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Imaginary conversation

We’re in a recession!

I don’t think so.

Yes we are; GDP fell two straight quarters.

That doesn’t mean we’re in a recession

Yes, it does.

OK, let’s say it does. Why should I care if we are in a recession?

Recessions are bad.

Why are they bad?

Because lots of people lose their jobs.

But lots of people are getting jobs right now; we have one of the strongest labor markets ever. So why are recessions bad?

Everyone knows recessions are bad, that’s why they’re called recessions.

Yes, but why are they bad? What’s the big problem?

Well, productivity has recently declined.

Does productivity usually decline in recessions?

No, but it did this time.

But that’s just a coincidence, as you yourself have just admitted. So why are recessions bad?

We have high inflation.

Is inflation usually high during recessions?

No, but it is this time.

But that’s just a coincidence, as you yourself have just admitted. So why are recessions bad? I need an answer.

You just don’t want to admit that we are in a recession!

Sigh . . .

PS. Perhaps were are experiencing a banana.

Changing of the guard

China’s population appears to have peaked last year at just under 1.413 billion, and has begun what is expected to be a protracted decline to 587 million at the end of the century. By that time, Nigeria will have more people than China.

India’s population is now 1.408 billion, as is rising at about 14 million per year. Thus India is just a few months away from having the world’s largest population. It’s population is expected to exceed 1.65 billion people in the early 2060s, before falling back to 1.45 billion at the end of the century:

Just imagine if British India had not been partitioned; they’d now have 1.8 billion people!

These forecasts are subject to charge. Forecasts of China’s future population have been dramatically trimmed in just the past three years, due to an unexpectedly rapid reduction in their birth rate. It’s also hard to predict how much immigration China will receive in the distant future. If it becomes a first world country, then I’d expect China to import workers to do the jobs that the Chinese don’t wish to do.

It is also very difficult to predict the US population in 2100, as that mostly depends on future decisions we make regarding immigration. If we were serious about competing with China (we are not), we’d accept 100 million high skilled immigrants from China.

The following statement was published in a China news outlet:

China is struggling to overcome young people’s growing reluctance to start families. Over the past year, the government has launched an unprecedented drive to push couples to have more kids, raising the birth limit and introducing a range of policies to support new parents. So far, however, the measures appear to be having almost no effect.

That has to be one of the funniest things I’ve ever read, right up there with Trump saying no one respects women more than he does. AFAIK, China is the only country that limits how many children a woman is allowed to have. To call legal limits on childbirth an “unprecedented drive” for more kids, is like Trump saying he has unprecedented respect for women when he grabs their private parts.

The Chinese government may have its reasons, but to an outsider like me their entire policy regime seems bizarre.

I often see people say the world has too many people or too few people. But they never tell me how they know this. How many people would be optimal? Is it 6,712,334,233 people, or 8,913,212,793 people? Or is it 12,382,008,113 people? Be specific. And how do you know which is the right number? (BTW, the animal kingdom might vote zero as the optimal figure.)

I’m agnostic on population—I acknowledge my ignorance as to the optimal population. My focus is on making the world a better place for those who are here, and those who will be here in the foreseeable future. As for the very long run, who really knows anything?

PS. Scott Alexander is also agnostic.

When should the inflation target be raised?

Here’s The Economist:

There may be a benefit in the short term, too, to raising targets now. Reducing stubbornly high inflation requires cooling the economy, which generally involves raising the unemployment rate. The lower the inflation target, the more unemployment central banks need to generate to get there. If the costs of inflation at 3% really are not much different from inflation at 2%, central banks will be generating additional unemployment for little benefit. . . .

Set against this, however, are the consequences of reneging on a 30-year promise. The experience of the past year has made clear that the public detests inflation; both finance ministries and central banks are being excoriated for losing control of price growth. To shift the goalposts now could give the impression of giving up the fight entirely. . . .

As long as inflation is so far off-target, such considerations seem likely to stay the hand of any would-be monetary reformers. Yet once it peaks, restoring a degree of central banks’ credibility, the pain of further disinflation, together with the promise of well and truly escaping the zero lower bound, could just start to make the idea of higher targets more alluring.

I’m not convinced that raising the inflation target is a good idea. But let’s say I’m wrong and that the benefits of moving to a 3% inflation target outweigh the costs. When should the target be raised?

The Economist suggests that it might be wise to do so in the near future, when inflation has fallen to 3% and further disinflation would lead to higher unemployment. I disagree.

If we are to move to 3% inflation, then we should wait until inflation has fallen back to 2% before making that intention public. At that point the Fed should announce that it will keep the 2% inflation target for immediate future, but plans to shift to a 3% inflation target during the next recession. That would make it seem more like a principled decision, and less like an expedient to avoid unpleasant choices, which would reduce policy credibility. If we make the change when inflation is overshooting the Fed’s target, why would anyone believe the new target would be adhered to?

PS. You may want to check out the 22nd Amendment to the Constitution, which was enacted before America became a banana republic. (Or the 27th Amendment). When people say they want to expand the Supreme Court, I respond, “As long as the new rule doesn’t take effect at a time which would benefit the current administration.”

Random observations

1. The scientific community is coming around to my view of the origin of Covid:

Andersen said the studies don’t definitively disprove the lab leak theory but are extremely persuasive, so much so that he changed his mind about the virus’ origins.

“I was quite convinced of the lab leak myself, until we dove into this very carefully and looked at it much closer,” Andersen said. “Based on data and analysis I’ve done over the last decade on many other viruses, I’ve convinced myself that actually the data points to this particular market.”

Worobey said he too thought the lab leak was possible, but the epidemiological preponderance of cases linked to the market is “not a mirage.”

“It’s a real thing,” he said. “It’s just not plausible that this virus was introduced any other way than through the wildlife trade.”

In my view, this interpretation is far more embarrassing to the Chinese government than a lab leak, which is why the CCP continues to cover-up evidence that the pandemic began at one of China’s animal markets.

2. Ben Southwood makes a very good point:

The BLM protests of 2020 (and subsequent “defund the police” movement), will end up worsening global warming. On the other hand, I don’t want to suggest that the woke are anywhere near as bad as the environmentalists, who continue to oppose low carbon nuclear, hydro, wind, solar and geothermal power.

3. And speaking of the woke, Wesley Yang provides a platform for a left wing teacher who reports on the state of our public schools. It’s even worse than you thought:

I’ve had liberal friends of mine dispute (to my face!) straightforward accounts of what my colleagues have said. They’ll tell me school districts could never embrace such obviously unworkable policies; what else can I do except shrug my shoulders and say, “I’m sorry, but yes, they can?” They’ll tell me I sound like one of those right-wing grifter types; what else can I do except sigh and tell them the grifters have a point?

This is where I have to stop and make one thing very clear: I’m a leftist. Like, a big one. I hate capitalism, I support abortion on demand, and I unironically use phrases like “systems of oppression” and “the dominant culture.” The last big paper I put together for my undergraduate degree was on critical race theory, for the love of God! I’m not the sort of person who can be easily dismissed as a conservative crank. But plenty of my fellow leftists are still willing to try, on the grounds that anyone who thinks there might be any problem with DEI policies must necessarily be a slack-jawed MAGA troll.

Read the whole thing. Still think I’m crazy for wanting to abolish the public schools?

4. It’s weird how politics evolves. When I was young, I used to praise Houston’s no-zoning policies. Progressives would roll their eyes at my fanatical libertarianism. Now it’s increasingly the conservatives who defend zoning, while progressives like Matt Yglesias want to abolish the practice. Here’s M. Nolan Grey:

Far from the doomsday predictions made by the zoning pushers in bygone eras, unzoned Houston works just fine. Between 1970 and 2020, the city nearly doubled in population from 1.2 to 2.3 million, assuming the title of America’s fourth-largest city. Attracting a blend of working- and middle-class Americans and international migrants seeking opportunity, Houston is now our nation’s most diverse city.

Thanks in part to a lack of zoning, Houston builds housing at nearly three times the per capita rate of cities like New York City and San Jose. It isn’t all just sprawl either: In 2019, Houston built roughly the same number of apartments as Los Angeles, despite the latter being nearly twice as large. This ongoing supernova of housing construction has helped to keep Houston one of the most affordable big cities in the U.S., offering new arrivals modest rents and accessible home prices even amid seemingly endless demand.

Most people are tribal, and conform to their tribe. I try to stick with my principles. Zoning is bad whether it’s being pushed by progressives or conservatives.

It’s also bad for politicians to tell teachers what to teach, whether they are forcing them to teach woke stuff or banning them from teaching woke stuff.

5. Might the UK consider NGDP targeting?

But Truss has the whiff of market monetarism about her. She has proposed a review of the Bank of England’s mandate. If the Bank didn’t have an inflation target, what would it have? Rather than targeting inflation, market monetarism involves targeting income. This is called a “nominal GDP target” — the Bank would be looking not just at inflation, but inflation and growth. It is the overall size of the economy that matters, not just the inflation rate. That is likely what Truss is looking for from her review of the Bank. In the Channel 4 debate, she pointed to Japan’s central bank as a model, which switched to nominal GDP targeting in 2015. (Economists like Scott Sumner recommend using market indicators to set interest rates; it’s not clear whether Truss supports that.)

Just to be clear, I favor NGDP level targeting, with the level targeting part of the policy being much more important than the NGDP part of the regime.

BTW, I don’t know enough about UK politics to have an opinion on the race for PM. As I’ve gotten older, I’ve come to view the zeitgeist as being much more important than personalities. (And yes, that also applies to Trump. I’m far more worried about Trumpism than I am about Trump.)

6. Penn Jillette is one of my favorite people. Reason is one of my favorite magazines. So what could be better than a 2-hour Reason magazine interview of Penn Jillette? (By Nick Gillespie.)

(Things I have in common with Jillette: Born in 1955, tall, obsessed with Bob Dylan, libertarian, atheist, annoyed with the recent right wing drift of libertarianism. Differences: Jillette is really talented.)

7. Here’s Razib Khan, who self-identifies as conservative:

8. Putin must be smiling as he contemplates our stupidity:

The U.S. is considering sanctions that would target a United Arab Emirates-based businessman and a network of companies suspected of helping export Iran’s oil, part of a broader effort to escalate diplomatic pressure on Tehran as U.S. officials push to reach a deal on Iran’s nuclear program.

Why not just send a check directly to Putin?

9. File this under “Politics is downstream of (Anglo-Saxon) culture”. Here’s the FT on the new Conservative Party:

But Tories want the fairy tale. For many, the test is no longer what you have done but whether you believe. There is no place for questioning. Approbation comes by faith alone. . . .

Doubt is such a heresy that both candidates must now deny any link between Brexit and delays at Channel ports, or its role in the labour shortages and weak pound which are exacerbating inflation.

It would be like a Republican who spent early 2016 calling Trump a fraud, suddenly become a true believer and spouting theories about a stolen election because the GOP base demanded it.


What is a low interest rate policy?

Some commenters struggled with my previous post, which looked at two types of low interest rate policies, one expansionary and one contractionary. In that post, I focused on the expected path of exchange rates.

Today, I’ll tell the same story in New Keynesian language, focusing on the role of the natural rate of interest. Consider the following two policies:

1. The Fed reduces market interest rates at a time when there is relatively little change in the natural rate of interest.

2. The Fed reduces the natural rate of interest. It also reduces market interest rates, but by less than the decline in the natural rate of interest.

These are both “low interest rate polices”, but the first is expansionary while the second is contractionary. When Keynesians speak of a low interest rate policy, they have in mind the first type. When NeoFisherians speak of a low interest rate policy, they visualize the second type.

In my previous post, I gave an example of a central bank that simultaneously appreciated their currency and generated expectations of further currency appreciation (as with Switzerland in January 2015.) The currency appreciation sharply reduced the natural rate of interest. The promise of further currency appreciation led to lower nominal interest rates. Because the natural interest rate fell by more than the market interest rate, the policy ended up being contractionary.

Keynesians often forget that central banks can move the natural interest rate by more than they move the policy rate. NeoFisherians often forget that central banks can move the market interest rate relative to the natural rate.

I try to remember both truths.

PS. The National Review just announced that the US is in recession because of two quarters of negative RGDP growth. Who’s going to tell them?

PPS. NGDP grew at a 7.85% annual rate in Q2. That’s way too fast.