Relevant and even prescient commentary on news, politics and the economy.

Free Trade, the Primrose Path, and the Blinkered Blindness of macroeconomists

by New Deal Democrat

Free Trade, the Primrose Path, and the Blinkered Blindness of macroeconomists

Here’s what I learned today: the origin of the phrase “being led down the primrose path.”

It turns out that in medieval times, one meaning of the word “primrose” was the “prime,” or first or loveliest, rose.  Thus taking the primrose path was a particularly lovely journey. At least by the time of Shakespeare’s “Hamlet,” where Ophelia speaks of the “primrose path” to Laertes, the connotation developed of the use of a lovely and seductive experience to lure a mark to their misfortune or doom.
The doctrine of free trade is macroeconomists’ primrose path.  Today’s example comes from Tim Haab’s blog “Environmental Economics,” in the below post entitled “Quote of the Day: Both sides win from free trade . . . sheesh,” which I am reproducing in full:

That moment you realize the Chinese administration understands economics better than the U.S. administration…

From the Steve Bannon interview story:

“In reality, China and the United States’ long term cooperation has brought about real benefits for both countries’ peoples, any unbiased person will clearly see this fact,” [Chinese Foreign Ministry spokeswoman Hua Chunying] told a daily news briefing in Beijing.

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Interactive timeline

Plan the time to take a deep breath and look at Steven Harper’s Interactive Timeline: Everything We Know About Russia and President Trump at Moyers and Company.

When it comes to Donald Trump, his campaign and their dealings with Russia past and present, sometimes it’s hard to keep track of all the players without a scorecard. We have one of sorts — a deeply comprehensive timeline detailing what actually happened and what’s still happening in the ever-changing story of the president, his inner circle and a web of Russian oligarchs, hackers and government officials.

Since first launched in February 2017, the timeline has grown to more than 400 entries — and we will continue to add updates each week.

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Industrial production: once again, the hard data fails to confirm the sof … ofertheluvofgaud

by New Deal Democrat
Industrial production: once again, the hard data fails to confirm the sof … ofertheluvofgaud

This morning’s report on industrial production confirms that the economy remains on autopilot, and that’s a good thing.

Overall production increased again, and the trend of rising production since spring of last year is clear:

When we break it down by manufacturing (blue, left scale), mining, and utilities (red and green, right scale), we get pretty much the same picture:

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Why Is The Fed Raising Interest Rates As Fast As It Is?

Why Is The Fed Raising Interest Rates As Fast As It Is?

I have a theory that at least some people at the Fed are supporting interest rate increases not because they are worried about incipient inflation that must be nipped in the bud in advance under a regime of inflation targeting, but because they are looking over the horizon and worrying about a possible recession in the not-too-distant future, and they want to be able to have interest rates high enough that they can then engage in lowering them as a stimulative policy tool under the circumstances.  If they are too low, then extraordinary measures will need to be used, and some of those measures may not be available in the future.

This theory is based on nothing solid at all, nothing.  I think that those who may be thinking this (and my likely candidate(s) would be people at the very top) are constrained in speaking openly due both to the current institutional arrangement of consensus decisionmaking within an established inflation targeting system with a 2% inflation target, not to mention pressure not to talk about possible future dangers.  The current line is that the economy is doing well, and certainly it is on the standard measures of unemployment and inflation, even if the former could be better and wages could be rising more rapidly.  Indeed, it is this good performance that is supposedly underlying the moves to raise interest rates and possibly “normalize” the balance sheet (which I doubt there will be too much action on).  But my theory is that for some of them it is a matter of trying to “normalize” on interest rates as well while the possibility of normalizing is possible, while the economy is doing fairly well and one can raise them without obviously slowing things down noticeably, so that indeed there will be the ability to lower them again in the future when necessary.

He did not put this theory forward, but it was reading the recent column by Larry Summers that appeared in the Washington Post on Monday was been linked to by Mark Thoma today (unable to make that link, sorry) and also can be gotten to at larrysummers.com/2017/08/14/why-the-federal-reserves-job-will-get-harder.  He is focused on the upcoming ending of the term of his rival as Chair of the Fed, Janet Yellen, and is worried about who Trump will pick and what will happen.  While stating that he would have “preferred a slower pace of interest rate adjustment,” he bottom lines that “Overall it has done well in recent years” (even though he did not get picked to be Chair).

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Real retail sales disappoints . . . the Doomers

Real retail sales disappoints . . . the Doomers

This morning’s report on July retail sales once again belies the claim that “hard data” and “soft data” are divergent..

Not only did July come in at a strong +0.6% (+0.5% ex-autos), but June was revised up as well. Given basically non-existent inflation, this means that real retail sales made two more new records for this expansion:

In fact, real retail sales look like they are right in line with a multi-year trend.

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Current Account Deficits and Safe Assets

by Joseph Joyce

Current Account Deficits and Safe Assets

The International Monetary Fund has issued its External Sector Report for 2017, and among its key findings: “Global current account imbalances were broadly unchanged in 2016…” The U,S. continues to record the largest deficit, $451.7 billion, which is equal in value to 2.4% of U.S. GDP. The continuing deficits contribute to the increase in the U.S. debtor status in its net international investment position (NIIP), currently valued at $8.1 trillion, which is equal to 42% of GDP. The Fund is concerned that these imbalances, as well as the persistent surpluses in Germany and other nations, “…raise the risk of disruptive corrections down the road, including due to diverging stock positions.” But as long as the dollar serves as the world’s reserve currency,  a U.S. current account deficit will be an inherent feature of the international financial system.

The share of U.S.-dollar denominated liabilities in the foreign reserves of central bankscontinues to hold at over 60% of all reserves. Foreign central banks own about $4 trillion of U.S. Treasury debt, and foreign private residents another $2 trillion. Andreas Steiner of the University of Gronigen (see also here) has demonstrated that the reserve currency status of the dollars lowers the current account balance as foreigners exchange goods and services for U.S. securities. John Benedetto of the U.S. International Trade Commission has shown that the U.S. current account deficits of the last decade were largely financed by the purchases of foreign governments of U.S. government debt.

The increases in foreign official holdings of Treasury securities have been partially offset in the capital accounts of many emerging market economies by private capital inflows. Laura Alfaro of Harvard Business School, Sebnem Kalemli-Ozcan of the University of Maryland and Vadym Volosovych of Erasmus University Rotterdam (see also here) pointed that developing countries with high productivity growth have received equity inflows. The “uphill” capital flows in the opposite direction are due to the official purchases of Treasury debt by these countries’ central banks. These patterns are consistent with the “long debt, short equity” composition of many emerging markets (see here).

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“The Changing of the Guard:” the prescient 1980 book that foretold neoliberalism

“The Changing of the Guard:” the prescient 1980 book that foretold neoliberalism

About a month ago I read the synopsis of an interview in which Thomas Frank described the near evisceration of the Democratic Party.  Here’s his simple version:

“[T]he Democrats have, what happened is that some years ago they decided they didn’t want to be the party of the people anymore. They didn’t want to be the sort of traditional Democratic Party that I grew up with, the party of Roosevelt, Truman, Kennedy, Johnson. That’s not what they wanted to be.

“They wanted to be something different. This involved … It was an enormous transition in the Democratic Party all through the seventies, all through the eighties, all through the nineties until they are what we see them as today. They are a party that represents a group of very affluent white collar professionals. That’s who leads the party. That’s who they speak for. That’s whose issues they care about. That’s really who they are….

“[T]he Democrats, as they moved away from their old working class base and they treated them very poorly and they did the same with other essential elements of their constituent groups, minorities for example … [W]hen they did things like got NAFTA passed which was really hard on working class people, when they did those things they used to have a saying. They’d say, ‘Well you know we don’t have to worry about that. Those people have nowhere else to go.’ Nowhere else to go. This was a Democratic saying in the 1990s.

“Trump gave those people somewhere else to go.”

This critique rang a bell, not because I have read similar requiems before, but because I read it as a foretelling nearly 40 years ago, in the late David Broder’s “Changing of the Guard.”  Broder described the worldviews of a bunch of technocratic Democrats — and some Republicans — then in their 30s and 40s, people like Gary Hart, Jerry Brown, and a guy named Bill Clinton, who … well, let me turn the mike over to the right-wing  Commentary Magazine, which said in its review at the time:

“For anyone still perplexed by the Democratic party’s recent [in the early 1980s] misfortunes, a careful look at these interviews … suggests that the much-heralded collapse of liberal ideology is a more serious problem than even the election debacle would indicate. The conventional analysis is that liberalism’s dilemma stems from a failure to advance beyond the policies and attitudes embodied in the career of Hubert Humphrey: a reliance on economic growth as the principal means of curbing poverty, a generous and ever-expanding system of social-welfare benefits, and a foreign policy stressing containment of the Soviet Union and aid to the developing world. But it is important to keep in mind that many new-generation liberals have consciously rejected the Humphrey tradition. “We are not a bunch of little Hubert Humphreys,” Gary Hart declared upon winning election to the Senate in 1974 ….

“They speak with pride of having promoted more open and efficient government, of being more accessible to the public, of maintaining their “independence” from the established party organizations, and of their opposition to the spoils system.”

 

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Jon Chait Shoots at all the Ducks in a Row — and Manages to Miss (once)

Lifted from Robert’s Stochastic  Thoughts
Jon Chait Shoots at all the Ducks in a Row — and Manages to Miss (once)

I admire both Jon Chait and Glenn Greenwald. They do not admire each other. I enjoy it when they debate. Sometimes they both make fools of themselves.

Jon Chait wrote a blog post “The Alt-Right and Glenn Greenwald Versus H.R. McMaster”. The chance to simultaneously critique the right and the left must have delighted him. The post is a critique of this column in The Intercept

Chait has many convincing criticisms of Greenwald. However he also wrote these paragraphs (bolding mine)

Trump “advocated a slew of policies that attacked the most sacred prongs of long-standing bipartisan Washington consensus,” argues Greenwald. “As a result, he was (and continues to be) viewed as uniquely repellent by the neoliberal and neoconservative guardians of that consensus, along with their sprawling network of agencies, think tanks, financial policy organs, and media outlets used to implement their agenda (CIA, NSA, the Brookings/AEI think tank axis, Wall Street, Silicon Valley, etc.).”

It is certainly true that all manner of elites disdain Trump. What’s striking is Greenwald’s uncharitable reading of their motives, which closely tracks Trump’s own portrayal of the situation. Many elites consider Trump too ignorant, lazy, impulsive, and bigoted for the job. Instead Greenwald presents their opposition as reflecting a fear that Trump threatens their wealth and power. (This despite the pro-elite tilt of his tax and regulatory policies — which, in particular, make it astonishing that Greenwald would take at face value Trump’s claim to threaten the interests of “Wall Street” and its “financial policy organs.”)

This is a very odd critique.

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Rational Optimism?

by Peter Dorman (originally published at Econospeak)

“Rational” Optimism?

I just finished this long, rather convoluted meditation on “rational optimism”.  Must we admit the world is getting better, getting better all the time?

Really, there are two types of multidimensionality that need to be considered.  The first is that “better” is, if it’s anything, vector valued.  Many aspects of life go into its calculation, as well as the distribution of outcomes across places and peoples.  Typically some things will be getting better and others worse, so either we abandon blanket judgments or we propose weights.  Instead the discussion on both sides is a combination of hard (or hard-ish) numbers for particular indicators, like life expectancy and poverty, and vague aggregations like “most” or “in general”.

Second, the financial notions of alpha and beta are highly relevant to this discussion.  What matters is both the mean outcome of interest and the risk attached to it.  In a sense, the modern world has purchased yield (realized material benefits) at the cost of greater tail risk (catastrophic climate change, nuclear war).  This should be obvious, but the point is that reward cannot be evaluated apart from risk.

I’m not passing judgment on the bottom line (if there even is one), just saying that, if optimism/pessimism is a matter worth speculating on, we might as well do it in a disciplined way.

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The Buchanan-MacLean Controversy

The Buchanan-MacLean Controversy

The book, Democracy in Chains (with an even more lurid subtitle) by Nancy MacLean, a respected (until now) historian at Duke University makes a strong argument that the late James M. Buchanan of UVa, VaTech, and George Mason was the crucial link between the ancient states right racism of John C. Calhoun and the current Trump administration. From Calhoun, incredibly inaccurately labeled a “libertarian,” through the Agrarian Populist literary movement that was popular at Vanderbilt where Jim wanted to go but did not (he went to Middle Tennessee State, a poor boy claiming to be a “socialist,”), Buchanan becomes supposedly an effective supporter of racial segregation in Virginia in the 1950s, and then becomes the inspiration for all of later Austrian libertarianism, having attended the opening meeting of the Mont Pelerin Society in 1947 (where they chose to be called “neoliberals”), and then after founding the Thomas Jefferson Center for Political Economy at the University of Virginia, and then running to  VA Tech in the early 70s, and then to George Mason in the early 80s, well, then he had a connection with the Koch Brothers, although this fell apart in the late  90s, but nevertheless he is the main link proving that Trump is a racist enemy of democracy.

This account has brought forth a massive counterattack from many current libertarians, much of it looking to me to be justified, involving many  serious factual errors.  I am not going to list them but note these sources for discussions of such matters: Munger, Horwitz, which includes other sources.  I shall try to deal with matters not covered by them, noting that I largely agree with their critiques.  The hard bottom line is that this may be a left version of  rightist climate change denial: those reading this book need to be aware of how deeply flawed and erroneous it is, although it makes some valid points.

So what is valid?  There is a very hard point that was not a main point in the book and has largely not been discussed, with most of the attention being on the deeply flawed account of Buchanan and G. Warren Nutter’s role in the matter of 1950s Virginia school desegregation (more on that  later). The hard point is Buchanan’s role in Chile.  MacLean is right that while there has been much been more publicity about the roles of Hayek and Friedman in Pinochet’s regime in Chile, Buchanan’s role there, nailed in by a crucial visit in 1980, may have been far more influential in forming the eventual  constitution, although this happened well after the original coup by Pinochet in 1973.  He played a key role in developing their constitution, which MacLean claims has anti-democratic elements that have in place defenses for the rights of capitalists that can only be overcome by two rounds of legislative votes. Yes, does put  a pro-capitalist tilt in there, but two  rounds of the legislature to overturn it?  In fact it was accepted by a referendum and has been amended numerous times since and reestablished a parliamentary democracy. Does not exactly look like Stalin or Hitler or Mao or  Kim Il Sung or something deserving the label “democracy in chains.”.  But it is not  pretty, given all the blood Pinochet spilled, and just like Hayek and Friedman, Buchanan has this  matter on his late conscience, and it is notable that he never published anything on this, and aside from a meeting in Palo Alto right after he did it, he never publicly bragged about it or acknowledged it, although apparently he did so at that  meeting.  But maybe he realized that it was the stain on his career that it is, and he was  in the end embarrassed about it and wished to cover it up.

The second matter is the most controversial, and indeed is the centerpiece of MacLean’s book.  This is the matter of his role with Nutter in 1959 in the school desegregation issue in Virginia, the one point regarding which an actual professional economist has come out for MacLean, namely Brad DeLong.  This is a much murkier matter, and after looking at it I see it as unclear with MacLean leaving out crucial  details, quite aside from ignoring crucial exculpatory evidence, even as she has some case.  This has to do with a report Buchanan and Nutter wrote to a specially appointed commission to deal with the school desegregation issue in 1959, in the context of Prince Edward County going for massive resistance against the 1954 Brown vs Board of Education SCOTUS ruling that led to the racial integration of public schools.  I think Buchanan should have signed the petition of VA academics supporting that ruling, but he did  not.  His proposal with Nutter suggested allowing vouchers for private schools along with  public schools, and MacLean and DeLong claim that this supported the effort to close down public schools in Prince  Edward County.  MacLean is right that at the time this did  effectively support that movement, although the Buchanan-Nutter proposal did not call for ending public education, and Buchanan has been in many places on record supporting the existence of public education, if with private school competition in the form of vouchers.

This  is  the central part of the book’s argument, and it is the most heatedly debated, and I do not  have the bottom line on it, although it looks to me that MacLean has overstated her argument. A crucial issue has to do with race, obviously.  MacLean herself accepts that there is zero  evidence that Buchanan was himself a racist and that all of  this was just part  of his  supposedly libertarian/Koch/Trump view of the world. As it is, I think that whatever was really going on in 1959, the bottom line on Buchanan’s views is given on p. 56 of her book where she grants that he supported “voluntary” and “local” desegregation based on local conditions, which she then effectively dismisses with a remark that he did not know what was going on in Arkansas and elsewhere, a comment that looks to me to be seriously stupid, to be very blunt.  Bottom line here is that Buchanan and Nutter may have effectively played a role in supporting the pro-segregationists in Virginia in 1959, but that was not their  position.

What about major problems with MacLean’s arguments?  I shall note three, starting with one noted by others and effectively granted by MacLean herself.  This is the claim she makes in the final chapter that Tyler Cowen supports suppressing democracy.  This is based on a quote she supplies that was definitely taken out of context, a context where it was clear that the content of the isolated quote was contradicted by what immediately followed it.  Even those who have supported MacLean’s book on Facebook such as Gary Mongiovi have agreed that MacLean was simply out to lunch on this matter, although while she has recognized that the quote is problematic, she has not fully retracted her argument related to it.  This is almost certainly tied to Cowen being director of the largely Koch-funded Mercatus Center at George Mason, with this being sort of the final piece de resistance of her book and argument, supposedly from racist anti-democratic John C. Calhoun to supposedly anti-democratic and implicitly racist Koch-funded libertarians at George Mason and Donald Trump.

A second problem reflects that MacLean is not an economist and seems to seriously misunderstand public choice theory, with her views on rent seeking being a strong example.  In discussing rent seeking, a concept originated by Buchanan’s important coauthor, the  late Gordon Tullock, and labeled by the centrist liberal development economist, Anne Krueger, she consistently identifies the supposed rent seekers as politicians seeking voting support from activist liberal groups such a unions and civil rights groups, especially the latter, whom the the supposedly anti-democratic tendencies of Buchanan are directed against.   But in fact in public choice theory the rent seekers are priviate interest groups that use government to create artificial monopolies, which generate the rents these groups are seeking.  It is really a quasi-Marxist view that sees capitalists using the government to enhance their  corrupt  profits.  It is ironic that I have seen public choice economists show up at URPE social gatherings at meetings to discuss how they have this in common with the radical left URPE folks, opposition to corrupt use of the government by rent seeking private interests.  I am not sure the URPE  people were all that open when I saw this, but there is no doubt that MacLean simply is completely wrong here and totally misrepresents public choice theory on this point, although the strongly pro-free market stance of both Buchanan and Tullock can easily mislead people on this.

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