,700.

Yup, cutting the IOR is expansionary, even when in negative territory.  And those sorts of market responses (assuming at least partly unexpected, as some of them are) should have been it for the “finance” theories that negative IOR is contractionary, but you can never drive a stake through these zombie theories. There are still those “models” . . .

The Telegraph story looked at some macro data, which at first glance looks like a mixed bag.  Inflation has been running around negative 0.1% to minus 0.2% for 4 years:

It looks like 3 years, but that’s a quirk of year over year data, the actual CPI shows it’s 4 years:

So that doesn’t look very good for negative IOR.  But recall that in most countries inflation has recently been falling sharply, due to the plunge in oil prices.  Inflation has never been a reliable indicator.  NGDP growth has recently been accelerating in Sweden (up at a 9% annual rate in 2015, Q2), and the most recent RGDP growth shows 3.2% over the past year, which is higher than in previous years.  The best evidence comes from the unemployment rate, which leveled off at 8% after the Riksbank’s disastrous monetary tightening of 2011, but has recently fallen to 7%.

One final graph, which is really weird.  While other countries are seeing a surge in currency hoarding, Sweden is experiencing exactly the opposite, despite the negative rates. What’s up in Sweden?  Will the Nordic countries be the first to adopt the sort of cashless 1984-style panopticon state that is so beloved by authoritarians and Puritans everywhere?

PS.  I have a reply to John Cochrane over at Econlog.