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Gambling with other people’s lives

I don’t have much confidence in our foreign policy establishment. They did correctly decide to fight WWII.  But that was sort of a no-brainer, given that we were directly attacked at Pearl Harbor. Since then?

We were told it was worth inflicting a lot of short run pain on the Vietnamese people, as in the long run they would benefit.

We were told it was worth inflicting a modest amount of pain on the Cuban people, as in the long run they would benefit.

We were told it was worth bombing Libya, as in the long run the Libyan people would be better off.

We were told it was worth invading Iraq, as it would help the Iraqi people.

We were told it would benefit the Yemeni people if we helped the Saudi’s invade Yemen.

We overthrew a bunch of foreign leaders in places like Iran and Latin America, which often backfired.

I’m not dogmatic on this issue. It’s quite plausible that some of our interventions helped the situation. It’s just that I don’t have a lot of confidence in the foreign policy establishment. They talk like they know what they are doing, as if foreign relations is a hard science, but the results suggest otherwise.

Now we are being told that it’s worth inflicting a lot of pain on Chinese firms and American consumers on the theory that this will somehow help improve Chinese governance in the long run. Is it any surprise that I lack confidence in this theory?

Kyle Bass is one of the most famous China critics. Bloomberg reports that he is now advocating a policy that he hopes will kill lots of Chinese people. How many? He doesn’t say. But the logic of his proposal suggests the policy would only “work” if the death toll were in the millions.

“We should take our [medical] supplies and go back home. Let the chinese virus rampage through the ranks of the GT and the rest of the communist party,” the founder and chief investment officer of Dallas-based Hayman Capital Management wrote.

There are about 80 million people in the Chinese Communist Party, most of whom are not “communists” in any meaningful sense of the word.  Given the current location of the virus (concentrated in Hubei province) and given the isolated position of the Chinese leadership, an enormous number of ordinary Chinese people would have to die in order for the leadership to be threatened.

In 1959, Chairman Mao was willing to sacrifice many millions of Chinese people based on his “theory” of how the economy should be structured.  He felt that the very real short run pain would pay off in terms of future gains.  He was wrong.

Obviously most China hawks aren’t as idiotic as Bass, but those who advocate getting tough with the Chinese are willing to contemplate the fact of short run pain based on the theory that this will somehow lead to positive political developments.  I see very little evidence from the historical record that this is likely to work.  Not zero evidence; South Africa might (or might not) be a counterexample.  But not enough evidence for me to want to engage in game theoretic strategies that impose suffering on ordinary people in exchange for very uncertain gains.

I recommend Gene Epstein’s article on the US trade war against China.  Here’s an excerpt:

When a state wages war against another state, it generally portrays itself as having first considered all the peaceful ways of settling grievances. In this case, we are told that the US can’t use the World Trade Organization to challenge China’s practices because China doesn’t comply with that organization’s rulings. The evidence is that China’s record of compliance is better than ours. An academic study on this subject scrutinizes the 43 cases in which China has been a target of trade disputes from its entry into the World Trade Organization in December 2001 through December 2018. The author finds that, in 42 out of the 43 cases,“China has timely and satisfactorily implemented WTO tribunals.” He concludes that “China’s record of compliance suggests that the dispute settlement mechanism has been largely effective in inducing compliance.”

He also observes: “Ironically, while the US has been accusing China of not complying with WTO rules, the US’s record of compliance is evidently worse than that of China. The US refusal to change the practice of ‘zeroing’ has been a blunt denial of its World Trade Organization obligations and outright disrespect for World Trade Organization rulings. In addition, while China has never been subject to any request for retaliations as a result of failure to comply, the US has faced 15 [such] requests.”

PS.  I have no idea whether Bass is a nationalist.  But one reason I oppose nationalism is that it leads people to begin to treat “the other” as if they are less than fully human.  And don’t tell me that Bass’s proposal wouldn’t have much actual impact.  I know that.  He’s not just cruel; he’s dumb.  I am interested in what he wants to achieve.

PPS.  Do you remember what Jerry Falwell said when AIDS first appeared on the scene?

AIDS is not just God’s punishment for homosexuals; it is God’s punishment for the society that tolerates homosexuals

Some preliminary thoughts on state capacity

The following two pictures show two very different sides of the Chinese system:

This shows a mass banquet in Wuhan. The government held a number of such celebrations in Wuhan during January 2020, and this helped spread the coronavirus. The second shows a new hospital in Wuhan, built in just a couple weeks:

These pictures show us several aspects of the “state capacity” of the Chinese government. On the negative side, the Chinese system has little freedom, which often leaves the Chinese government uninformed of dangerous situations that need to be addressed. The Chernobyl incident in the old Soviet Union is another example of this problem.

So perhaps “freedom” is one aspect of state capacity, as it allows states to be better informed.

The second picture shows that the Chinese government is good at getting stuff done quickly. For instance, they built a large high-speed rail system in a fairly short time.

The Brazilian government has not built much infrastructure in recent years. Is this due to a lack of “state capacity”, or have they (much like New York City) simply chosen to use that capacity to pay large pensions to middle class people, instead of building infrastructure.

I suspect that the difference between China and Singapore on the one hand and Brazil and New York on the other has to do with more than just preferences. I am fairly confident that China can build infrastructure at lower cost than Brazil, and Singapore can do so more cheaply than New York.

So perhaps low cost production by the state is one aspect of state capacity. But I’d be even more specific. It doesn’t do much good for a state to be able to produce haircuts at a lower cost than other states, as this activity is almost always (rightly) done in the private sector.

So what really matters is the ability to produce goods that are usually produced by governments at low cost. (I mean cost holding quality constant, as you’d obviously prefer high quality public goods.) I recall reading that Sicily has more forest rangers than all of Canada, so I’m going to go out on a limb and assume that Canada has more state capacity to produce forest ranger services at low cost.

The Brazilian example also hints at another issue, is the state doing the right thing? Perhaps state capacity depends at least in part on the state’s ability to ascertain and then undertake the things it should be doing.

In my 2008 study entitled “The Great Danes”, I discovered that once the intellectual climate moved in favor of free markets during the 1980s and 1990s, those countries with a high level of “civic virtue” (basically low corruption) moved toward free market regimes much faster that those countries with less civic virtue. Thus Denmark and New Zealand moved rapidly toward free market policy regimes, Greece and Italy much less so.

So one aspect of state capacity is the ability of countries to act in a way that is seen as desirable by a consensus of people who don’t have a special interest to inhibit change. A government that is able to “do the right thing” has more state capacity than one that does not, even if somewhere between 1% and 40% of the time the “right thing” turns out to be wrong. (If experts are usually wrong, then things are pretty hopeless. You might as well just flip a coin.)

In my paper on neoliberalism I described three models; moral, political and economic. Utilitarianism was the right moral system. Maximize aggregate utility. Neoliberalism was the right economic system, best able to implement utilitarian moral values. And hyper-democracy (meaning decentralized democracy with referenda) was the best political system, the best way to referee disputes about exactly how to construct the optimal policy regime.

Denmark, Singapore and Switzerland were the models of utilitarianism, neoliberalism and hyper-democracy. The best way to answer these questions:

1. What are the appropriate goals?

2. What economic system best achieves those goals?

3. What political systems best referees disputes over how to implement policy?

Thus any discussion of state capacity involves an ethical dimension, a technical dimension, and an epistemic dimension. Governments need the right moral values and the information needed make intelligent decisions about policy. The economy needs an incentive structure (i.e. technique) that will facilitate getting things done.

Even though Denmark, Singapore and Switzerland all have a great deal of economic freedom, they are also high in state capacity. Maybe it’s partly because they have a lot of economic freedom?

PS. In a January 1 post on state capacity libertarianism, Tyler Cowen specifically mentioned the success of Denmark, and indirectly alluded to the success of Singapore. Today he described the Swiss system as highly successful. I believe the three models in my 2008 paper are pretty close to what Tyler has in mind by “state capacity”. (Perhaps he’d add “scale”, which allows big countries to do extraordinary things like exploring space or confronting China. I wouldn’t.)

Why stock prices are increasing

In recent days, a number of medical experts have predicted that the coronavirus will turn into a global pandemic. At the same time, the US stock market has rallied strongly. Why?

I’m not certain.  Perhaps there are multiple factors, including an increasing likelihood of Trump’s re-election. But I suspect that one reason is that the stock market disagrees with the experts. The stock market is predicting the coronavirus will not become a global pandemic. But what sort of data would lead to this expectation?

A recent Bloomberg article suggests one possibility:

While cases have spread around the globe, the virus’ impact has been most keenly felt in Hubei, which has seen a staggering 97% of all deaths from the illness, and 67% of all patients. . . .

But Hubei — known for its car factories and bustling capital Wuhan — is paying the price, with the mortality rate for coronavirus patients there 3.1%, versus 0.16% for the rest of China.

What could explain this huge discrepancy?  The Chinese data is somewhat unreliable, as some deaths from coronavirus are listed as other causes, such as “heart failure”.  But that’s true in both areas.  Another possible explanation is that the virus has been in Hubei for a longer period, and that some of the outside cases will eventually lead to death.

But that explanation doesn’t seem consistent with the facts.  From January 24 to January 28, about 6% of the total deaths in China were outside Hubei.  Since then, the share has dropped steadily, and is now down to 2.2%.  The share should be increasing.

I have two other explanations:

1. The number of cases of infection outside of Hubei is much more accurate than the number within Hubei.  Within Hubei, the facilities are overwhelmed and there may be far more infections than reported, as many patients have not been tested.  That also implies that the actual death rate is somewhat lower than 3%.

2.  The people who fled Hubei are likely middle-aged, not elderly.  Most of the deaths are among the elderly.  Note that the death rate overseas is also lower than in Hubei, but not as low as the non-Hubei part of China.

I suspect that the stock market disagrees with experts who predict a global pandemic:

The Wuhan coronavirus spreading from China is now likely to become a pandemic that circles the globe, according to many of the world’s leading infectious disease experts.

It will be interesting to see who turns out to be right.  I don’t have a strong opinion either way.

One thing is clear; the Chinese government badly mishandled this crisis and Xi Jinping’s authoritarian policies have created a horrific situation within Wuhan.  If local medical officials had not been silenced early on, the crisis could have been nipped in the bud.  On the internet, lots of Chinese citizens are now recommending the documentary film “Chernobyl”.

Off topic:  We now know how many Republicans have integrity.

Precisely one.

The world is increasingly fragile

The following points seem obvious to me:

  1. The world is much richer and safer than it used to be.
  2. Death at a young/middle age is viewed as a greater tragedy than in the past.
  3. People are much more risk averse than before, more fearful of death.

I suppose these trends are probably linked. They explain the increase in health and safety regulation, our overreaction to terrorism, and also the phenomenon of “helicopter parents”. Two recent events show that the increase in fear can also have an impact on the economy:

1. The Boeing 737 Max fiasco

2. The coronavirus in China

If these two events had occurred in a world with 1970-level risk aversion, the economic impact would have been far smaller. The Boeing 737 would have been quickly fixed with a software patch and some extra pilot training. The coronavirus would not have disrupted the global economy nearly as much as it has (even if 50 years ago China had a large economy integrated into the global system.)

I’m not trying to argue that we are overreacting today, merely pointing out that as time goes by we becoming less accepting of risk. Based on my limited reading of history, it seems like things have been trending this way for centuries.

I see no reason why this process will end anytime soon. If we could take a time machine into the distant future, we’d probably view the people as pathetic cowards, just as the ancient Greeks would view us.

We are also relying increasingly on complex technological systems. I wonder if the interaction of increased risk aversion and technology will lead to future “risk recessions”, i.e. economic disruption caused by our unwillingness to accept even small risks from pathogens, or computer viruses. Imagine if all cars eventually become self-driving and terrorists discover a way to hack the system in such a way as to cause auto accidents. Would we shut down the entire transport system?

People are also more averse to disruption in their lives. Tyler Cowen’s “The Age of Complacency” discusses how these attitudes slow economic growth. You might think they should help the environment, but the reverse seems to be true. Consider Germany, where people are upset at the new Tesla factory:

The protests highlight a broader phenomenon in German society — the growth of nimbyism. Even industrial developments such as Tesla’s that point to a low-carbon future are coming under attack.

One of the biggest casualties is wind energy. There was a dramatic decline last year in Germany’s construction of onshore wind farms, partly because of objections raised by environmental campaigners worried about turbines’ effect on wildlife.

Of course the environmentalists in Germany are also shutting down their entire nuclear power industry. So in the name of the “environment”, the greens are opposed to almost everything that would reduce global warming.

In the US, environmental laws are used (misused) to stop dense development near transit lines.

Other goals such as equal rights are also undermined by our increased fear of risk. Right now, Chinese people are being discriminated against all over the world. Ironically, the Chinese themselves are heavily involved in this discrimination, as when Chinese people in California refuse to participate in social events with other Chinese Americans. Literally everyone is afraid of the Chinese, even the Chinese. Discrimination is not about victims and villains, all groups are villains.

The rise in nationalism is another aspect of this increased risk aversion. People have an increased fear of the crime and cultural disruption that will be brought in by immigrants.

You might notice that this post links to my previous post on doubts about progress. As we get richer and safer, we also get more cowardly, more picky, more sensitive (safe spaces!), more discriminatory (great news for Trump), more impatient, etc. Thus the gains from progress are largely dissipated in a decline in human dignity.

PS. Don’t eat at P.F. Chang, you might catch coronavirus from one of the Mexicans who work there. After all, one out of every 40 million Americans have the virus, and if you are young and healthy you have maybe a 1/1000 chance of dying if you do catch the virus. That 1 in 40 billion risk is simply unacceptable!

Megan Greene on NGDP (forecast) targeting

This FT article by Megan Greene is a sort of breakthrough:

If they are serious about achieving their mandates more effectively, the Fed and ECB should consider other strategies.

One has been circulating for decades: target the sum of inflation and total real output, or nominal gross domestic product. With NGDP targeting, a central bank automatically lowers rates as output falls, to push up inflation. That eases real debt burdens and lowers real interest rates, helping to generate growth. As output rises, rates adjust higher to bring inflation down and maintain the target.

A potential obstacle is that NGDP is reported quarterly, with a lag. But NGDP could be reported more frequently and accurately if the Fed treated it as a priority. The Fed could also target the forecast of NGDP instead, which is reported in the monthly blue-chip economic indicators survey of business economists.

There have been plenty of other pundits calling for NGDP targeting, but this is the first one I recall that advocated a “target the forecast” approach.  If forecasts are useful in monetary policy (and they are) then we obviously need to create a market-based NGDP forecast.  Hypermind has actually done so, but we need to create a much more liquid NGDP futures market.

We cannot trust the consensus forecast of economists because they consistently forecast too high, just like the Fed itself:

It’s always around 1.9% to 2.0% in the out years—a major embarrassment for the profession.  Trust markets, not economists.

PS.  The 3-month/10-year Treasury spread recently inverted.  As I pointed out a year ago, that doesn’t necessarily mean money is too tight or that a recession is imminent.  But when combined with other indicators, it seems clear that money is currently a bit too tight.

Some of this relates to the coronavirus epidemic, which has a small chance of being a major problem for the global economy and a large chance of blowing over in a few months.  The following analogy might be helpful:

Suppose you see a crazy guy load one bullet into the cylinder of a revolver.  He puts the gun to his head and pulls the trigger.  Nothing happens.

Would you say, “See, he made a wise decision, as nothing bad happened.  He just had some fun playing Russian roulette.” Or would you say that even in retrospect his decision was foolish?

That’s sort of how I think about current Fed policy.  I think there’s a 5/6 chance of no recession this year.  But I still think it would be wise to cut the IOR rate, to further reduce that risk.  I am disappointed by the Fed’s recent decision, and hope that they are monitoring events closely.  There’s a real danger that they will fall behind the curve if the coronavirus crisis gets much worse.  Indeed I think it likely they will fail to adopt a sufficiently expansionary policy in the event of a global pandemic.

If that happens, we can’t let them off the hook with excuses about unforeseen “shocks”.  The markets are very clearly indicating RIGHT NOW that money is a bit too tight.

They’ve been warned. Fix it.

PS:  I agree with this:

“The bond market is basically telling the Fed that it hasn’t done enough and will be called back to do more and that the longer they wait the more they will have to do,” said Michael Darda, market strategist at MKM Partners. “If the bond market thought Powell’s comments on wanting higher inflation were credible in his press conference, you wouldn’t have seen break-even inflation rates falling as they did.”

HT:  David Beckworth