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Here we go again

There’s a renewed danger of recession this year, and to explain why it’s worth revisiting the recent past. I have argued that we normally would have had a recession last year, but a nimble Fed was able to adjust policy in time to prevent the recession and create America’s first expansion of more than a decade.

On many occasions, Fed policymakers make contractionary errors late in a business cycle. The yield curve inversion such as occurred in March 2019 is normally a pretty good recession forecaster, but not perfect. It depends on how the Fed reacts. But just being far enough along in the business cycle that unemployment has fallen to the natural rate is likely as good a recession forecaster as the yield curve inversion, indeed they often go together.

The Fed avoided recession in 2019 because it ignored its Keynesian Phillips curve models that suggested overheating, and reduced rates three times. The Fed was looking at market indicators, not the unemployment rate. (Hmmm, who’s been suggesting the Fed be guided by market indicators?)

In early 2019, the trade war with China disrupted manufacturing and reduced the equilibrium (or “natural) interest rate. Fortunately, the Fed saw what was happening and responded. Now, in early 2020 the coronavirus is disrupting Chinese manufacturing and reducing the equilibrium interest rates. The yield curve has once again inverted (3m/10y). Let’s hope that the Fed sees what’s happening and once again responds aggressively. If so, there will be no recession. (Or we might luck out and the coronavirus fades away quickly.)

The consensus of economic forecasters (at the Philly Fed) calls for roughly 4.0% NGDP growth from 2020 Q1 to 2021 Q1. That’s 2.1% RGDP growth and roughly 1.9% inflation (using the PCE, not the deflator) The Hypermind prediction markets says 2.95%, which is quite a discrepancy.

The Philly survey of private economists has been consistently too optimistic on inflation for a decade, just like the Fed itself. But the discrepancy is presumably also due to a lower RGDP forecast at Hypermind. When I first noticed the discrepancy a few months back, I indicated that I was about halfway in between the two in my forecast. I’ll stick with that. Say 3.4% (1.7%/1.7%).

On balance, I don’t think there’ll be a recession this year. But if the Fed ignores market warnings that the equilibrium interest rate is falling, then a recession becomes much more likely. Let’s hope they pay attention. They’ve done such a nice job under Powell that it’d be a shame to see all those gains washed away.

Or as a Hollywood tough guy would say, “Nice expansion you got there Jay, it’d be a shame if something happened to it. How about 50 basis points?”

We need more immigrants, get over it.

Trump’s chief of staff is at it again. A few months back he told a stunned press conference that of course there was a quid pro quo in the pressure put on Ukraine, and that reporters just needed to “get over it”.

Now he stunned a crowd in England:

Acting White House chief of staff Mick Mulvaney told a crowd at a private gathering in England on Wednesday night that the Trump administration “needs more immigrants” for the U.S. economy to continue growing, according to an audio recording of his remarks obtained by The Washington Post.

“We are desperate — desperate — for more people,” Mulvaney said. “We are running out of people to fuel the economic growth that we’ve had in our nation over the last four years. We need more immigrants.”


HT:  David Beckworth

Abe’s employment miracle and Japan’s meaningless “recessions”

When Abe took office at the beginning of 2013, almost no one (including me) predicted an astounding boom in employment. Prime age employment had hovered around 70% for two decades.  If you had told experts that Japan would spend most of the 2010s in “recession”, they would have been even more dismissive of the claim that there was about to be an employment miracle. But Japan did spend most of the 2010s in recession:

And yet there was an employment miracle, with employment surging to 78% of the prime age population:

And now the media is full of reports that Japan is about to enter its fourth recession of the past 10 years (during which time the US has had zero recessions.)  All I can say is if these are truly recessions, then give me more and more and more of them.

PS, even if you include the 65-74 year olds, who are surging in number and tend to work less, the Japanese employment ratio is still rising:

Lenin, capitalists, rope.

Bloomberg: reports there will be no more “excuses”:

President Donald Trump said he doesn’t want to limit trade with China by overusing national security “excuses,” citing his interest in selling jet engines to Beijing.

It was always about mercantilism, not national security.

PS. Here’s an interesting timeline:

August 2019, Trump hints that he might commute the sentence of Rod Blagojevich, a corrupt former Illinois governor. (Actually, it’s enough to say “former Illinois governor.”)

January 2020, Blagojevich (who is a Democrat) pens an op ed where he criticizes the impeachment effort against Trump.

February 2020, Trump commuted Blagojevich’s sentence.

PPS. Almost every day I see an article on how central banks are increasingly ineffective. Meanwhile, the new head of the IMF is suggesting that the BOJ needs to relax (implicitly lower) its inflation target to conserve ammunition. This is truly a new dark age of monetary economics, much like 1933-68.

PPPS. I have a new Mercatus working paper on currency manipulation. Here’s the abstract:

Currency Manipulation, Saving Manipulation, and the Current Account Balance

Concern over currency manipulation plays a major role in international economic diplomacy. Unfortunately, the concept is not well defined, and the most coherent explanations apply to a concept more accurately termed “saving manipulation,” as it has little to do with market exchange rates. I argue that the costs of currency manipulation are far lower than they are widely assumed to be and that the optimal response is either to do nothing or to boost domestic saving rates.

It’s a long paper, so make sure you pay attention to the John Cochrane quote discussed on page 15. Try to figure out the sense in which Cochrane is right, and the sense in which he’s wrong.

Was China the worst possible place for the coronavirus to hit?

Alex Tabarrok has a new post entitled:

Is the world fortunate that the coronavirus hit China first?

I probably agree with Alex as much or more than any other blogger, but here I’d like to argue the opposite hypothesis. My argument will be based on four factors:

1. China is one of the few countries in the temperate region of the world with a big population and no free speech, which inhibits its ability to become aware of a viral outbreak in a timely fashion.

2. In regions that did become aware of coronavirus in a timely fashion, the disease spread has been far less severe than in Hubei.

3. China is developed and populous enough that many of its people travel all over the world. That’s not true of many poor countries.

4. The virus is widely believed to thrive on cold dry air and quickly fade away in warm humid weather. Thus it might have been less of a problem in a tropical country.

Here’s the data we have so far. (Later I’ll discuss its possible inaccuracy):

1. The disease is mostly confined to Hubei province, where it is very widespread (nearly 50,000 reported cases, and many unreported. There are over 1300 confirmed deaths, almost all in Hubei.

2. Most of the other cases (about 20%?) are in other Chinese provinces, but there are only a few dozen deaths.

3. There are two overseas deaths, three if you include Hong Kong.

4. The most important point is this. As the disease spreads all over the world, the share of cases outside Hubei has remained low, and is actually falling over time. That’s odd.

Just yesterday, there was a big revision in the Chinese data, so there is reason to question its accuracy. But the puzzling data within China (i.e. an increasing share within Hubei) is mirrored by the international data. Obviously the Chinese government is not faking the international data!

Here’s the elephant in the room. The fact that the coronavirus has been controlled reasonably well in areas outside of Hubei suggests that if the Chinese government had immediately done the things that foreign governments and non-Hubei Chinese governments have been doing, the outbreak on Hubei would be just as mild as it’s been elsewhere. They didn’t do those things because their repressive political climate caused the central government to be unaware of the severity of the problem. Local doctors knew, but were ignored. It was an obvious “unforced error’ by the Chinese government, ultimately caused by their lack of freedom.

Maybe I’m missing something, but I don’t see why my claim here is even controversial. China was probably the single worst country for the coronavirus outbreak to occur. (Other viruses may be different.)

PS. Off topic, consider this:

Mr Tribe said there was still hope that the federal judiciary could remain a check on Mr Trump’s power, and a crucial test would be whether the judge in the case against Mr Stone approved the reduced sentence. “As long as the courts are not wholly subservient we have not plunged completely into the darkness of a banana republic,” he said.

Well at least Trump doesn’t get to pick the judges. Oh wait . . .