GPT-4 agrees with me

“China lied, people died.” In a sense this is true, but not in the way that lab leakers assume.

New evidence shows Covid samples closely associated with raccoon dog DNA in that famous Wuhan animal market. The Chinese government denied that raccoon dogs were being sold there. It seems they lied. (Just as they lied about the death toll from the recent Covid outbreak in China, which was an order of magnitude higher than the official figures.)

People who rely on lab leaker “evidence”, may wonder why GPT-4 apparently views the zoonotic origin hypothesis as being more plausible. This LA Times story does a nice job of laying out the evidence that the animal market is the culprit. (BTW, It’s written by a scientist that had previously called for more research on the possibility of a lab leak.)

Of course the lab leakers are already trashing the Atlantic story, whining that the scientific findings have not yet been released. Wait, aren’t these the same people who recently touted the US intelligence community’s claims? Has that evidence been released?

So cute, but so deadly:

No, 7% NGDP growth is not OK

Suppose we’d recently experienced 15 years of roughly 10% NGDP growth (as in the late 1960s and the 1970s.) Now NGDP growth slows to 7%. It would be reasonable to call the slowdown a successful contractionary monetary policy.

Twelve month NGDP growth was 12.2% in the fourth quarter of 2021, and slowed to 7.4% in the fourth quarter of 2022. So does that also represent a successful application of a contractionary monetary policy? No. Context is everything.

Over the last 30 years, the Fed has successfully kept the average inflation rate fairly close to 2%, until recently. During 2021, it was appropriate that NGDP rebound sharply from the extremely depressed conditions of 2020 as the economy re-opened. But once we reached the previous NGDP trend line, it was essential that NGDP not overshoot the target. Instead, NGDP has soared far above the previous trend line, and this is what has caused the recent high inflation.

It’s important not just to look at growth rates, but also consider levels. While policy may seem to be improving as NGDP growth slows, it’s actually getting worse as the level of NGDP moves further and further above the appropriate target path. This overheating has pushed the natural interest rate sharply higher, and largely explains why the Fed has failed to successfully tighten monetary policy despite substantial increases in its target rate.

I fight a hopeless and never-ending battle to convince people to stop thinking about policy in terms of “concrete steps”. The most important Fed decision in recent years has been its abandonment of average inflation targeting, and its signaling that it will tolerate inflation and NGDP growth that is far above trend. That tolerance has sharply raised the natural rate of interest. While the Fed also raised its policy rate, it increased more slowly than the natural rate. The net effect of the (expansionary) signaling and the (contractionary) rise in the policy rate, has been to loosen monetary policy, which has caused extremely rapid NGDP growth.

No, 7% NGDP growth is not OK. It should have been closer to 4% during 2022. There would have been a technical recession, but unemployment would not have rising very sharply with 4% NGDP growth. It would have been more like one of those pseudo recessions that you often see in countries like Japan and the UK.

PS. Off topic, but I can’t help commenting on the recent news about SVB. I had thought the libertarian movement hit rock bottom when the Neanderthal alt-right took over the Libertarian Party. Now I see Silicon Valley libertarians are lamenting the fact that the government won’t bailout a bunch of wealthy depositors. Can the libertarian movement go any lower?

Matt Yglesias nails some of the hypocrisy:

They convinced me!

Chile travel tips

In the remote chance you are planning a trip to Chile, here are a few travel tips:

1. Do not visit Chile during February. This is far and away my most important suggestion. Most of the problems we ran into were directly or indirectly related to the decision to visit at a time when the tourist areas are very crowded. I’d suggest December or March.

2. Visiting Chile is much more difficult than visiting New Zealand, and requires more careful planning. Of Chile’s 4 most important scenic areas, we only saw one (Torres del Paine.) And that’s despite renting a car and driving more than 3500 kilometers. And in that one notable area we did visit, we never saw the most famous towers:

The other three are the Atacama Desert, Easter Island and the Carretera Austral highway. Chile is a very big country, and you can’t just rent a car and hit the highlights as easily as in New Zealand. If I were younger and more adventurous, the 1200km Carretera Austral highway would be my number one goal—it’s regarded as perhaps the most beautiful drive in the world. But I don’t like long gravel roads. If they paved it, Chile could turn itself into a must see tourist destination. As it is, New Zealand is the superior option, especially if you don’t speak Spanish.

2. Anticipate problems. Previously, I mentioned the border closure with Argentina, but there were other problems as well. A national park might be closed on the day you arrive. Gas stations can be difficult to find (even with GPS.) Refill at half a tank. You might be bumped from a tour you already booked and paid for. GPS is useful, but less reliable than in America. Many of our problems were linked to the fact that we traveled in the peak tourist season. Crime is not a big problem in the south, but be careful in Valparaiso.

3. We spent 6 days in the central area (Valparaiso and Santiago), but in retrospect the time would have been better spent in the far north or Easter Island. (I actually might prefer Juan Fernandez Island, which is the one that Robinson Crusoe is based on.) If you insist on going to the wine country, pick Casablanca Valley, not the Maipo Valley. If you insist on the Maipo Valley, go to the Santa Rita Winery, which has a great museum (by the far the best I saw in all of Chile. Unlike with most European countries, in urban Chile you want to focus on the modern areas. (Las Condes in Santiago.) We had an excellent lunch at the Mandarin Oriental in Santiago. Oddly, food in Chilean hotels is often better than in ordinary restaurants. But again, I’d skip the cities entirely.

4. We spent most of our time in the Lake District, which is a good area for old people. The scenery is picturesque, not the sublime of the Torres del Paine (and Atacama?) Lake Llanquihue is huge, and the view of Osorno Volcano is impressive. There are German style towns along its shoreline. Here’s a view from our hotel room in Puerto Varas:

Further north, I enjoyed the Huilo Huilo resort, which should appeal to fans of Lord of the Rings.

5. My favorite part of Chiloe Island was visiting the smaller island called Quinchao. There’s a nice drive of about 20 miles along the spine of this island, and you can see the snow-capped Andes about 60 miles away across a large bay.

6. I’m not a foodie, but the seafood seemed fine and reasonably priced. If you want something specifically Chilean, try the fixed price menu at Peumayen Ancestral Food in Santiago. There is no western style fast food in the south. This struck me as really odd, given that the Chilean economy is very “globalized.”

If you want a North American analogy for our trip, consider Chile to be like the Pacific Coast from Cabo to Anchorage. Using that analogy, it’s as if we flew to Alaska and spent 6 days there. Then flew to Seattle and rented a car. We worked our way through Washington and Oregon (and failed to dip into Canada due to border issues.) We ended up visiting San Francisco (Valparaiso), Napa (Casablanca) and Sacramento (Santiago). A total of 26 days, which is a few too many given the relatively modest portion of Chile that we were able to see.

While there were some frustrations, it remains true that challenging travel is the most effective form of life extension. Four weeks of travel in Chile felt like 3 or 4 months of life in Orange County. Time passes far more slowly. By the end of the trip, it seemed like the first few days happened many months earlier. Sort of like when you were young, and summer vacation seemed to stretch on forever. And for sufferers of SAD, the bright summer sunshine feels very nice in the middle of February.

PS. Patagonia has inspired some outstanding literature. Earlier I mention Chatwin’s In Patagonia and Bridges’s Uttermost Part of the Earth. Add W.H. Hudson’s Idle Days in Patagonia. The Bridges book is the least distinguished from a literary perspective, but the best overall due to its amazing content.

PPS. The Santa Rita Winery had this map of Juan Fernandez Island in its museum:

It looked familiar, and when I got home I found that I own the same map:

I love the hand drawn (and colored) mountains in those old maps. On some of them, the island volcanos are issuing smoke.

Bad news for the US?

The New York Times has some bad news for the foreign policy establishment in the US:

The announcement by Iran and Saudi Arabia that they are re-establishing diplomatic ties could lead to a major realignment in the Middle East. It also represents a geopolitical challenge for the United States and a victory for China, which brokered the talks between the two longstanding rivals.

Under the agreement announced on Friday, Iran and Saudi Arabia will patch up a seven-year split by reviving a security cooperation pact, reopening embassies in each other’s countries within two months, and resuming trade, investment and cultural accords.

Yikes, peace between Iran and Saudi Arabia? That sounds like a horrible idea.

Of course I’m being sarcastic. But there actually are people that look at the world this way. The anti-Chinese hysteria in the US foreign policy establishment has reached such an extreme level that some experts are dismayed by this breakthrough simply because China helped to negotiate the deal:

News of the deal, and particularly Beijing’s role in brokering it, alarmed foreign policy hawks in Washington.

“Renewed Iran-Saudi ties as a result of Chinese mediation is a lose, lose, lose for American interests,” said Mark Dubowitz, the chief executive of the Foundation for Defense of Democracies, a Washington-based think tank that supports tough policies toward Iran and China.

Our foreign policy establishment needs to wake up. Saudi Arabia, Iran and China all have bad governments, but the biggest danger to world peace comes from Russia.

Will economists ever learn?

Here’s Jason Furman, in a WSJ article calling for tighter money:

What makes the current inflation particularly troubling is that all the hoped-for saviors have come and gone without reducing underlying inflation very much. Inflation was supposed to go away after base effects receded, when the economy got over the Delta and Omicron surges, when the ports were unclogged, when timber prices fell, when the fiscal stimulus wore off, when microchips were available, when energy prices came back down again after the Russian invasion. All of that has happened, and yet the underlying inflation rate remains above 4.5% on just about every time horizon and every measure.

All the forecasts I’m seeing are suggesting that NGDP in the first quarter of 2023 will come in very hot. So what went wrong in 2022?

In my view, we made some of the mistakes of 2008, but not all. This time, both inflation and NGDP were telling the same story—so that wasn’t the problem. And I don’t think the key problem was a lack of reliance on market forecasts. Instead, I see policymakers repeating these two mistakes from 2008-09:

1. Not doing level targeting.

2. Assuming that interest rates represent the stance of monetary policy.

Both hawks and doves tended to view policy in 2022 as contractionary, due to sharply rising interest rates. Actually, monetary policy in 2022 was highly expansionary. The rising rates were caused by the rapid growth in NGDP.

Interest rates do not now and never have represented the stance of monetary policy. Throughout history, many policy blunders have been based on that misconception. Focus on the level of NGDP, not the rate of interest.

Our textbooks tell us not to reason from a price change. Our money and banking texts say that interest rates are not monetary policy. But we don’t seem to be able to help ourself.

PS. Tyler Cowen sent me this tweet. I fear for our profession if a concept as fundamental as “Don’t reason from a price change” is associated with a crackpot like me.