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A Bernie Sanders Narrative for Seniors

A Bernie Sanders Narrative for Seniors

What follows is some unsolicited advice for the Sanders campaign.

Politico has an important piece on the downside of the extraordinary age bias in Sanders’ support.  Like a teeter totter, the large advantage Sanders enjoys among younger voters is counterbalanced by his dismal showing among the older crowd.  The article reviews voting breakdowns from the 2016 campaign and current poll results, and it shows that Sanders is not just behind among seniors, but way, way behind.  His political strengths guarantee he will survive the winnowing of the twenty-odd 2020 pretenders, but sheer arithmetic suggests he will need to make significant inroads among older voters, something he hasn’t done up to this point, to overtake Biden—assuming of course Biden doesn’t overtake himself.

So how can he do this?  The first thing to realize is that he doesn’t need absolute majorities among retirees and near-retires, just enough support so his advantage among the non-elderly isn’t erased.  The second is that direct material benefits alone are never enough.  People don’t simply vote in their immediate financial interest, although of course interests play an essential role.  Economic motives are like nuclei around which layers of narrative form, but it’s the narrative—the meaning—that orients people, and an economic condition can be explained in multiple ways.  Not all explanations are equally valid, of course, but in politics that’s largely irrelevant.  So yes, Sanders can and should talk up Social Security expansion and how universal health insurance would benefit  those on Medicare too.  But that’s not a sufficient political strategy; it lacks an encompassing narrative.  This narrative doesn’t have to be one all older people will gravitate to, but it has to speak to a significant portion of them.

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A Very Erroneous Chart in the Economic Report of the President

A Very Erroneous Chart in the Economic Report of the President

Menzie Chinn has been reading the latest Economic Report of the President and finds a very erroneous and misleading chart, which is figure 1-6 from this this document (see page 45), which states:

Equipment investment, in particular, exhibited a pronounced spike in the fourth quarter of 2017, as both the House and Senate versions of the TCJA bill, which were respectively introduced on November 2 and November 9, stipulated that full expensing for new equipment investment would be retroactive to September 2017. This created a strong financial incentive for companies to shift their equipment investment to the fourth quarter of 2017, so as to deduct new equipment investment at the old 35 percent statutory corporate income tax rate. After the initial spike in the rate of growth in fixed investment, standard neoclassical growth models would predict a return of the rate of growth to its pre-TCJA trend, but from a higher, post-TCJA level, with the capital-to-output ratio thereby asymptotically approaching its new, higher steady-state level.

Earlier on page 43 we see:

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Tariffs and Monetary Policy: Moral Hazard and Rent Seeking

Tariffs and Monetary Policy: Moral Hazard and Rent Seeking

President Trump’s threat to impose tariffs on Mexico over immigration has pushed Federal Reserve Chair Jay Powell to say that if the tariffs lead to economic growth slowing, the Fed will cut interest rates.  While the bump may be about to end, this announcement was followed by a  solid global surge of stock markets on June 4 followed by smaller increases the next day.  This sets up a moral hazard situation for Trump where if he behaves irresponsibly on trade policy (with even GOP senators basically freaking out), the Fed might bail him out with interest rate cuts.

How is rent seeking entering into this?  I note a point just made by Dean Baker, that all these tariffs Trump is imposing on his own without any Congressional approval offer him the option of allowing specific exemptions from them.  So Trump can grant exemptions to specific sectors or even firms that favor him.  So Trump’s trade wars are opening up a whole new vista for rent seeking.

Finally, and unsurprisingly, many of his trade policies look to fail to achieve their supposed goals.  This is pretty obvious for the case of the tariffs on Mexico, which by potentially weakening the Mexican economy weaken Mexico’s ability to reduce Central Americans from to the US.  Another case involves the Chinese firm Huawei, supposedly both to enhance US national security and support the US high tech sector.  But according to a story in the Washington Post, 6/5/19 reports that 61 percent of experts say that Trump’s ban on US firms supplying parts to Huawei will both weaken US national security by reducing US influence over Huawei and the whole 5G sector, with the relevant US firms being hurt.  I do not think even the Fed can bail the US economy out from this mess.

Barkley Rosser

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ISM manufacturing and residential construction spending trends continue

ISM manufacturing and residential construction spending trends continue

May data has started out where April left off, with continuations of trends in both manufacturing and construction.

First, manufacturing: it is still expanding, but at a much lower rate than last summer’s red hot numbers. The overall ISM manufacturing index declined a bit to 52.1, but the leading new orders sub-index rose slightly from 51.7 to 52.7:

Looking forward to Friday’s employment report, the ISM employment sub-index also rose slightly from 52.4 to 53.7. This suggests that Friday will show an increase in the leading manufacturing jobs sector.

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Keynes’s Private Letter to Roosevelt

From Brad. My bold

To Franklin Delano Roosevelt, 1 February 1938

Private and personal

Dear Mr. President,

You received me kindly when I visited you some three years ago that I make bold to send you some bird’s eye impressions which I have formed as to the business position in the United States. You will appreciate that I write from a distance, that I have not revisited the United States since you saw me, and that I have access to few more sources of information than those publicly available. But sometimes in some respects there may be advantages in these limitations! At any rate, those things which I think I see, I see very clearly.

(1) I should agree that the present recession is partly due to an ‘error of optimism’ which led to an overestimation of future demand, when orders were being placed in the first half of this year. If this were all, there would not be too much to worry about. It would only need time to effect a readjustment;—though, even so, the recovery would only be up to the point required to take care of the revised estimate of current demand, which might fall appreciably short of the prosperity reached last spring.

(2) But I am quite sure that this is not all. The recovery was mainly due to the following factors:—

(i) the solution of the credit and insolvency problems, and the establishment of easy short-term money;

(ii)the creation of an adequate system of relief for the unemployed;

(iii) the public works and other investments aided by Government funds or guarantees;

(iv) investment in the instrumental goods required to supply the increased demand for consumption goods;

(v)the momentum of the recovery thus initiated.

Now of these (i) was a prior condition of recovery, since it is no use creating a demand for credit, if there is no supply. But an increased supply will not of itself generate an adequate demand. The influence of (ii) evaporates as employment increases, so that there is a dead point beyond which this factor cannot carry the economic system. Recourse to (iii) has been greatly curtailed in the past year. (iv) and (v) are functions of the upward movement and cease—indeed (v) is reversed—as soon as the position fails to improve further. The benefit from the momentum of recovery as such is at the same time the most important and the most dangerous factor in the upward movement. It requires for its continuance, not merely the maintenance of recovery, but always further recovery. Thus it always flatters the early stages and steps from under just when support is most needed. It was largely, I think, a failure to allow for this which caused the ‘error of optimism’ last year.

Unless, therefore, the above factors were supplemented by others in due course, the present slump could have been predicted with absolute certainty. It is true that the existing policies will prevent the slump from proceeding to such a disastrous degree as last time. But they will not by themselves—at any rate, not without a large-scale recourse to (iii)—maintain prosperity at a reasonable level.

(3) Now one had hoped that the needed supplementary factors would be organized in time. It was obvious what these were—namely increased investment in durable goods such as housing, public utilities, and transport. One was optimistic about this because in the United States at the present time the opportunities, indeed the necessities, for such developments were unexampled. Can your Administration escape criticism for the failure of these factors to mature?

Take housing. When I was with you three and a half years ago the necessity for effective new measures was evident. I remember vividly my conversations with Riefler at that time. But what happened? Next to nothing. The handling of the housing problem has been really wicked. I hope that the new measures recently taken will be more successful. I have not the knowledge to say. But they will take time, and I would urge the great importance of expediting and yet further aiding them. Housing is by far the best aid to recovery because of the large and continuing scale of potential demand; because of the wide geographical distribution of this demand; and because the sources of its finance are largely independent of the stock exchanges. I should advise putting most of your eggs in this basket, caring about this more than about anything, and making absolutely sure that they are being hatched without delay. In this country we partly depended for many years on direct subsidies. There are few more proper objects for such than working-class houses. If a direct subsidy is required to get a move on (we gave our subsidies through the local authorities), it should be given without delay or hesitation.

Next utilities. There seems to be a deadlock. Neither your policy nor anybody else’s is able to take effect. I think that the litigation by the utilities is senseless and ill-advised. But a great deal of what is alleged against the wickedness of holding companies is surely wide of the mark. It does not draw the right line of division between what should be kept and what discarded. It arises too much out of what is dead and gone. The real criminals have cleared out long ago. I should doubt if the controls existing today are of much personal value to anyone. No one has suggested a procedure by which the eggs can be unscrambled. Why not tackle the problem by insisting that the voting power should belong to the real owners of the equity, and leave the existing organizations undisturbed, so long as the voting power is so rearranged (e.g. by bringing in preferred stockholders) that it cannot be controlled by the holders of a minority of the equity?

Is it not for you to decide either to make a real peace or to be much more drastic the other way? Personally I think there is a great deal to be said for the ownership of all the utilities by publicly owned boards. But if public opinion is not yet ripe for this, what is the object of chasing the utilities around the lot every other week? If I was in your place, I should buy out the utilities at a fair price in every district where the situation was ripe for doing so, and announce that the ultimate ideal was to make this policy nation-wide. But elsewhere I would make peace on liberal terms, guaranteeing fair earnings on new investments and a fair basis of valuation in the event of the public taking them over hereafter. The process of evolution will take at least a generation. Meantime a policy of competing plants with losses all round is ramshackle notion.

Finally, the railroads. The position there seems to be exactly what it was three or four years ago. They remain, as they were then, potential sources of substantial demand for new capital expenditure, Whether hereafter they are publicly owned or remain in private hands, it is a matter of national importance that they should be made solvent. Nationalise them if the time is ripe. If not, take pity on the overwhelming problems of the present managements, And here too let the dead bury their dead. (To an Englishman, you Americans, like the Irish, are so terribly historically minded!)

I am afraid I am going beyond my province. But the upshot is this. A convincing policy, whatever its details may be, for promoting large-scale investment under the above heads is an urgent necessity. These things take time. Far too much precious time has passed.

(4) I must not encumber this letter with technical suggestions for reviving the capital market. This is important. But not so important as the revival of sources of demand. If demand and confidence reappear, the problems of the capital market will not seem so difficult as they do today. Moreover it is a highly technical problem.

(5) Businessmen have a different set of delusions from politicians, and need, therefore, different handling. They are, however, much milder than politicians, at the same time allured and terrified by the glare of publicity, easily persuaded to be ‘patriots’, perplexed, bemused, indeed terrified, yet only too anxious to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word. You cold do anything you liked with them, if you would treat them (even the big ones), not as wolves or tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish. It is a mistake to think that they are more immoral than politicians. If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way. Perhaps you will rejoin that I have got quite a wrong idea of what all the back-chat amounts to. Nevertheless I record accurately how it strikes observers here.

(6) Forgive the candour of these remarks. They come from an enthusiastic well-wisher of you and your policies. I accept the view that durable investment must come increasingly under state direction. I sympathise with Mr Wallace’s agricultural policies. I believe that the SEC is doing splendid work. I regard the growth of collective bargaining as essential. I approve minimum wage and hours regulation. I was altogether on your side the other day, when you deprecated a policy of general wage reductions as useless in present circumstances. But I am terrified lest progressive causes in all the democratic countries should suffer injury, because you have taken too lightly the risk to their prestige which would result from a failure measured in terms of immediate prosperity. There need be no failure. But the maintenance of prosperity in the modern world is extremely difficult; and it is so easy to lose precious time

I am, Mr President

Yours with great respect and faithfulness,

J.M. Keynes


John Maynard Keynes (1938), “Letter of February 1 to Franklin Delano Roosevelt,” in Collected Works XXI: Activities 1931-1939 (London: Macmillan).

my comment. Notice how the focus on housing was abandoned by later Keynesians. Housing is key to the business cycle (and to the effects of monetary policy which were not Keynes’s interest at all when the economy was in a liquidity trap). Yet somehow, investment in macro models is always business fixed investment.

The point is that, in 1938, Keynes gave the excellent advice for what to do in 2008. He was ignored then and ignored again in 2008 (except by Brad).

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The sources of the next recession

The sources of the next recession

While we are waiting for the ISM May manufacturing survey and construction spending data to be released later this morning, both of which will give us important clues to Friday’s jobs report, let me write down some thoughts on the nerdy question I ruminated about this weekend: what is the most likely source of the next recession?

I should start by noting that I remain on “recession watch” for later this year, as in, a substantially heightened risk, due to enough of the long leading indicators turning negative by the end of last year. But my base case remains that there will be a slowdown without an actual recession, because those indicators haven’t gone down *enough* and some, like real M1 and some housing metrics, have already rebounded.

But I read a tweet over the weekend from a political source I respect, who essentially said, “housing’s fine, there will be no recession, end of story,” and, well, I was annoyed.

That’s because housing isn’t always the source of a recession, and occasionally, as in 2000-01, it doesn’t turn down very much at all. In fact, housing has turned down since the beginning of last year about as much as it turned down in 2000 – which didn’t prevent the 2001 recession, did it?

So what are other sources of recessions? Here’s my take:


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The Rise and Fall of FDI

by Joseph Joyce

The Rise and Fall of FDI

After the global financial crisis,  international capital flows contracted, especially bank lending in Europe. Foreign direct investment (FDI) by multinational firms, however, provided a steady source of external finance, particularly for emerging market economies. The McKinsey Global Institute has calculated that the global stock of FDI increased from 46% of world GDP in 2007 to 57% in 2016 ($25 trillion to $41 trillion). But FDI flows fell by 27% in 2018 according to the Organization of Economic Cooperation and Development (OECD), and this drop followed a decline of 16% in the previous year. We have entered a new period of contraction by multinational firms, and in particular, U.S.-based multinationals.

A significant amount of the decline is due to firms based in the U.S. responding to changes in U.S. tax law. The U.S.-based firms repatriated earnings that had been kept abroad to avoid U.S. taxes. As a result, the U.S. recorded a negative FDI outflow of $50 trillion in 2018, down from a positive outflow of $379 billion in the previous year. By the latter half 2018, the acquisition of foreign assets had returned to positive levels, but the long-run changes of the tax code revision on the foreign operations of U.S. firms will only become clear over time.

Ireland and Switzerland were particularly hard-hit by the disinvestments, since these countries had often attracted FDI because of generous tax provisions. There were also reversals of investment in Special Purpose Entities (SPE), which allow the multinationals to channel funds through countries with favorable regulatory and tax practices to their ultimate destination. The OECD reported that FDI flows to SPEs in Luxembourg and the Netherlands fell to negative levels last year.


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A Tariff Laffer Curve?

A Tariff Laffer Curve?

Douglas Irwin is a very good economist. Let’s highlight his Historical Perspectives on U.S. Trade Policy:

The Civil War marked the beginning of a long period of high U.S. tariffs. These tariffs served the dual purpose of raising revenue for the federal government and keeping out foreign goods, ostensibly for the protection of U.S. labor and business. After the war, tariffs (which generated roughly half of government revenue) remained high to service the enormous debt burden that resulted from the war. Yet by the mid-1880s a curious problem had arisen: though much of the debt had been paid off, federal revenues were outstripping expenditures by as much as 50 percent. Republican and Democratic politicians agreed that the fiscal surplus should be reduced, but they proposed exactly the opposite policies for achieving this objective. Democrats advocated cutting tariff rates in an effort to reduce revenue. Arguing that this would simply encourage imports and raise even more revenue, Republicans proposed higher tariff rates to reduce fiscal revenue. This debate over the tariff “Laffer curve” essentially hinged on whether existing tariffs were above or below the revenue-maximizing rate, which in turn depended on the height of the tariff and the price elasticity of import demand.

Irwin examined this issue in his Higher Tariffs, Lower Revenues? Analyzing the Fiscal Aspects of the “Great Tariff Debate of 1888”:

This paper examines this debate and attempts to determine the revenue effects of the proposed tariff changes. The results indicate that the tariff and the price elasticity of U.S. import demand during the 1880s below the maximum revenue rate, and therefore a tariff reduction would have reduce customs revenue.

Irwin also contrasts the other policy agendas of the two parties.

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Kenneth Thomas in WSJ

Kenneth Thomas (an AB contributor) was quoted April 7  in the Journal a second time on the general question of how to solve the problem of subsidy bidding wars.  Unfortunately it is behind a paywall…but worth pointing to…

Opinion | Pass a Law to Combat Rent-Seeking

Congress could invoke the Commerce Clause to limit destructive competition over corporate subsidies.

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North Korean Near-Famine Leads To Dead Nuclear Negotiators

North Korean Near-Famine Leads To Dead Nuclear Negotiators

It has not been officially reported by the North Korean govt, but long running rumors are now being reported by various  serious media that Trump’s big pal Kim Jong Un has recently killed the top 5 officials of his govt who set up his  failed summit with US President Trump.

According to sources I watch there has been a massive crop failure this year in the Democratic Peoples’ Republic (DPRK). The big issue there is if the local, semi-allowed private markets in ag will save the population from outright starvation. At this time this is not  known.

So this difficult situation may be partly responsible for Kim Jong Un killing the top five negotiators with the US on nuclear weapons for the summit in Hanoi.  In addition, reportedly five more senior officials have been sent to rural labor, or something like that.

The lead official word from the DPRK side is that the person Kim Jong Il killed was Kim Hok Choi, I apologize if I have misspelled his name. But I have it close, and I send my best regards to his family and the families of those others whom were also reportedly killed.  As well as this unfortunate team,  four more beyond Kim Hok Choi were executed, and five more were sent to rural labor camps, including one alleged to be a “right hand man” of Kim Jong Un.

The unclear question is how much will the unofficial private markets in DPRK will save people from outright starvation/famine. The deepest  sources ai have followed say that it is unclear.  DPKR is not a “normal” country, and we have no way to know what is actually going on there now.

Given that his nation is facing food shortages, it is not surprising that he may be facing an internal challenge, and now we see that manifested by him overcoming any inside opposition by killing these five individuals.  Reportedly five more individuals suffered being expelled to the countryside, including Kim Jong Un’ s “right hand man.”

A serious and unresolved issue at this point is how the unofficial private markets may save people there from starving to death.

Barkley Rosser

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