Trump and “other people”

In the past, I’ve argued that Trump’s trade war with China is exactly what he says it is, an exercise in mercantilism. And for that reason it’s doomed to fail.

Others argue that Trump’s actual objective is to stop China from becoming a great power. Perhaps he’d like to do that, but I just don’t see the evidence that it’s a central concern of Trump.

Here’s Trump responding to the Philippines’ decision to pull out of its defense treaty with the US:

“I really don’t mind, if they would like to do that, that’s fine,” Trump said Wednesday during a meeting with Ecuador President Lenin Moreno at the White House. “We’ll save a lot of money. You know my views are different from other people. I view it as, ‘Thank you very much, we’ll save a lot of money.’”

Who are these other people that Trump refers to?  I’d guess they are the foreign policy establishment within his administration:

The decision to terminate the agreement was seen as a pivot by Duterte’s government toward China and could complicate U.S. efforts to contest Beijing’s influence in the South China Sea. The Pentagon has vowed to shift more resources toward the Indo-Pacific to help counter China as part of what it views as the coming “great power” competition with Beijing and Moscow.

The president’s remarks represented a sharp departure from the position of the Pentagon, with Esper telling reporters en route to a NATO conference in Brussels on Tuesday that “it’s a move in the wrong direction, again for the long-standing relationship we’ve had with the Philippines, for their strategic location, for the ties between our peoples and our countries.”

Trump says he cares about saving money, while the foreign policy establishment cares about the US having a lot of allies in East Asia to confront China.

Who’s right?

Who’s calling the shots?

Who knows?

All I know is that Trump and his administration are not on the same page, and Xi Jinping is very, very happy about that fact.

Why average inflation targeting matters

The FT has a new piece by Gavyn Davies discussing the possibility (likelihood?) that the Fed will soon adopt average inflation targeting. To see why it matters, consider the Fed’s current policy stance under two scenarios:

1. Inflation targeting: The Fed should probably cut rates, but it’s debatable.
2. Average inflation targeting: The Fed should cut rates, and it’s not even debatable.

Those two cases might not look so different. But it just so happens that the Fed has opted not to cut rates right now, even though it’s likely that a rate cut is appropriate. So Fed policy would change if we switched to average inflation targeting. Jay Powell hinted at this in his recent press conference:

Over time, an average inflation targeting framework would be different than our current framework in the sense that it wouldn’t be—there would be some aspect of trying to make inflation average 2 percent over time, which means if it runs below 2 percent for a time it has to run above to bring the average. So, that is a different framework. Our current framework is one where we say, we or would be equally concern with deviations of inflation from target on either side. But that isn’t—that doesn’t suggest an intention specifically to have those deviations be symmetric. In other words, that would—consistent with—that would be having all the deviations to be on one side, which is what we’d had actually. So I think it is a change in framework, and over time it would lead to a different approach to policy.

Let’s assume that Jay Powell is frustrated with the persistent undershooting of the Fed’s 2% inflation target and wants to do something about it.  But a substantial portion of the FOMC believes current policy is appropriate because inflation is only modestly below 2% and with a strong economy is likely to rise over time.  The policy hawks also believe that lower rates could trigger excesses in asset markets.  So the Fed is standing pat for the moment.

Switching to average inflation targeting would be a way of forcing the Fed’s hand.  FOMC members could no longer say we are only slightly below the inflation target and likely to hit the target in the near future.  This would push the Fed toward a more expansionary policy stance.

If the Fed does adopt average inflation targeting this summer, it will be a good indication that the Fed thinks money is currently too tight.  This action would likely be linked to an easing of monetary policy.  Trump continues to be very lucky.

PS.  I am seeing a surge in articles discussing the unusually long business cycle expansion.  In the future, we will see many more such articles and  people will cite factors such as a lack of financial crises.  Actually, there were 9 recessions from 1945 through 1982, and virtually no financial crisis.

Once I’m gone I hope you’ll remember that I was the one who said business cycles would become much less frequent in the future, and I told you why.  The others will attribute the lack of recessions to good luck, but then they never saw it coming.

PPS.  Judy Shelton has been nominated for a position at the Board.  She shares the same weaknesses as the earlier Moore and Cain nomination.  She switched from being very hawkish during the period of high unemployment in the early 2010s to being very dovish today when unemployment is low.  Beside those three, the only other person I know who made that switch was Donald Trump.  Hmmm. . . .

In defense of Shelton, in 1994 she correctly pointed out that FDIC was likely to create reckless lending by banks:

Shelton’s views on the Federal Deposit Insurance Corporation have also drawn criticism. In her 1994 book, “Money Meltdown,” Shelton advocated for ending federal deposit insurance, which most economists credit with restoring faith in the banking system following the Great Depression. Shelton called it a government subsidy that distorted financial markets. “Depositors no longer have to make judgments about the competence of bank management or the characteristics of the loan portfolio,” she wrote.

In my view, FDIC was the number one cause of the 2008 financial crisis (with the exception of monetary policy).  Unfortunately, I expect her to backtrack on this issue in the upcoming confirmation hearings.  Her answer to this question will determine whether I support her nomination.

Why do social problems seem intractable?

Lorenzo directed me to an interesting study of human psychology. Here is the abstract:

Why do some social problems seem so intractable? In a series of experiments, we show that people often respond to decreases in the prevalence of a stimulus by expanding their concept of it. When blue dots became rare, participants began to see purple dots as blue; when threatening faces became rare, participants began to see neutral faces as threatening; and when unethical requests became rare, participants began to see innocuous requests as unethical. This “prevalence-induced concept change” occurred even when participants were forewarned about it and even when they were instructed and paid to resist it. Social problems may seem intractable in part because reductions in their prevalence lead people to see more of them.”

This supports my recent post on risk aversion, as well as earlier posts on progress. It suggests there’s no one to “blame”, it’s just a part of what makes us human.

We’re stuck on a treadmill, and always will be.

Jeff Sessions made Trump mad

There was no Nixon cult or Bush cult. Even the very popular President Reagan never had a cult. So what makes the Trump Republican Party a cult?

One answer is that Trump critics are shunned by other Republicans. Mitt Romney is called a “Judas” for his vote to convict Trump. But a Democrat who voted to convict Clinton might also have been shunned.

In my view, what makes the Trump GOP a cult is that the demands of loyalty go far beyond anything in American political history.

John Bolton is about as conservative as Republicans you’ll find. Recently, he wrote a book that mentioned that Trump had demanded a quid pro quo in his conversation with the Ukrainian President. It’s hard to see why this is a big deal. First, because it’s obvious that there was a quid pro quo. Second, because Trump chief of staff Mulvaney admitted there was a quid pro quo in a very public setting. And third, because the Trump people insist that even if there was a quid quo pro, nothing wrong was done.

So Bolton’s remark was of no importance. And yet Republicans responded by calling Bolton a “tool of the radical Dems“.  Mulvaney got away with it because he was willing to backtrack, to claim he was misunderstood.  (BTW, why does Trump continue to fill his administration with traitors and backstabbers?)

On the other hand, GOP members of Congress often get away with opposing a particular Trump initiative, as when they refused to support Steve Moore and Herman Cain for the Fed. So what explains the difference with Bolton?

The Trump cult is all about Trump as a leader, not a policymaker. You can disagree with this or that policy, but you are not allowed to do anything that might undercut his image as a leader, especially something that embarrasses him in front of the general public. Obviously, the general public doesn’t care who is appointed to the Fed.

The Trump cult has two components, the true believers and those who are support Trump for policy reasons and/or out of fear. Lindsey Graham and I both know that (in Grahams’ words) Trump is a “race-baiting, xenophobic religious bigot”, but Graham pretends to support him anyway.

Among the general public, very few support Trump out of fear, and none vote for him for that reason. Rather Trump supporters are divided into those with blind faith in him and those who support his policies like tax cuts, deregulation and conservative judges. Trump’s skill at demagoguery has gradually produced an increasing number of voters and politicians in the former group.

Many people don’t know what actually happened in the mass suicide at Jonestown. The metaphor “drink the Kool-aid” now means to be taken in by a charismatic leader. But a substantial portion of the 918 deaths at Jonestown were murder, not suicide. A cult includes plenty of true believers, but also those too terrified to dissent.

Even some Trump critics are a part of the cult. Reporters have asked some retired GOP figures who don’t like Trump why they don’t speak out more. They report that they are afraid of being shunned by the local GOP, and some even claim they are afraid for the safety of their family. Unlike at Jonestown, those safety fears are probably groundless, but they are new in American politics. GOP members who disagreed with Reagan did not fear for the safety of their families.

Most politicians are at least somewhat cowardly. But that is also true of most non-politicians, including me. The real question is not why they behave in a cowardly fashion under these circumstances, rather where do “these circumstances” come from? How did Trump create this cult? Even FDR (who shared a few similarities with Trump) was never quite able to achieve this sort of stranglehold over the Democrats, despite being far more popular and far more powerful at getting things done.  I don’t see the appeal of Trump, but millions obviously do.

I think the best way to understand the Trump cult is to look at ordinary voters, not the sort of well-informed voters that read blogs. These average voters don’t pay much attention to policy issues. They are the engine that drives the Trump cult.

Take the sad case of Jeff Sessions. He was far and away the most Trumpian member of the US Senate. Long before Trump, he was opposing free trade, opposing entitlement cutbacks, and calling for immigration restrictions. If Trump died tomorrow, many GOP Senators would breath a quiet sigh of relief and go back to supporting freer trade. But not Jeff Sessions. He’s a true believer, and would carry on the white nationalist torch.

Sessions has decided to run again for the Senate in Alabama. He might win in the end, but he’s having trouble getting the support of GOP voters. Many don’t know that he loyally served Trump for years, and only recall that Trump mocked him for recusing himself from the Russia probe. Of course he was required to do that because he was involved in the case being investigated.

Here’s the reaction of Alabama voters:

The negative effect of Mr. Trump’s barrage against Mr. Sessions became clear in interviews with 20 Alabama voters. Most brought up the recusal with no prompting. Many said they held it against their former senator, though some admired him for sticking to his principles. And even those who couldn’t recall what exactly Mr. Sessions did had heard enough to understand that whatever happened was bad for the president.

“I know he did something that made the president mad,” said Susan Woodman, a retired speech therapist who came away from the Huntsville event undecided but impressed with one of Mr. Sessions’s rivals, Tommy Tuberville, a former Auburn University football coach.

People who are not members of a cult do not automatically assume that anything that “made the President mad” was wrong.  I’m guessing that those women who refused to let Trump grab them by the pussy also made Trump mad.

Susan Woodman may not be the typical voter.  She’s probably less well informed than average.  But I think her case gets at something important about the Trump cult.  At its core, this isn’t about specific policy issues.  Trump himself has been all over the map; indeed he was once a Democrat.  If it were about the issues, then Trumpistas would love Jeff Sessions.  He’d be winning in a landslide.   If Trump cared about how his agenda would do once he left office, he’d have already endorsed Sessions.

The core of the Trump cult is blind loyalty to the President.  That’s what makes Trump different.  All presidents have a certain degree of loyalty from their supporters, but Trump is in an entirely different league.  Reagan was an actor who became President.  Trump is a President who became an actor.

The Dems only have two guys who appeal to swing blue-collar voters in the Rust Belt, and one of them is a socialist who turns off a different kind of swing voter.  Trump understood that Biden was the only one who threatened his job, and set out to smear him with an avalanche of lies.  He was even willing to engage in highly corrupt practices to do so. It worked.  People now know that Biden did, “something that made the President mad”. With Biden (unfairly) tarnished, I see little chance that the Dems will be able to defeat Trump.  Trump’s a much more skilled demagogue than anyone they can nominate.  The Dems seem to have no Bill Clinton or Barack Obama to fight back.

Last year I predicted the Dems would self-destruct, and it’s coming true. I’m old enough to recall when the Dems did the same thing against another corrupt Republican running for re-election presiding over a prosperous economy ginned up by measures designed to help in the short run but hurt in the long run. The Democratic Party should be re-named “The Committee to Re-elect the President.”

PS.  Ed Muskie was the Biden of the 1972 campaign.  Nixon’s people used “dirty tricks” like forged letters to discredit Muskie.

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