Current Affairs

That is the title of my latest Bloomberg column, here is one pithy excerpt:

Among emerging economies, the Philippines moved from being an Asian growth laggard into some years of 8 percent growth. Voters responded by electing as president Rodrigo Duterte, one of the most aggressive and authoritarian populists around. In eastern Europe, Poland has been seeing average 4 percent growth for more than 25 years, yet the country has moved in a strongly nationalist direction, flirting with sanctions from the EU for limiting judicial independence. Hungary, Slovakia, Slovenia and now the Czech Republic all are much wealthier than 20 years ago and mostly have been booming as of late. Yet to varying degrees they too have moved in nationalist, populist and possibly even anti-democratic directions.

And the closer:

So the next time you hear material discontent cited as driving electoral results, just remember that economic data are usually interpreted through a cultural lens.

And yes, I cover New Zealand and the Czech elections too.

Eric Crampton makes many good points, here is one of them:

But that gets us to one of the risks: the intersection of Labour, Green and New Zealand First’s core beliefs is distrustful of markets and of foreigners. I can’t see how we get anywhere close to the proposed 100,000 houses built in any reasonable time without allowing foreign workers, materials, capital and expertise to help.

New Zealand’s Overseas Investment Regime already makes us the most restrictive in the OECD. Any land adjacent to a reserve must go through the screening regime, and it will be tough to ease that back under the current coalition. Heck, even New Zealand’s Fletcher Construction has to jump through Overseas Investment Act hurdles because it has foreign shareholders. New Zealand First has proposed cutting immigration numbers substantially, and Labour and the Greens have been very sympathetic to that view. The incoming government has also signaled an intention to re-negotiate trade agreements to allow banning non-residents from buying houses. If supply issues are appropriately addressed, the ban does no good and could backfire if it prevents foreign investors from building houses here to rent out.

Vernon Small offers a more pessimistic take.

That is the title of my latest Bloomberg column, here is one excerpt:

Now enter the Fed, which I think of as a tool of Congress and the president. It gives Congress a means of promoting economic growth and stability (one hopes), as well as a path for deflecting the blame if tough decisions must be made. Congress insists that the Fed is “independent,” precisely for this reason. But if voters hated what the Fed was doing, Congress could rather rapidly hold hearings and exert a good deal of influence. Over time there is a delicate balancing act, where the Fed is reluctant to show it is kowtowing to Congress, so it very subtlety monitors its popularity so it doesn’t have to explicitly do so.

If we imposed a monetary rule on the Fed, even a theoretically optimal rule, it would stop the Fed from playing this political game. Many monetary rules call for higher rates of price inflation if the economy starts to enter a downturn. That’s often the right economic prescription, but voters hate high inflation. The Fed would probably lose its political capital if it had to follow through on the rule, and monetary policy would end up politicized for a long time.

Central bank quasi-independence is a quite a fragile institution, and it is maintained only by allowing central banks to juggle lots of balls at once. If you make a rule too tough, even a good rule, sometimes what you get is a rule that snaps and breaks.

Do read the whole thing.

The polity that is New Zealand

by on October 19, 2017 at 7:54 am in Current Affairs | Permalink

Sometimes proportional representation systems throw up surprising results, as they just did in New Zealand.  National won the biggest share of the vote at 44%, but the new government is a coalition between Winston Peters and Jacinda Ardern:

Ardern’s stunning popularity was dismissed as “stardust” by English, but she went on to experience huge support from young voters and women and was credited with breathing life back into the New Zealand political scene.

Her personal popularity and the huge crowds she drew around the country was hailed “Jacindamania”, and she was compared to rock-star politicians such as Barack Obama and Justin Trudeau.

A Labour government has pledged to wipe out child poverty, make tertiary education free, reduce immigration by 20,000-30,000, decriminalise abortion, introduce a water tax and make all rivers swimmable within 10 years.

Here is the full story, further evidence that politics is changing for good, and not just because of narrow economic reasons.  Last year the New Zealand economy grew 3.9%.  Jacinda by the way “Was brought up as a Mormon but left the church over its anti-homosexual stance.”

That is the thesis of my latest Bloomberg column, note that Kim is only 33 and could be around for another fifty years or so he hopes.  Peaceful exile probably is not an option!  So how does one hold onto power and avoid those anti-aircraft guns?  Here are some excerpts:

It is very difficult to predict the world a half-century out. Fifty years ago, China was just coming out of the Cultural Revolution, and Japan’s rise was not yet so evident. North Korea was possibly still richer than the South, which in 1960 was one of the poorest countries in the world. It’s unlikely anyone had a reasonable inkling of where things would stand today.

So if you are a dictator planning for long-term survival under a wide range of possible outcomes, what might you do? You don’t know who your enemies and your friends will be over those 50 years, so you will choose a porcupine-like strategy and appear prickly to everyone.

We Americans tend to think of Kim as an irritant to our plans, but his natural enemy in the long run is China. It is easier for North Korea to threaten Chinese cities with weapons, and its nuclear status stands in China’s way of becoming the dominant regional power in East Asia. Chinese public opinion has already turned against North Korea, and leaders wonder whether a more reliable, pro-Chinese option to Kim might be installed. Since assuming power, Kim has gone after the generals and family members with the strongest ties to China.

One way to interpret Kim’s spat with U.S. President Donald Trump is that he is signaling to the Chinese that they shouldn’t try to take him down because he is willing to countenance “crazy” retaliation. In this view, Beijing is a more likely target for one of his nukes than is Seattle.

More radically, think of Kim as auditioning to the U.S., Japan, South Korea and India as a potential buffer against Chinese expansion. If he played his hand more passively and calmly, hardly anyone would think that such a small country had this capacity. By picking a fight with the U.S., he is showing the ability to deter just about anyone.

There is much more at the link, and of course I consider the “are these people really all so rational?” critique.  You will note by the way that this inverts the usual argument that a longer time horizon means more cooperation.  In this case a longer time horizon means more signaling and a more rambunctious form of signaling, precisely because the time horizon is long.

If the federal government boosts the Earned Income Tax Credit, or for that matter just lowers tax rates on lower-income workers, firms have an incentive to hire more labor (and also an incentive to expand hours for individual workers).  Those effects are large, for a fixed EITC boost, to the extent the demand for labor is elastic.

Note that if EITC boosts only labor demand, without the scale of business expanding as well, the marginal product of labor will fall somewhat, undoing some of the beneficial net wage effects.  On the other hand, if the scale of business expands, some of the benefit is reaped by capital and natural resource owners as well.

OK, now say we cut corporate tax rates.  Companies do more of…something, maybe we’re not quite sure what.  Labor is targeted less directly, though in “simple stupid” theory we treat labor as the main marginal cost.  So if corporate rates don’t have a large impact on activity overall, they might have a disproportionate impact on labor demand within the changes that do happen.  For instance, if plant size stays the same, you hire more labor to distribute more product.

As with EITC, to the extent the elasticity of demand for labor is small, the quantity of labor hired won’t go up much, nor will wages.

Maybe a corporate rate cut will induce an increase in overall scale and activity, and thus the hiring of more capital and resources, in addition to labor.  That may mean a smaller immediate boost to labor returns, but in the longer run labor is combined with more capital and resources and thus may maintain a higher marginal product.

EITC does have the advantage of being more directly targeted to labor.  But in the world-states where that targeting matters, labor ends up surrounded by not enough capital.  Cutting the corporate tax rate is more likely to favor scenarios where the demand for labor goes up, capital thickens around labor, and labor remains relatively non-commoditized.  This may go especially well for workers when there are increasing returns to scale.

The economics of these cases are fairly similar, albeit with the afore-mentioned difference in terms of targeting.  That difference may or may not favor EITC.  In any case, for me it is strange if people favor an EITC boost but are skeptical about cuts in the corporate rate.  Both require an elastic demand for labor, if they are to be effective in raising wages.

Egalitarians tend to think the more “naked,” targeted subsidy to labor will be more effective than removing disincentives to production, but that doesn’t really follow.

Note also that cutting corporate probably lowers avoidance/fraud, whereas boosting the EITC would increase tax fraud.

A few of you have asked about Trump decertifying the Iran deal.  I think it is a big mistake, keeping in mind the old chess maxim “The threat is stronger than the execution.”  If we slap them, they slap us back by doing something like, say, green-lighting the Iraqi invasion of Kurdistan.  Whatever next level of escalation we might consider, I don’t think it would do us much good.

That said, I find most defenses of the Iran deal shocking in their naivete or perhaps self-deception.  The deal didn’t do much good in the first place, and came to pass because the Europeans weren’t going to uphold the previous sanctions anyway.  As it stands, the Iranians continue to enrich uranium and develop and test long-range missiles, and they could buy a bomb from North Korea as quickly as it would take to deliver the package.  Furthermore, they still support terrorism on a large scale, talk gleefully about the destruction of Israel, and in general their citizenry favors the idea of the government having nuclear weapons.  They simply decided that a slower path toward nuclear weapons, rooted in stronger international economic relations, was in their national interest.  However much you think they have or have not violated the formal terms of the treaty, they’re using the treaty to get a better, richer, and more stable version of nuclear weapons.  Israel and Saudi Arabia, the two countries that don’t have the luxury of wishful thinking on these issues, understand this quite well.

The thing is, Trump’s action won’t change any of this, and will only make us seem less reliable, should someday further action be required.  It is a foolish, high time preference move, but those who support it — Trump included — often have a better understanding of the underlying realities than do the critics.

The Trump administration is demanding the World Bank allocate less capital toward Chinese projects:

“The bottom line here is right now we’ve got too high a percentage of the World Bank’s balance sheet that’s going to countries and to projects that already have ample borrowing capacity,” a senior Treasury official told Reuters, which noted that China is the IBRD’s biggest recipient of development loans, totaling $2.4 billion.

As I understand it, the World Bank makes money on these loans and there is a cross-subsidy of other Bank activities, most of all aid.  A World Bank that stopped such loans would be poorer and less skilled, and over time could devolve into one of the poorer, less effective poverty-fighting parts of the United Nations, without much of a political power base at that.

Yet China has several trillion dollars worth of reserves.  They seem to like, and be willing to pay for, World Bank infrastructure expertise when bundled with the loans.  Given the overall Chinese record in this area, it is hard to argue they don’t know how to build up an infrastructure.  So why do they borrow then?  I think of the Chinese leadership as like a university president who doesn’t want to spend down the endowment to boost immediate consumption.

It is bad if/when the current equilibrium goes away.  Yet it also is unlikely that the United States will continue to underwrite the building up of its major geopolitical rival.  We (in essence) guarantee some loans to them so they in turn can make loans to us, also guaranteed by us.  That’s a lot of guaranteeing.  In return we receive an out-sized role running and staffing the World Bank, which you can think of as a “soft power” endowment of sorts.  In return the Chinese can hold onto a larger foreign currency endowment and receive some expertise.

That American lead WB role is worth less over time as multilateral capital flows continue to decline relative to private sector flows, and as more emerging economies require less aid.  Furthermore China has set up its own development bank for Asia, namely the AIIB.  More generally, we seem less interested in helping the Chinese maintain the size of their endowment, and perhaps they are not so favorably inclined toward our soft power endowment either.  On top of that, receiving the infrastructure expertise continues to decline in value for the Chinese, as they develop more and more of their own expertise.  At this point, they should be telling us how to build infrastructure.

And so the arrangement is likely to unravel.  I don’t approve of Trump pulling the plug on this one, but more realistically that was the underlying trend in any case.

The biggest losers probably are the aid-receiving poorest African countries who currently free-ride upon the Bank’s indirectly American-guaranteed, China-funded staffing, higher expertise, and higher prestige.

China and America probably lose too, as each country will find it harder to maintain its chosen kind of endowment.  And the pretense of cooperation will fade, which has good and bad effects but mostly bad.

During much of the 1982-2001 period, the Western world seemed to be moving in a very favorable direction, indeed most of Asia too.  Over time, Westerns intellectuals and commentators came to expect triumphant feelings and relatively low levels of stress.

9/11, the financial crisis, and now Brexit/Trump/populism/nationalism have upset this feeling.  The level of stress is now especially high in part because it was, not long ago, especially low.  The contrast is difficult for us to stomach, and comparisons with say Richard Nixon or Andrew Jackson help only a little.

In the postwar era, running up through the 1980s, the objective level of stress was much higher than today.  The risk of nuclear war was pretty high, overt racism was much more common, the safety net was much weaker, and it was far from clear that so much of the world would develop economically or become democratic.  Yet all this came right after the easily-remembered stress of World War II, and so it felt like a relief nonetheless.

As a kind of coincidence, memories of World War II wore off just as stress-relieving positive events were kicking into full gear.  That gave America an especially long period of low stress, unprecedented by historical standards.

We are not used to feeling as much stress as we do today.  Yet even in the optimistic scenarios in my predictions, the level of stress today is relatively low compared to what we can rationally expect for the next few decades.

Her earlier prediction:

Obamacare would not, and could not, be the program that had been promised or intended. It had already failed to deliver on key promises for coverage, affordability and of course, the infamous promise that “if you like your doctor, you can keep your doctor.” It was also dangerously unstable, requiring steady executive intervention just to keep the program from collapsing. I argued that these executive interventions, enthusiastically supported by the law’s proponents, were setting a precedent that would eventually be used against it. Worried that health care was too hostage to the vicissitudes of the markets, Democrats had instead made it the prisoner of politics.

“Essentially they’ve made it so that Republicans can undo two-thirds of this law with a stroke of the presidential pen,” I said at the close of my opening statement. “Obamacare is now beyond rescue. The administration has destroyed their own law in order to save it.” Four years later, we are watching those dominos fall.

Here is the full Bloomberg piece.

  • The Puerto Rico Electric Power Authority (PREPA) declined to ask for help from mainland electric utilities in the days after Hurricane Maria, instead turning to a small Montana-based contractor to carry out grid restoration practices.
  • Earlier this week, PREPA CEO Ricardo Ramos told E&E News that his bankrupt utility did not reach out to munis on the continental U.S. because he was unsure it could pay them back for assistance. About 90% of the island remains without power weeks after the storm hit.
  • The American Public Power Association (APPA), the trade group for U.S. munis, confirmed that mutual assistance programs were not activated, but said PREPA had already contracted with Whitefish Energy by the time the trade group convened a conference call to coordinate aid. PREPA did not respond to requests for comment.

Here is the full story, and here is a related piece, via Brian S.

Economist Jeffrey Sachs is joining with a scion of the wealthy Pritzker family and a former New York state legislator to fund candidates for local offices in the hope of reversing a conservative tide that has put Republicans in control of most US state governments.

Their group, called Future Now, was scheduled to announce its first donations on Monday — about $160,000 to be distributed to 10 Democratic candidates running this year for Republican-held seats in the Virginia state legislature.

…To qualify for Future Now’s funds, candidates must agree to pursue 21 objectives ranging from a “liveable” wage for all jobs to universal health coverage, an end to the mass incarceration of non-violent offenders and support for “clean, safe energy”.

Future Now’s founders say their goals are meant to be reached by 2030. In the meantime, they say they will measure progress through such means as the publication of state-by-state statistics.

Here is more from Gary Silverman at the FT.

From Lisa Abramowicz on Twitter:

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping:” Thaler [link]

Alex on Twitter:

It’s funny that the behavioral critique of the market is now that it is not volatile enough!

USA fact of the day

by on October 12, 2017 at 7:24 am in Current Affairs, Economics, Law | Permalink

The top 0.1 percent of earners projected to pay more to the IRS than the bottom 80 percent combined. This year, official government data show, the top 20 percent will pay 95 percent of all income taxes.


Not just that: It’s hard to cut tax rates on moderate-income people without simultaneously benefiting the rich. That’s because everyone pays the same marginal tax rates on, say, their first $50,000 in income, regardless of how much they make in total. So cutting, for example, the 15 percent tax bracket helps the poor and rich alike.

That is all from Brian Faler at Politico.

Those who fail to repay a bank loan will be blacklisted, and they will have their name, ID number, photograph, home address and the amount they owe published or announced through various channels – including in newspapers, online, on radio and television, and on screens in buses and public lifts.

…In the southern city of Guangzhou, the personal details of some 141 debt defaulters have so far been displayed on screens in buses, commercial buildings and on media platforms at the request of local courts.

Meanwhile in Jiangsu, Henan and Sichuan provinces, the courts have teamed up with telecoms operators to create a recorded message – played every time someone calls – for those who fail to repay their loans. The message tells the caller: “The person you are calling has been put on a blacklist by the courts for failing to repay their debts. Please urge this person to honour their legal obligations.”

That is from SCMP, via Viking.

Elsewhere in the Middle Kingdom, Shanghai adopts a facial recognition system to name and shame jaywalkers.