Current Affairs

I wrote it for a Spanish-language periodical, here is the end bit:

There is plenty of talk about Obama being half-black but perhaps the more important fact is that Obama is from Hawaii. Many Hawaiians barely think of themselves as North Americans and they live thousands of miles from the continent. The Hawaiian background is part of where Obama’s cosmopolitanism – which is strong and sincere – comes from.

My description may sound like a very favorable portrait of Obama on economics but he will likely encounter serious problems if he wins the election.  The important American Presidents are those like Reagan who “know a few big things” and push them unceasingly, without much regard for the pragmatic or even the reasonable.  Obama is not used to connecting with mainstream America and if he wins it is because the country is fed up with Republicans, not because the voters have absolute confidence in him.  Congress will test him.  The chance that he makes big mistakes will be small, and that’s all for the better.  But the best prediction is that he will be ineffective in tackling most of America’s biggest problems.

Here is the whole thing, not entirely correct by any means, but not so far off the mark either.

From a recent UCLA email:

Dear Colleagues:

As indicated in the attached letter from UCOP, Governor Brown signed into law AB 1887 which prohibits state-funded travel to a state that has passed a law that (1) authorizes discrimination based on sexual orientation, gender identity and gender expression, or (2) voids or repeals existing state or local protections against such discrimination. The law expressly identifies the University of California as an entity covered by the law.

As of the date of this notice, the States of Kansas, Mississippi, North Carolina and Tennessee are on the prohibited travel list. The list of states may be updated on the Attorney General’s website found here:

Please note that the law does not prohibit travel that is paid for or reimbursed using non-state funds.

File under “Blue state overreach,” a growing dossier.  How about not discriminating against people — co-authors, conference organizers, etc. — on the basis of the states they live in and the polities which rule over them?

For the pointer I thank E.

Mrs May later said the UK would be prepared to leave the EU without an exit agreement, saying: “No deal for Britain is better than a bad deal for Britain.” The government could then strike trade deals with other countries and use “competitive tax rates” to boost the economy, she said.

The prime minister confirmed that both [sic] houses of parliament would have a vote on the final Brexit deal, expected in early 2019. She did not clarify what would happen if either house were to reject the deal.

Here is the FT article, the pound is up again.  And while I do not think the House of Lords would block a democratically-determined Brexit, might this not lead to the end of the House of Lords as we know it?  If they don’t stand up for anything, why bother with them?

The Economist has a useful explainer on why the “WTO option” for Brexit will prove tricky; I would like to see more serious analysis of this issue.  Here is the latest on Northern Ireland, the chance of a hard border with the Republic of Ireland has gone up.

In any case, I suspect this was always the equilibrium.

I strongly favor NATO and I don’t think you can trust the Russians with just about anything, or for that matter make much of a deal with them.  I’m with Mitt Romney on all of this, as I’ve been saying for years.

That said, I feel some of the recent discussions on Trump’s pronouncements have been a bit kontextlos.  I would suggest this wee bit of background history:

1. Not too long ago, Germany did have a national leader, Gerhard Schröder, who in essence ended up as a paid agent of Vladimir Putin.  After leaving office, he has spent much of the rest of his career working for Gazprom.  Try on this bit for size:

Mr Schroeder was Germany’s Social Democrat leader from 1998 until 2005. He is a personal friend of Vladimir Putin and once described the Russian President as a “flawless democrat”. He joined the board of the Russian energy giant Gazprom after losing Germany’s 2005 election and has defended Russia’s response to the crisis in Ukraine on several occasions.

In other words, Germany had its own Trump long before the United States did.  You could call Schröder the Ur-Trump, albeit with a different socioeconomic pose.

2. It was Schröder who made the decision to take Germany off nuclear power and also to make the country energy-dependent on Russia:

As Chancellor, Gerhard Schröder was a strong advocate of the Nord Stream pipeline project, which aims to supply Russian gas directly to Germany, thereby bypassing transit countries. The agreement to build the pipeline was signed two weeks before the German parliamentary election. On 24 October 2005, just a few weeks before Schröder stepped down as Chancellor, the German government guaranteed to cover 1 billion euros of the Nord Stream project cost, should Gazprom default on a loan…Soon after stepping down as chancellor, Schröder accepted Gazprom’s nomination for the post of the head of the shareholders’ committee of Nord Stream AG, raising questions about a potential conflict of interest.

Russia now provides 35% of Germany’s oil imports and 39% of the natural gas imports.

I say NATO as an instrument for opposing Russia (not its only purpose, however) mostly ended with the Russian gas deal, because Putin can turn off the spigot any time he wants.  Germany, the major European power, can no longer stand up to Russia in a pinch and it cannot do so because of the corruption of one of its major leaders.  (Merkel I believe would not have done the same, but it is hard for her to undo this unfortunate situation, though I applaud the toughness she has shown, which at times has been considerable.)  Furthermore, earlier U.S. presidents, most of all Bush, didn’t have the stones or the means to do anything about this.

If you’re looking for icing on the cake, try this:

3. Germans today are some of the most anti-American people in Europe, and that doesn’t help the Atlantic alliance either.  It’s not uncommon for German citizens to suggest they don’t see much difference between Putin and the United States (NYT), or even may be pro-Putin, and I mean that pre-Trump.  So when Trump equates Putin and Merkel, German citizens have been equating American presidents with Putin for a good while now.  That’s not an excuse or rationale for Trump’s behavior, but it is worth keeping in mind when thinking about how to reboot the alliance moving forward.

I don’t at all favor what Trump is saying, or how many Republicans don’t seem to be complaining, but NATO has been on the ropes for some time now.  On the Russia issue, Trumpismus is far more advanced in Germany than here in the United States.  The sorry truth is that some of what Trump is saying is true, though his current rhetoric probably will end up making it worse.

President-elect Donald Trump criticized a cornerstone of House Republicans’ corporate-tax plan, which they had pitched as an alternative to his proposed import tariffs, creating another point of contention between the incoming president and congressional allies.

The measure, known as border adjustment, would tax imports and exempt exports as part of a broader plan to encourage companies to locate jobs and production in the U.S. But Mr. Trump, in his first comments on the subject, called it “too complicated.”

“Anytime I hear border adjustment, I don’t love it,” Mr. Trump said in an interview with The Wall Street Journal on Friday. “Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”

Here is the WSJ piece.  I am not suggesting, however, that I favor his preferred alternative or for that matter most of his other policy ideas.  By the way, here is Trump on heroes.  A willingness to think things through from scratch is in some ways admirable, but dangerous in matters of foreign policy and nuclear weapons, where predictability is at a premium.

And see some related remarks from Conor Sen.

Washington Post: The cyberattack struck Los Angeles Valley College late last month, disrupting email, voice mail and computer systems at the public community college in Southern California. Then, school officials found a ransom note.

The missive advised the college that its electronic files had been encrypted and that the files could only be unlocked with a “private key.” The attackers would supply the key after receiving payment in the valuable digital currency known as bitcoin, which can be used anonymously without a centralized bank.

“You have just 7 days to send us the BitCoin after 7 days we will remove your private keys and it’s impossible to recover your files,” the attackers warned, according to a copy of the note obtained by The Washington Post.

Leaders of the Los Angeles Community College District decided to pay the ransom.

The college paid $28,000 and the files were restored.

ArsTechnica: According to the FBI, ransomware payouts in the United States jumped from $25 million in all of 2015 to over $209 million in just the first quarter of 2016.

Clearly, this is just the beginning.

In my latest Bloomberg column I consider William F. Buckley’s old conundrum:

William F. Buckley famously said he would rather be ruled by the first 2,000 people listed in the Boston telephone directory than by the faculty of Harvard University.

Here is part of my take:

For better or worse, direct rule by Buckley’s 2,000 American citizens probably would mean a slower pace of immigration, less emphasis on free trade, more law and order politics, and a blunter form of nationalism in foreign policy.

Those don’t match my policy preferences (I am more of a globalist, and also a professional academic), but I fear what the Harvard faculty could bring. I can imagine an America closer to Bernie Sanders’s vision, with single-payer health insurance, levels of taxation exceeding 50 percent of GDP, levels of immigration unsustainable with a large welfare state, too many aggressive attempts to legislate equal treatment for various groups, excessive fondness for a universal basic income, and too many humanitarian interventions abroad.

Don’t forget:

It’s a good rule of governance that policy cannot race too far ahead of the citizenry, and I don’t view faculty as a class of people well-suited for that kind of humility.

But for the Fed and the EPA, among other areas, I very much want Harvard.  My conclusion is this:

The real issue here isn’t intellectuals versus populism writ large. There is a time and place for populist sentiment, but an excess can be counterproductive on its own terms. As expertise is pushed out the door, the citizenry itself gets a bad name, precisely when we most need it to step up to the plate and demand some excellence.

Do read the whole thing.

I should note that on this topic I have been very much influenced by my colleague David Levy and also his work with Sandra J. Peart, see for instance their newly arrived book Escape from Democracy: The Role of Experts and the Public in Economic Policy.

Martin Feldstein had a recent piece in the WSJ that defended the idea of a border tax adjustment, which would be a part of the proposed corporate tax reform. He points out that if imports were no longer deductible, and exports received a subsidy, then the border adjustment would not distort trade. Rather the effect would be exactly offset by a 25% appreciation of the dollar. I certainly understand that this would be true of a perfect across-the-board border tax system. But is that what we will have?

1. Will the subsidy apply to service exports? (Recall that services are a huge strength of the US trade sector.) Let’s take Disney World, which makes lots of money exporting services to European, Canadian, Asian and Latin American tourists visiting Orlando. Exactly how will Disney determine the amount of export subsidy it gets? Do they ask each tourist what country they are from, every time they buy a Coke? That seems far fetched—what am I missing? If Disney doesn’t get the export subsidy, then the 25% dollar appreciation would hammer them, and indeed the entire US service export sector.

2. What about all those corporate earnings that are supposed to be repatriated? (And future earnings as well.) If the dollar appreciates by 25%, then doesn’t this hurt multinationals? Or am I missing something?

Update: It just occurred to me that corporate cash stuffed overseas is probably held in dollars. But future overseas earnings may still be in local currency.

Keep in mind that the prediction of 25% dollar appreciation is from the supporters of the plan, like Martin Feldstein. If you did this sort of adjustment without any dollar appreciation, the impact would be devastating on companies like Walmart. Given the Fed’s 2% inflation target, how could they pass along a (effective) 25% tariff on almost everything they sell?

There are other points of value at the link.  I agree with Scott’s most general claim that the case for this tax has not yet been made.

A few years ago I wrote this about Bolivia:

It is much debated in Bolivia whether corruption is going up or down.  I believe it is going up, but partially for good reasons.  For instance the construction sector is doing well, and construction tends to be corrupt in many countries, for reasons intrinsic to the activity itself (e.g., lots of big contracts, easy to claim invisible expenses, etc.).  That means higher corruption but also a better corruption than the penny ante bribes of a shrinking economy.

I still think that is correct, and at the time it didn’t meet up with mass moral opprobrium, even though with some very very small chance I may have condemned the citizenry of Bolivia to corrupt, exploitative rule for ever and ever.  I should add that such points are standard fare in the literature, see for instance the book on corruption by Susan Rose-Ackerman.

Now, these days, with more American status relationships on the line, everyone is up in arms because Peter Thiel had the following exchange with Maureen Dowd:

When I remark that President Obama had eight years without any ethical shadiness, Mr. Thiel flips it, noting: “But there’s a point where no corruption can be a bad thing. It can mean that things are too boring.”

As I interpret Peter, he is not saying it would have been good to have an exogenous increase in the corruption of Obama the individual.  Rather, had some other conditions been different/better, the overall level of corruption in government would have been higher and that combination might very well have been a net plus.  If you would like a “left wing example,” had the fiscal stimulus been twice as large, corruption in government probably would have been higher too (pointing out “the stimulus wasn’t very corrupt” is missing the point and in fact is a sign that you are a rampant mood affiliator, determined to restore the mood you feel is just, rather than tracing the analytic point at hand).  In other words, Peter’s point is entirely defensible and probably correct.  He’s not saying that “corruption is good.”

Now, to be sure, there is another dimension here.  The incoming Trump administration is showing too many signs of being corrupt, and many people are condemning it on these grounds.  Peter’s remark does not fit into that narrative and Peter has been a significant Trump supporter.  But let’s think about this a little more.   First, is there a role for some outsiders who eschew the dominant moral choruses of approbation and condemnation, in favor of making other, different points?  I certainly hope so, because often I try to be one of them (though unlike Peter I have not supported Trump).  Second, Peter is not an outsider in this process, rather he has taken on an important position on the Trump transition team.  Given that reality, you can’t expect him to produce a quotation here condemning Trump.  So he instead makes some other (valid) outsider-like point about corruption.  Now, you might object to Peter’s role on the transition team, but that is old news at this point.  You shouldn’t be holding any extra grudge against him for his corruption answer.  And above all, keep in mind these are reporter-chosen excerpts from a four-hour dinner/interview, and so we don’t know the surrounding context and qualifications and possibly accompanying off the record statements.

People, you need to pick your targets.  Get upset about the things worth getting upset about, such as the absence of a sustained foreign policy plan to head off imminent volatility in global relations.

How many of you have been expecting that heading?  Of course it involves cows:

A Dutch woman has seen her request for Swiss citizenship refused for the second time by local residents who object to her media campaigning against cowbells and other Swiss traditions.

Nancy Holten, 42, was born in the Netherlands but grew up in Switzerland from the age of eight, speaks fluent Swiss German and has children with Swiss citizenship.

A vegan and supporter of animal rights, she gained a reputation in her community of Gipf-Oberfrick, in the canton of Aargau, after campaigning against cowbells, claiming they were damaging to cows’ health.

She has also objected to hunting and piglet racing, and complained about the noise of church bells in the village, campaigns that have seen her regularly interviewed in the Swiss press over the past few years.

Last November, Holten had her citizenship application turned down for the second time by the residents’ committee.  That’s despite her meeting all legal requirements and the municipal and cantonal authorities having no formal objection.

In Switzerland local residents often have a say in citizenship applications, which are decided primarily by the cantons and communes where the applicant lives, rather than federal authorities.

In Holten’s case it seems her campaigning has not won her many friends in the village, with the president of the local branch of the Swiss People’s Party, Tanja Suter, telling the media that Holten has a “big mouth”.

The commune did not want to give Holten the “present” of Swiss citizenship “if she annoys us and doesn’t respect our traditions”, said Suter.

Is this not what politics should be about, namely the relationship between man and nature?  Here is Gipf-Oberfrick, the community in question:


Here is the full story, with a variety of interesting points and examples at the link, via Ted Gioia and Dan Wang.

Following up on yesterday’s discussion, I received this in my email:

I think you protest society (and whatever you think the cause is) on the unconditional probabilities but only protest cops on the conditional probabilities.

That is from a very high quality correspondent.  Since I think BLM is in large part trying to raise consciousness about society at large, and not just complaining about the cops, it is fine for them to protest the large number of bad outcomes for many black people without getting too caught up in the “conditional upon x, y, and z, is a cop more likely to shoot a black or a white person?” sort of question.  Body cameras, reforming/ending the War on Drugs, stronger civil liberties, and other changes make sense for macro reasons, no matter what your view on the conditional probabilities.  So a big chunk of your 300+ comments are simply off the mark.

My response to the correspondent included the following good advice:

Every movement…has a smart version and a stupid version, I try to (almost) always consider the smart version.  The stupid version is always wrong for just about anything.

If you focus on the stupid version, you too will end up as the stupid version of your own movement.

RMB accounted for 98% global bitcoin trading volume over past six months

Here is the link, picture, and source.  Of course that is all about capital controls, and a capital control-evading mechanism is what Bitcoin has evolved into.  I wonder how it will evolve further, especially if the Chinese crack down on the practice, which they are more than capable of doing.

That is the topic of my latest Bloomberg column, I know that so many of you are full of excuses.  Here is one part of the column:

If we’re really headed off the cliff, selling all equities has to be better than doing nothing. Buying nonleveraged puts would be a possible Step 2, and most of the people in my Twitter feed have the smarts to figure out the mechanics. If it’s geopolitical and indeed market volatility you expect, deal in VIX options instead; VIX measures of volatility are lower than a few years ago, giving you a juicy target if you are sure volatility will rise. I get that this is somewhat hard, but if you’re right about Trump you can make a fantastic rate of return by acting on your worries. If you’re capable of getting an MBA at a good school, this learning should not be off-limits to you.

It is true that stock markets don’t typically predict “black swan”-style political catastrophes, but that is like saying sports betting markets don’t usually predict upsets. The point remains that upsets are not the norm, and if markets don’t predict them probably you should not expect them. But if you do nonetheless, go ahead and bet (or invest) accordingly.

What about the notion that market timing is a bad idea for amateurs, and how would you know when to come back into the market with your funds? That’s a fair worry, but not if you think the U.S. is headed for fascist catastrophe or rule by a KGB cabal.

I do give an answer at the end, and it is all the more worrying.

So if people have bifurcated mental modes, and their behavior is ruled so often by inertia, opposing the worst aspects of a Trump administration is going to be all the harder for most of us.

Which is all the more reason to short the market.

By now I’ve queried quite a few people, and I’ve yet to hear of anyone being short.  You might argue that stock markets don’t reflect social welfare, which is fair enough.  But then what market prices would you propose we look at?  Consumer durables for instance are doing fine.  Or is there no market discipline on your view at all?

Several loyal MR readers requested I cover this topic.  My views are pretty simple, namely that I am a fan of the movement.  Police in this country kill, beat, arrest, fine, and confiscate the property of black people at unfair and disproportionate rates.  The movement directs people’s attention to this fact, and the now-common use of cell phone video and recordings have driven the point home.

I don’t doubt that many policemen perceive they are at higher risk when dealing with young black males, and that is part of why they may act more brutally or be quicker to shoot or otherwise misbehave.  I would respond that statistical discrimination, even if it is rational, does not excuse what are often crimes against innocent people.  For instance, a man is far more likely to kill you than is a woman, but that fact does not excuse the shooting of an innocent man.

I also don’t see that citing “Black Lives Matter” has to denigrate the value of the life of anyone else.  Rather, the use of the slogan reflects the fact that many white people have been unaware of the extra burdens that many innocent black people must carry due to their treatment at the hands of the police.  The slogan is a way of informing others of this reality.

“Black Lives Matter” is a large movement, if that is the proper word for it, and you can find many objectionable statements, alliances, and political views within it.  I don’t mean to endorse those, but at its essence I see this as a libertarian idea to be admired and promoted.

The non-deductibility of imports is simply crazy. It will immediately increase inflation. Take IKEA, for example, they cannot source locally, they will increase prices immediately by 20%, or whatever the tax will be. At all effects, it is a flat tariff of 20% on every import. This guy seems to want to transform the US into North Korea. And think about the distortions: Boeing will become a purchasing company, making more money using the tax-credit to buy prosciutto and Camembert to sell to retailers at prices lower than the marginal cost, than producing planes.

That is Coasean reasoning from Massimo, there are other good comments as well.  For instance Bob noted:

There will be a huge move to asset based leasing. So Wal-mart, instead of borrowing money will sell thier real estate to a REIT and lease it back. They essentially can keep the deduction.