No, NASDAQ has not reached 11,743; it’s around 8950 as I write this post. I’m going to make a slightly different argument. I’m going to argue that 11,743 is where NASDAQ would be if NGDP had grown as expected after the spring of 2000.

Between the spring of 1990 and the spring of 2000, NGDP grew at a 5.57% rate. That seems like a reasonable forecast of the growth rate over the following few decades, given what investors knew at the time, as I am comparing similar points in the business cycle.

In that case, as of the spring of 2000, investors probably expected NGDP to be around $28,001b by the spring of 2019. The actual value was $21,341b.

Let’s assume that money is neutral in the long run, and that the ratio of NASDAQ/NGDP is not impacted by monetary policy in the long run. In that case, NASDAQ would have now been at 11,743. If money is not neutral, and a more expansionary monetary policy leads to a higher NASDAQ/NGDP ratio (by boosting RGDP growth), then NASDAQ would have been even higher than 11,743.

Of course investors did not accurately forecast the slowdown in NGDP growth, and hence bonds would have been a much better investment in 2000, in retrospect. And even the NASDAQ/NGDP forecast was probably a bit optimistic at the very peak (when NASDAQ briefly exceeded 5000). But it’s not surprising that when one looks back over a period of several decades, the very peak price will have been, in retrospect, too high. That’s the nature of efficient markets. The very peak Bitcoin price also looks too high today, but no one at the time knew where the peak would be.

The overall tech bubble was actually not all that irrational, as we now know that fairly high tech stock prices were quite justified in the late 1990s, especially conditional on rational NGDP growth forecasts. Of course we didn’t know which specific tech stocks would become trillion dollar companies, which is the nature of efficient markets.

PS.  A quick reply to Tyler Cowen:

1. I do not believe that national security was an important motivation for Trump in the trade deal.

2. I do believe that national security was an important motivation for many people in the US government, as Tyler says.

3.  I do not believe the trade deal improved US national security.  Indeed I believe the opposite is true, as the trade war is part of the US government effort to create a new cold war, which I see as reducing US national security.

4.  I do believe that China spies on the US, and tries to steal technology that would improve its military capability.  (Other countries also do this.)  I believe we should try to prevent this from occurring, but I don’t believe that this spying has a material impact on US national security.

5.  I believe that a richer China would improve US national security.

6.  I believe that Russia is by far the greatest threat to US national security, with North Korea a distant second.

To conclude, I believe it makes more sense to interpret the trade deal as an exercise in mercantilism, and judge it on that basis.  If you are worried about the trade deficit (I am not), then Trump’s policies have been a complete disaster.

I recently expressed some doubts about the idea of “progress”.  David Rose has a short essay that provides one example of how society is regressing:

Not long ago, it was possible for people with dramatically different views to talk to each other about what they believed and why they believed it. They were not afraid to speak their minds. And even when debate did not lead to agreement, the very act of discussion led them to connect to that person, to view him or her as an individual and not an objectified silhouette from the tribe of “them.”

Anyone over the age of 55 cannot imagine any leftist hippie in the 1960s or ’70s tolerating any censoring of another person’s speech. But today an increasing number of young people intimidate each other into silence so often that it is becoming a habit. Without realizing it, students are increasingly self-censoring to avoid being shunned. This is making them paranoid and miserable. Worst of all, they are getting used to it. That is a very dangerous thing for a free society. To say it is Orwellian is an understatement because it is occurring at a cultural level.

For decades I sat at the lunch table at Bentley College, free to say whatever I wanted.  I feel bad for younger academics that no longer have that freedom.

People often claim that China wants to impose its (illiberal) system on the rest of the world. But what sort of system do the Chinese actually prefer in other countries? Here’s The Economist:

Russian rent-seekers and their short-term interests play a central role in the Sino-Russian relationship. “Sometimes it seems that Russia’s policy towards China is shaped by the lobbying interests of the Kremlin’s heavyweights,” says Andrei Kortunov, head of the Russian International Affairs Council, a think-tank. The same is not true in reverse. Private Chinese firms are reluctant to invest in Russia. Some fear American sanctions; others worry about the lack of property rights and clear rules. To operate in Russia, you need what Chinese businessmen now call bao hu san—a protective umbrella provided by siloviki. For such a small market, why bother? There is an irony here. Russia’s regime has opted for the East; but Chinese people and investors are interested in Russia only to the extent that it is Western. Investors want rule of law, not cronyism. Tourists want St Petersburg, not Tuva.

From the same issue, we learn that America is not just a big bully, it’s also a hypocrite:

America, however, did not join the CRS. Instead it shares information on the foreign clients of American banks under FATCA’s reciprocal provisions. But sharing is patchy; a lot of countries get nothing. Combine that with the high level of anonymity offered by American shell companies, and it is hardly surprising that America has become the destination of choice for many tax evaders. One tax expert reckons that “over 90% of assets avoiding the CRS have been herded into the USA”.

America does not have to worry about the sort of bludgeoning that it doled out to Switzerland—no other country has anything like the same extra-territorial financial power.

Also from the same issue, evidence that something mysterious happened in the mid-2010s.  The entire world, including the US, China, India, Europe and many other places, suddenly became more bigoted against Muslims.  Why?

NAHEED NENSHI, Calgary’s ebullient mayor, says that when he was elected in 2010—becoming the first Muslim to lead a large North American city—only the foreign media brought up his religion. The local press never mentioned it. That changed when he ran for re-election for a third term in 2017. People “suddenly started talking about race and religion”, sometimes abusively, online. Although his rivals avoided bigotry, it encouraged formerly non-voting racists to turn up at the polls. He still won. Four years ago, when Justin Trudeau was elected, “Canada was bucking the trend,” says Mr Nenshi. Now it is learning that “we’re not immune at all” to the political maladies of the age.

In the early 1920s, Herbert Hoover led a relief effort in China Russia that assisted millions of starving peasants.  One of the great evils of nationalism is the denial of historical truth:

In the Volga region, where residents were driven by hunger to boil and eat human flesh, the ARA organised kitchens and transport, distributed food and rebuilt hospitals. . . . “The help given by the Americans can never be forgotten, and the story of their glorious exploit will be told by grandfathers to their grandchildren,” grateful Russians told them.

Yet the duplicity and paranoia of the Soviet government haunted the ARA’s operation to the very end. While publicly Bolshevik leaders showered the Americans with praise and thanks, the secret police instructed local officials: “Under no circumstances are there to be any large displays or expressions of gratitude made in the name of the people.” No sooner was the Russian job done than the authorities began to expunge all memory of America’s help.

The edition of the Great Soviet Encyclopedia of 1950 described the ARA as a front “for spying and wrecking activities and for supporting counter-revolutionary elements”. Modern Russian textbooks barely mention the episode.

I also doubt that American textbooks mention the episode.

Some people claim that the Chinese people like the draconian security measures being imposed, as they reduce crime.  It’s not that simple, as this story from Xinjiang demonstrates:

Six local Han Chinese businesspeople working in real estate, agriculture, services and retail estimated that the city population had halved from between 500,000-600,000 to about 200,000-300,000 over the past two years.

In the city centre, rows of shops were shuttered. Farther out, many low-rise houses — usually rented by migrant workers — had been demolished. . . . 

Another small business owner said people left Korla because of the inconvenience of the security. “It’s not that living here isn’t ‘stable’,” he said, using the Chinese authorities’ term for their mission in Xinjiang — to “stabilise” the region. “It’s the pressure of daily life. When you go into a shopping centre you have to scan your face, scan your ID, scan your bag, store your bag in a locker. You have to hand over ID just to buy something,” he said.

China had the goal of bring lots of Han people to Xinjiang.  Now they are leaving.

Back when I was teaching economics, India students used to tell me that while Modi was an anti-Muslim bigot, at least he was good for business.  Actually, nationalists are rarely good for business:

“There is no demand and no private investment,” groused Rahul Bajaj, chairman of Bajaj Auto, a motorcycle-maker, at its annual meeting in late July. “So where will growth come from?” The remark, widely interpreted as a swipe at Mr Modi, encapsulates Indian business’s disenchantment with the man they once regarded as their champion.

The immediate cause of the mood swing was the budget, presented on July 5th by Nirmala Sitharaman, the newly appointed finance minister. Business folk tuned in to the two-hour presentation expecting less red tape, fewer tariffs, more incentives for investment and lower taxes. They got the opposite.

At an international bank, analysts’ feigned interest turned to mild bewilderment, then despair, as Ms Sitharaman recited the budget’s 143 provisions. The top marginal tax rate for high-earners would increase from 35.9%, already above the level in most emerging economies, to 42.7%, roughly as much as the average in the OECD club of mostly rich countries. The corporate-tax rate for big companies stayed at 35% (compared with a global average of 23%, and 21% in America). Or at least it appeared to: a new levy of 20% on share buy-backs, on top of existing charges, would bring the capital-gains rate above 40%, among the highest in the world. Add in a tax on dividends and a recently imposed charge on recipients and, all told, the government could skim off 60% of corporate profits. New tariffs would be slapped on products from cashews to newsprint to fibre-optic cables.

I frequent do “not from The Onion” posts, which for some strange reason have become much more common in recent years. Maybe it’s time to do “not from the People’s Daily” posts.

In 2018, the Department of Homeland Security (DHS) announced its plan to require migrants list their social media accounts on immigration forms. The goal is to monitor and keep record of their social media activity. Although the monitoring isn’t supposed to apply to naturalized citizens, the information collected could influence the success of their applications for citizenship: conversations and comments made on social media may be scrutinized and interpreted to find reasons to deny the application.

The bad news:  Every day the US seems to become more like China.

The even worse news:  China’s a moving target, as it’s becoming ever more repressive.

The life expectancy gap between blacks and whites is falling rapidly, especially for women:

Miami is building air conditioned bus stops.  No, this is not a joke:

In America, even many prisons now have air conditioning. (I grew up without it.) Still think that living standards in America are declining?

The EU is a bit of a busybody, with some unnecessary regulations. It also does lots of good things, and overall I view it as a force for progress. Still, I’m glad that countries are free to leave if they find the EU to be too oppressive.

Unfortunately, there is no way for countries to leave planet Earth, no matter how oppressive its Global Master becomes. And in recent years the world’s master is becoming extremely oppressive, bullying both friends and enemies:

The company laying the controversial Nord Stream 2 pipeline said it had suspended work, as US sanctions against a project Washington says will increase Europe’s dependence on Russian energy imports came into force.

Germany condemned the sanctions, which threaten to plunge relations between Berlin and Washington, already badly damaged by President Trump’s constant attacks on Germany’s trade surplus and relatively low defence spending, to a new low.

German finance minister Olaf Scholz described the punitive measures as “serious interference in Germany and Europe’s internal affairs and our own sovereignty”. “We object to them in the strongest terms,” he told the German TV channel ARD.

Such measures were “incomprehensible and improper for friends that are also linked by our common membership of Nato,” he added.

I actually have no problem with the US putting economic sanctions on Russia. That’s our decision. But when we bully other countries into following our lead (including allies like Germany), then we show that we are no better than the countries we criticize. A truly shameful moment in American history, in a decade full of such disgraces.

History suggests that eventually someone, or a group of countries, will cut the US down to size.  Let’s hope it’s soon.

While politicians search in vain for trade deals that will help blue-collar workers, the real problem is being ignored.

U.S. Steel Corp. plunged after delivering a barrage of harsh news, warning of a loss and announcing it will shut down most of its Great Lakes Works facility near Detroit, lay off workers and slash its dividend.

. . . The industrial icon plans to lay off as many as 1,545 workers from the Michigan plant, reduce its quarterly dividend to 1 cent from 5 cents, and prune capital expenditures.

U.S. steelmakers are facing slowing demand in the manufacturing sector, even though mills have enjoyed protection because of Trump administration tariffs. U.S. Steel has been a laggard in the domestic industry, with aging plants that are less efficient than rivals with newer technology.

Tariffs can’t save steel jobs, which are going the way of the dodo bird. And the effects of automation are not gradual; they come in big chunks as obsolete mills close down.

Mark Perry directed me to a couple of stories that illustrate the problem:

In the 1980s, American steelmakers needed 10.1 man-hours to produce a ton of steel; now they need 1.5 man-hours, says Joe Innace of S&P Global Platts.

Most American steel is now made at super-efficient mini mills, which use electric arc furnaces to turn scrap metal into steel. (Traditional integrated steel mills make steel from scratch, feeding iron ore and coking coal into blast furnaces.) Some mini-mills need just 0.5 man-hours to produce a ton of steel, Innace says.

Increased productivity means today’s steel mills don’t need as many workers. Steel industry employment peaked at 650,000 in 1953. By the start of this year, U.S. steelmakers employed just 143,000.

We still produce as much steel as in the 1950s, but with far fewer workers. And the problem is about to get much worse:

“So steel and aluminum will see a lot of good things happen. We’re going to have new jobs popping up,” Mr. Trump told steel and aluminum executives last Thursday at the White House as he announced his 25% and 10% tax on imports.

Someone should tell him about Voestalpine AG ’s steel plant in Austria, which reveals the reality of steel production and jobs. A Bloomberg News story from June 20, 2017 offered a fascinating look at how a modern plant can now produce high-quality steel with few workers.

The plant in Donawitz, a two-hour drive from Vienna, needs all of 14 employees to make 500,000 tons of steel wire a year. The same mill in the 1960s would have needed as many as 1,000 workers to produce a similar amount albeit of lesser quality.

Free traders like Paul Krugman claim that mercantilists don’t understand basic Ricardian trade theory. Mercantilists claim that neoliberals put too much weight on efficiency and don’t understand the pain inflicted on blue-collar workers by import competition. The fact that mercantilists are almost totally silent on automation is the “tell” that Krugman is right—they really are ignorant of the basic ideas of comparative advantage. If they weren’t they’d focus on automation, not trade.

The recent trade deals (Nafta 2.0, China, etc.) certainly look like failures. That’s my view and also the view of Paul Krugman.  More generally, I see governments as being big and clumsy organizations, and assume that the most straightforward interpretation of their motives is usually the correct one.  Tyler Cowen offers an alternative perspective:

Elsewhere you will see Paul Krugman suggesting Trump has lost the trade war, but I don’t think he comes close to even seeing what the trade war with China is about. No matter what Trump says, the trade war is not about lowering the trade deficit. It is about (for a start) two major considerations: a) ensuring that national security-motivated partial economic decoupling takes place on terms not so unfriendly to America, and b) giving America levers to make sure China does not make such significant inroads into the world’s tech infrastructure, most notably with 5G but not only.

The stipulation of Chinese purchases of American exports, which probably they will not and cannot meet, is in fact a lever to give the United States enforcement power over the less tangible parts of agreement, which is indeed most of the agreement. We want China to be in default of the agreement terms, so we may threaten them with tariffs to enforce compliance elsewhere, and so that is a better rather than worse outcome for the United States.

I’ll respond to the specific points made by Tyler and then make a broader argument.

1. As far as I know, the “phase one” trade deal with China does not make economic decoupling any less painful for the US.  If it does, I’d like someone to explain which provisions do this.

2.  If decoupling were our goal, then it would be odd to insist that China become more open to trade and investment with the US, changes that would make China richer and more powerful.  Is that how we should be treating an enemy?  It’s not how we treat Cuba.  (I don’t see China as our enemy, although I understand that much of the foreign policy establishment disagrees with me.)

3.  I don’t believe that the trade war gives “America levers to make sure China does not make such significant inroads into the world’s tech infrastructure”.  We may have some levers in this area, but they have nothing to do with the trade war.  The US is in a very weak negotiating position on trade, as Trump’s political position is much weaker than Xi’s.

Tyler seems to acknowledge that at first glance his hypothesis doesn’t seem to make much sense.  Our trade demands don’t seem to align at all with the foreign policy goals that he thinks are motivating the trade war.  His explanation, however, seems a bit too clever to me. He’s right that China will not live up to its promises to hit certain import targets, but I don’t understand his claim that this gives us extra leverage to use in achieving the foreign policy goals:

We want China to be in default of the agreement terms, so we may threaten them with tariffs to enforce compliance elsewhere

If they are not complying “elsewhere” then we can simply impose tariffs in retaliation.  The silly export targets don’t give us any additional leverage.  It’s not like when the Feds got Al Capone for taxes because they couldn’t prove murder; the rule of law does not apply to the US government.  If we say that China is violating any provision of the agreement, then we can punish them any way we wish.  We don’t have to prove anything in a court of law.  All the various trade provisions of the deal give us zero additional leverage on the national security issues.

I don’t see Huawei as a threat to our national security, partly because I don’t see any evidence that they are spying on us, and partly because don’t think that spying has much impact on the balance of power.  But if I’m wrong then the appropriate policy is a boycott of Huawei, not a trade war.

I have a much simpler explanation for the seemingly ineffective parts of the trade deal.  Trump asks China for big trade promises for the same reason he asked Ukraine to undertake a useless investigation of Biden.  It’s all PR.  Trump wants to tell voters (especially farmers) that he got China to do what he asked of them.  All Trump’s actions can be most easily explained if you assume his only goal is to help Donald Trump, politically and financially.

(Note that Tyler was discussing the Trump administration, not just Trump, so the following is not directed at his post.)

Think about how implausible it is that Trump is motivated by foreign policy considerations.  The biggest threat to America is Russia, not China.  Russia is an expansionist power with far more nuclear weapons than China.  And yet Trump consistently acts in ways that provide aid and comfort to Putin’s Russia, while undermining our allies in Ukraine, Kurdistan, and elsewhere.  Trump even undermines our own intelligence services when he suggests that they are lying about Russian interference in the 2016 election and that Ukraine was the real threat.  I’m not saying that Trump is a paid agent of the Russian government (I don’t believe in conspiracy theories), just that he acts in such a way as to help our enemies and hurt our friends.  Why would a president who is sympathetic to Putin care about the smaller threat provided by China?

Today, Trump is surrounded by henchmen like Pompeo and Barr, but during the course of his 3 years in office he has had some top aides who were actual patriots, even if one disagrees with their views (as I often did.)  When they leave office they describe the administration as a clown show, using terms like “drug deal”, “idiot”, “moron”, kindergartener”.   But this is exactly what it seems like from the outside!  If an administration seems incompetent from the outside, and also seems incompetent to its own top officials, then the most parsimonious explanation is that it is actually incompetent.

People who disagree with me might argue that Trump himself is incompetent, but the “deep state” hijacked his trade agenda and diverted the negotiations away from mercantilism and toward neoconservatism.  Maybe, but the actual agreements looks much more like what you’d expect to get if you had mercantilists like Trump, Lighthizer, and Navarro running the show, but able to achieve only a small portion of their goals.  If containing China were the goal, then why did we make demands that would have the effect of making China more powerful, such as demanding that they open up their capital markets?

There’s a much simpler explanation.  Tyler’s right that the US government is trying to limit China’s power.  Thus the recent sanctions on Huawei were probably motivated by exactly the factors that Tyler describes.  But actions taken to limit China military power, such as export controls, sanctions on Huawei, etc., are essentially unrelated to the long trade war.

Tyler concludes:

In general, I am finding that commentary on the trade war is of relatively dubious value, in part for partisan reasons.  The key here is to set aside your political views, and spend a lot of time talking with national security people.

It’s hard to think of a more distinguished China expert than Henry Kissinger.  Here is the view of this leading advocate of realpolitik:

Former U.S. Secretary of State Henry Kissinger told an audience in Beijing on Thursday that China and the United States are in the “foothills of a Cold War,” warning that the current trade war between the two nations could escalate into an armed conflict worse than World War I if left unresolved. . . .

“If conflict is permitted to run unconstrained, the outcome could be even worse than it was in Europe,” Kissinger said. “World War I broke out because of a relatively minor crisis … and today the weapons are more powerful.”

“That makes it, in my view, especially important that a period of relative tension be followed by an explicit effort to understand what the political causes are and a commitment by both sides to try to overcome those,” Kissinger continued, according to Bloomberg. “It is far from being too late for that, because we are still in the foothills of a Cold War.”  (emphasis added)

That’s also my view, and yet I get called a starry-eyed naive idealist, who doesn’t understand power politics.

PS.  Some will say that my views of Trump’s policies reflect my political bias.  Is that also true when I lavish praise on his new kidney transplant policy:

The U.S. government proposed new rules Tuesday to increase organ transplants — steps to make it easier for the living to donate and to make sure that organs from the deceased don’t go to waste.

The proposals come after President Trump in July ordered a revamping of the nation’s care for kidney disease that included spurring more transplants of kidneys and other organs.

Or when I praise the corporate tax cut?  Or the recent reduction in labor market regulation?

And is my current pro-free trade policy view different from what my view was years ago, before Trump came on the scene?  How about the views of other Republicans (Rubio, etc.), who once favored free trade and are now born again trade warriors?  Who is letting partisan politics twist their views?