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Hypermind vs. the consensus of economic forecasters

There’s a new Hypermind NGDP prediction market, which you should definitely check out. It’s still early, but right now the mean forecast for growth from 2020:Q1 to 2021:Q1 is 3.05%. That suggests that money is a bit too tight.

In contrast, the consensus forecast of economists, which is published by the Philadelphia Fed, shows monetary policy is right on course.  They don’t provide NGDP forecasts, but they do have RGDP growth and PCE inflation:

If you combine the 1.8% RGDP growth with the 1.95% PCE inflation, it looks like the consensus forecast for NGDP growth is about 3.75% (albeit for 2019:Q4 to 2020:Q4).  Thus Hypermind forecasters expect nominal growth to be significantly lower than the consensus forecast of economists.

Let’s revisit this post in about 18 months.

PS.  Each forecaster at Hypermind provides a distribution in their new set-up.  So those long tails are not point estimates of individual forecasters. 

Hypermind is actually much easier to use than you’d think.  I encourage people to participate.  You will help to move the economics profession out of the Stone Age and also win free money.

PPS.  The 5-year TIPS spread is 1.55%.  That’s for the CPI, and implies about 1.3% for the PCE.  If you add 1.3% to the Philly Fed’s 1.8% RGDP forecast you get 3.1%.  Interesting.  (I expect inflation to be higher than that.)

PPPS.  FWIW, I predict 3.4% NGDP growth (which includes 1.6% RGDP growth).  That’s midpoint between Hypermind and the Philly Fed.  I believe money’s a bit too tight.

 

Some updates on China

Over at Econlog, I have a post discussing China’s recent decision to beef up the enforcement of intellectual property rights.  Check it out.

In other news, China is about to roll out a major land reform:

“This is the first time I’ve owned an industrial property,” said Mr Shi, 48, who had rented in seven locations before settling down in Dongheng. “I don’t have to worry about getting kicked out by landlords any more.”

Mr Shi’s good fortune is the result of an experiment in land reform that has been rolled out in 33 counties across China. It allows semi-autonomous collectives to sell certain types of rural land to third parties and to keep the bulk of the proceeds.

The model, which will be extended to the rest of the country at the beginning of next year, has been lauded as a means of bringing prosperity to rural businesses and communities and stimulating China’s flagging economy.

The article also points to some downsides with the plan, and I don’t know enough to comment on the specifics.  In the past, however, real estate reform has been a big deal in China.  In the late 1970s, they began giving farmers more property rights, and a couple decades later they allowed urban residents to own their own home.  Both changes had a massive (positive) impact on the Chinese economy.

China is loosening rules on foreign investment:

BASF has broken ground on a $10bn petrochemical complex in southern China, becoming the latest foreign company to increase its presence in the country as Beijing gradually relaxes restrictions on overseas investment. . . .

Beijing loosened restrictions that excluded foreign companies from investing or taking ownership stakes in industrial and financial sectors after the pace of growth of foreign direct investment into China slowed to just 3 per cent last year. 

Foreign companies have long been excluded from several high-growth sectors or forced to form joint ventures with Chinese companies. US and European chambers of commerce have called on Beijing to accelerate access for foreign investment. 

The BASF facility, in the city of Zhanjiang, is the first of its kind in China that will be fully owned by the company after Beijing allowed full foreign ownership of chemical “cracking” facilities used to produce plastics. 

Global stocks are up today, partly due to expectations of a phase one trade deal with China.  Another factor was the Hong Kong elections:

The Stoxx Europe 600 Index advanced, with all 19 industry sectors in the green. Equities climbed across Asia, led by those in Hong Kong, where local elections brought a landslide victory to pro-democracy candidates. 

It seems like the markets hope that this leads to fewer protests:

A record turnout helped pro-democracy parties win a majority in 17 of 18 district councils. [Stock market] Bulls hope the poll result will inspire disaffected Hong Kongers to focus on conventional politics rather than street protests.

In my view, Hong Kongers would be wise to continue the street protests, but in a non-violent fashion. Unfortunately, the recent escalation of violence plays right into Beijing’s hands. The Chinese government would prefer not to intervene in Hong Kong, and strangely enough the violence might actual make them less likely to do so.

Some people predicted blood in the streets, similar to Tiananmen Square in 1989. That may still happen, but Beijing may also be content for there to be blood in the streets from clashes between protesters and police. Recall that China doesn’t want to give democratic rights to Hong Kong because they fear it would cause urban Chinese on the mainland to demand similar rights. As long as there is “blood in the streets”, then mainland Chinese will not be attracted to the Hong Kong model.

A better option would be to adopt a two track strategy. Continue the street protests and have their newly elected officials (who admittedly have little power) do as much as they can to improve the economic situation in Hong Kong, especially housing. That should be combined with non-violent street protests to keep the pressure on.

I strongly recommend this Bloomberg article, which points out that violent protests can lead to a counterproductive rise in nationalism:

I, for one, do not mind the fact that my hometown Shanghai has doubled in size, or that my local dialect is no longer the only one heard on the streets. In exchange, I’m exposed to more diverse cuisines when I visit and meet more interesting people. And thanks to the wonderful, hard-working “little brothers” — almost always migrants — I can get bubble tea delivered to my doorstep within half an hour. 

In that sense, the most cosmopolitan Chinese cities now resemble New York. It doesn’t matter where you’re from; as long as you live there, you can call yourself a New Yorker. Hong Kong, on the other hand, has grown bitterly divided into tribal camps — locals, expats, mainlanders and domestic helpers. . . .

If the central government had qualms about taking a hard line against the protesters before, it surely doesn’t now that they enjoy negligible support from mainland Chinese. An even simpler strategy would be to let Hong Kong decline slowly. Neighboring Shenzhen, home to local champions such as Huawei Technologies Co Ltd. and Tencent Holdings Ltd., is already keen to steal away high-tech firms. Corporate tax rates at the Qianhai free trade zone, for instance, are lower than Hong Kong’s.

And this is not just a question of money. I am not the only liberal mainlander living in Hong Kong. We naturally root for the city’s democratic advances. After all, why did we leave China in the first place? Why shouldn’t Hong Kong, one of the world’s wealthiest and most global metropolises, be governed by its people?

Yet, our support for the protests is rapidly dwindling because we suspect that the anger on the streets has less and less to do with the city’s political system, and more to do with a nativist dislike of mainlanders and immigrants — not unlike the anger driving populist protests in the U.S. and Europe.

Of course, mainland China is to blame for Hong Kong’s divisions, but nonetheless the local Hong Kongers should avoid playing into China’s hand. Beijing wants it to look like self government in Hong Kong has failed.

Actually, it’s never been tried.

Are you one of those people?

US troops are back on the warpath in Syria:

United States troops have resumed large-scale counterterrorism missions against the Islamic State in northern Syria, military officials say, nearly two months after President Trump’s abrupt order to withdraw American troops opened the way for a bloody Turkish cross-border offensive. . . .

On Friday, American soldiers and hundreds of Syrian Kurdish fighters — the same local allies the Trump administration abandoned to fend for themselves against the Turkish advance last month — reunited to conduct what the Pentagon said was a large-scale mission to kill and capture ISIS fighters in Deir al-Zour province, about 120 miles south of the Turkish border.

“Over the next days and weeks, the pace will pick back up against remnants of ISIS,” Gen. Kenneth F. McKenzie, the commander of the military’s Central Command, told reporters on the sidelines of the Manama Dialogue security conference in Bahrain on Saturday.

Are you confused by this story? Are you one of those people who believes the president has a big impact on policy? Are you one of those people who judges a president based on how the country is doing?

Two views of the Phillips Curve

The standard (Keynesian) view of the Phillips Curve is that a strong economy leads to higher inflation. If I’m not mistaken, Milton Friedman reversed the causation, arguing that higher than expected inflation led to a stronger economy:

There is always a temporary trade-off between inflation and unemployment; there is no permanent trade-off. The temporary trade-off comes not from inflation per se, but from unanticipated inflation, which generally means, from a rising rate of inflation. The widespread
belief that there is a permanent trade-off is a sophisticated version of the confusion between ‘high’ and ‘rising’ that we all recognize in simpler forms. A rising rate of inflation may reduce unemployment, a high rate will not.

That’s also my view of causality, although I think inflation is the wrong variable.  The model should use the rate of growth in NGDP, not prices.

Here’s Nick Rowe:

Andy Harless’ tweet (about the US economy) got me thinking.

There’s a frog-boiling aspect to this economy. The consistent lack of *rapid* improvement throughout the recovery is enabling us to reach levels of employment that might not otherwise have been attainable.

It reminds me of my old post “Short Run ‘Speed Limits’ on recovery“.  The basic idea is simple: actual inflation (relative to expected inflation) might depend not just on the level of employment (relative to some unknown level of “full employment”), but also on the speed at which employment increases.

I’ve added an epicycle to the Phillips Curve that I think makes it fit the facts better. But I added that epicycle 10 years before the facts that Andy’s tweet asks us to explain. And it’s based on an idea that make sense, and goes back further still:

It’s difficult and costly to increase employment quickly, and easier and cheaper to increase employment more slowly, even for the same cumulative increase in employment. So if demand for output suddenly increases by (say) 10%, individual firms will raise prices and wages relative to the prices and wages they expect at other firms, or raise them more than they would otherwise have done if demand for output had slowly increased by that same 10%. Even with no underlying trend growth in productivity. Even with the same average level of demand for output.

There’s another way of thinking about this question.  Inflation is not determined by economic slack, rather it’s determined by monetary policy.  When monetary policy is highly expansionary and prices rise much faster than expected, then output tends to rise rapidly.  That’s Friedman’s view.  Thus it’s no surprise that a subdued rate of inflation is associated with a slow recovery.  Phillips curve models that predicted otherwise, i.e., mainstream Keynesian models, are simply wrong.

I do believe that Andy and Nick are making valuable observations here, albeit not because they provide a useful tweak to Phillips curve theory.  It’s better to simply drop the Phillips curve and focus on other models, such as the relationship between unexpected NGDP growth and changes in employment.

Instead, Andy and Nick are showing that the natural rate of unemployment is a slippery concept.  If inflation is stable (or better yet if NGDP growth is stable), then the economy will gradually move toward its natural rate.  Because of costs of adjustment, however, the fact that unemployment is currently above (or below) the long run natural rate does not mean that monetary policy is off course, even if inflation (or NGDP growth) is exactly on target, and even if the Fed has a dual mandate.  Monetary policy is off course if expected future inflation/employment outcomes are not consistent with the Fed’s dual mandate, as was the case during 2008-16

During 1933, both prices and NGDP rose rapidly, and yet unemployment was roughly 25%.  Now you could certainly argue that even faster nominal growth would have been desirable.  But even with appropriate monetary policy, unemployment in 1933 would have been well above any reasonable estimate of the natural rate.

Some people argue that the current 3.6% unemployment rate shows that money was too tight a couple years ago, when unemployment was 4.1%.  That’s not the case.  Money might have been slightly too tight in 2017, but only because inflation was also running a bit below target.  The optimal unemployment rate might well have been 4.1% in October 2017 (due to costs of rapid adjustment) and 3.6% today.  But it certainly was not 10% in October 2009.

Even when monetary policy is producing appropriate nominal stability, it would not be unusual to see the unemployment rate gradually falling (or rising) toward its long run natural rate.

Don’t boycott artists

The NYT has an article discussing a London exhibition of paintings by Paul Gauguin:

Is It Time Gauguin Got Canceled?

LONDON — “Is it time to stop looking at Gauguin altogether?”

That’s the startling question visitors hear on the audio guide as they walk through the “Gauguin Portraits” exhibition at the National Gallery in London. . . .

 . . . The artist “repeatedly entered into sexual relations with young girls, ‘marrying’ two of them and fathering children,” reads the wall text. “Gauguin undoubtedly exploited his position as a privileged Westerner to make the most of the sexual freedoms available to him.”

How should we judge people who lived in an earlier era?  By our standards?  By their standards?  Indeed, should we make any judgments about their personal life?

I am a utilitarian, so I like to think about the practical value of cultural practices such as “shaming”.  How does it make society better off?  Does it discourage bad behavior?

When artists are long dead, it’s harder to make a utilitarian argument for boycotting their work.  I suppose one could argue that shaming discourages bad behavior, and that even the prospect of future shaming (after death) could encourage artists to behave better, to insure they have a good reputation in posterity.

That seems like a bit of a stretch, especially if the behavior was not seen in the same way when the artist was alive.  A French/Peruvian artist living in the 19th century might not have realized that by 2019 the NYT would regard certain types of sexual practices as being more evil when engaged in by  “privileged Westerners” than when similar practices were engaged in by native born men.  So I’m dubious that the prospect of a future boycott would have deterred Gauguin.

There are also significant costs associated with boycotting artists.  Gauguin was an extremely productive artist, producing (in aggregate) paintings worth hundreds of millions, if not billions of dollars.  There would be large costs if viewers were deprived of the pleasures associated with viewing this art.  Some viewers might find that Gauguin’s personal life in some way tainted the art, which prevented them from enjoying the paintings.  But that’s an argument for individuals to avoid viewing the art, not a societal boycott.  Where’s the “externality” argument calling for collective action?

Ironically, when I was young, Gauguin’s personal life was considered a plus by people (men?) in the artistic community—he was viewed as a sort of “hippie”, rejecting staid bourgeois values.  In the 19th century, his life was seen as scandalous for reasons entirely different from those discussed in the NYT.

There’s also the slippery slope argument against boycotts.  Should D.W. Griffith’s films be boycotted because he glorified racism?  Should Leni Riefenstahl be boycotted for glorifying Hitler?  Should Frida Kahlo be boycotted for glorifying Stalin?  Does your answer depend on whether you are on the left or the right?  When it comes to politics, even highly intelligent people often hold appallingly ill-founded opinions.  Should we cut people some slack because it’s apparently so difficult to think clearly about political issues?

And what about unproven allegations?  Many in Hollywood are boycotting Woody Allen due to allegations that were investigated by the authorities and found to be unsubstantiated.  Why not let the criminal justice system do its job?

In the end, we might end up not punishing the worst people.  Many, many, many famous artists who produced art and literature of incredible beauty and sensitivity were basically cruel jerks in their personal life.  But being a mean person doesn’t get you blacklisted, rather you get blacklisted for violating some sort of taboo.  In the 17th century, it might have been atheism, then later it might have been homosexuality, then (in the 20th century) the advocacy of fascism and communism.  Today it might be racism or sexism.  But this is self-indulgence; society is boycotting people based on our current ideological obsessions, not the eternal moral truth that cruelty is the worst thing that humans do.

“The person, I can totally abhor and loathe, but the work is the work,” said Vicente Todolí, who was Tate Modern’s director when it staged a major Gauguin exhibition in 2010, and is now the artistic director of the Pirelli HangarBicocca art foundation in Milan.

“Once an artist creates something, it doesn’t belong to the artist anymore: It belongs to the world,” he said. Otherwise, he cautioned, we would stop reading the anti-Semitic author Louis-Ferdinand Céline, or shun Cervantes and Shakespeare if we found something unsavory about them.

As I utilitarian, I have a hard time justifying that claim.  Shaming can deter bad behavior.  But so can prisons.  And what is the marginal value of shaming in a culture that already has prisons?  So perhaps Vicente Todolí is right for the wrong reason.  Some artists are deserving of being boycotted, but from a “rules utilitarian” perspective we’d be better off agreeing to a blanket rule analogous to the First Amendment to the US Constitution.  No boycotts of artists.

Gauguin may or may not have been evil, but his art is among the few things that make life worth living: