Current Affairs

Speaking on Capitol Hill Thursday, Federal Reserve Board Chair Janet Yellen warned lawmakers that as they consider such spending, they should keep an eye on the national debt. Yellen also said that while the economy needed a big boost with fiscal stimulus after the financial crisis, that’s not the case now.

“The economy is operating relatively close to full employment at this point,” she said, “so in contrast to where the economy was after the financial crisis when a large demand boost was needed to lower unemployment, we’re no longer in that state.”

Yellen cautioned lawmakers that if they spend a lot on infrastructure and run up the debt, and then down the road the economy gets into trouble, “there is not a lot of fiscal space should a shock to the economy occur, an adverse shock, that should require fiscal stimulus.”

In other words, lawmakers should consider keeping their powder dry so they have more options whenever the next economic downturn comes along.

Here is the full story.  Here is my earlier post on which macroeconomic theories will rise and fall in status because of Donald Trump.  She and the Fed were less wise but a mere month ago.

Tourists are expected to outnumber the local population of 330,000 by seven to one next year, according to official data. By comparison, last year visitors to France outnumbered the French by two to one

…The number of tourists has risen by as much as 30 percent every year for the last four years, according to Iceland’s Tourist Board. They brought in revenues of $3.2 billion in 2015, a third of the country’s export earnings. Tourism is the single biggest employer, and many Icelanders are pouring money into services and new construction.

…“It’s like the city is not my city anymore,” Birgitta Jonsdottir, the leader of the Pirate Party, complained last month. “It’s like Disneyland downtown.”

A poll in October conducted by the national broadcaster RUV reported that 87 percent of Icelanders want the government to raise fees or taxes on tourists.

Think of that as Iceland’s version of Trumpism.  Here is the full NYT story.

These protests are also counterproductive. There will be plenty of reasons to complain during the Trump presidency, when really awful decisions are made. Why complain now, when no decision has been made? It delegitimizes the future protests and exposes the bias of the opposition.

Here is his full NYT piece, which has many other points of interest.  Here is my earlier Conversation with Luigi, in which we discussed many things, including Trump.

It seems they do in China:

– The results show that when controlling for demographic, economic, and social factors, losses due to earthquakes are found to be associated with increases in both marriage and divorce rates. While the estimated elasticities are low, amounting to 1.92×10−2 and 6.102×10−2, respectively, they are highly significant, suggesting that a doubling of losses due to earthquakes increases marriages by 1.92 percent and divorces by 6.102 percent with a lag of one year. Since the first elasticity is smaller than the second, losses due to earthquakes may influence familial instability. Moreover, these effects increase in the second year but cannot be traced beyond three years after the disaster.

That is from Xu and Deng, and for the pointer I thank John Saunders.

It seems likely that Trump and a Republican Congress can agree on some big mix of tax cuts and spending.  Furthermore, there are plenty of rumors that Trump may push on the independence of the Fed and the ten-year yield leaped upon his election.  So odds are it will be a stimulus with some degree of monetary accommodation, and in that case even tax cuts for the wealthy can serve as an effective form of QE into the assets the wealthy invest in.

And yet 80% of economists are Democrats, many top economists signed a petition opposing Trump, and I can’t think of a single top economist who has endorsed Trump.  So clearly something has to give, and here are some theories that may rise or fall in status:

1. “The multiplier is high.”  That seems ready to decline in status.

2. “Even wasteful expenditures can boost demand and help pull us out of secular stagnation.”  Ditto.  “We need to do stimulus right” will make a comeback.  And I see “the distributional effects of stimulus really matter” lurking around the corner.

3. “Tax cuts aren’t as good as government spending.”  That actually may rise in status, especially if Congress gets the bargain they want — lots of tax cuts — rather than what Trump wants.

4. The notion of how a credibly irresponsible leader can improve macro performance won’t get cited as much.

5. Austrian-like theories of how there can be a boom in the short run, yet with great long-run dangers, will return to prominence, albeit with modifications to the original Austrian story.

6. Criticizing countries with trade surpluses will decline in status.

7. The efficient markets hypothesis will decline in status.  It imposes too much discipline on our judgments of leaders and their policies.  The more certain we are of our own judgments, the more that evidence contradicting those judgments should be downgraded.  Right?

Don’t get me wrong, I think most (not all) of these moves will be “economists coming to their senses,” and thus good news.  But let’s be clear about what is going on.  While I don’t expect many instances of people making claims they do not believe, in terms of what gets emphasized, stressed, and repeated, macroeconomic discourse is about to change.

That is the topic of my latest Bloomberg column.  Here is part of the optimistic case:

There is historical evidence that racist propaganda is most effective when communicated to young people and propagated through schooling. There isn’t such a danger in the U.S. now, when surveys show less prejudice among the young and schools promote multiculturalism. The cultural impact of millennials will increase as they age and more of the elderly die. Nor does American big business show interest in jumping on the pro-prejudice bandwagon — quite the contrary.

It’s worth remembering that attacks targeted at minorities are hardly new. In 2014, 59 percent of religiously connected hate crimes were directed at Jews. That’s no excuse for the current wave of anti-Semitic oratory, but maybe we’re just noticing it more because of the election. Smartphones, viral videos and social media will bring the worst events to our attention.

The broader historical data suggest that discrimination can persist across many generations, and of course the U.S. has a long history of prejudice toward many groups. The real lesson might be, “We’ve been worse all along,” rather than, “Things are getting worse again.” That’s not comforting, but it might imply greater sustainability for what we cherish in current American institutions. The 200-plus reported incidents in election week (an annual rate of about 10,400) have to be compared with the 293,900 hate crimes reported for 2012 (note that the two numbers do not use exactly the same counting metric).

Yet I don’t quite buy it, all things considered:

Overall, I find the pessimistic scenario to be more convincing.

Do read the whole thing to see why.

The NYT offers a variety of Facebook criticisms.  Probably you already have heard the latest:

Donald J. Trump’s supporters were probably heartened in September, when, according to an article shared nearly a million times on Facebook, the candidate received an endorsement from Pope Francis. Their opinions on Hillary Clinton may have soured even further after reading a Denver Guardian article that also spread widely on Facebook, which reported days before the election that an F.B.I. agent suspected of involvement in leaking Mrs. Clinton’s emails was found dead in an apparent murder-suicide.

There is just one problem with these articles: They were completely fake.

Just to be clear, while I have a Facebook profile, I am not a user of the service.  The interface confuses me, and I don’t like how strictly information is filtered through the prism of sharing and social connections.  In this sense I take the criticisms to heart and they influenced my behavior long ago.

But I wish to suggest a simple comparison: how does Facebook compare in this regard to email and forwarded emails?  I haven’t seen formal numbers,  but I strongly suspect emails have been a far more important source of misinformation about Hillary Clinton (and Trump) than was Facebook.  (I do recall Matt Yglesias tweeting an estimate, and it sounded brutal for email.)  That is especially likely to hold for the elderly, who use email far more than Facebook and furthermore were more likely to support Trump.

How about comparing Facebook to what other people tell you?  What a load of crock they are.  People, pshaw.  Just think about their algorithms.  At least Facebook has access to The Washington Post.

By the way, the presidency aside, were all of the other electoral results so truly radical?  It doesn’t seem so.

In other words, we are holding Facebook to an especially high standard.  If doing so leads to improvements in Facebook (NYT), so much the better.  Still, for purposes of perspective it is probably welfare-improving if people get more of their news from current, non-improved Facebook, compared to the relevant alternatives for most people.

Now if you are going to compare Facebook to me and Alex…well, then you need to side with us.  So there is still a case for spending less time on Facebook.  That is, unless you’re going to share our content there.

like-and-share

The Niskanen Center says no, Vox says yes.  Bailey and Bookbinder at Niskanen:

…while the Clean Power Plan is a dead letter for reasons explained below, every other such executive action will be litigated and delayed. The environmental NGOs’ law departments are getting back into their 2003-2006 mode even as we write this. Not only were the great majority of similar Bush agency actions overturned by the courts, but the current makeup of both the D.C. Circuit and the other federal appellate courts are significantly more favorable to environmental litigants than they were a decade ago.

…getting rid of the CPP is not going to have much of an effect on steadily-declining power sector emissions. As EPA has indicated, the CPP would have little real impact on emission paths in the early years, as low gas prices and state renewable mandates have done most of the work already. There is no sign either will change soon and technology (e.g. LED streetlights) is driving electricity demand reductions in ways that will probably continue.

Trump’s reputed interest in freeing-up permitting of energy infrastructure (e.g., gas pipelines and drilling on public lands, if indeed it can be achieved) may have the paradoxical effect of further reducing emissions. It could make it easier to get currently very cheap Marcellus / Utica gas into the center of the country and perhaps even increase overall natural gas output. This can have only one outcome; reduced national gas prices overall and less coal consumption.

Roberts and Plumer at Vox:

You can see a partial list of past House Republican bills here. In 2013, they proposed cutting EPA funding by fully one-third. GOP committees churned out bill after bill to cut research funding for renewable energy by 50 percent, block rules on coal pollution, block rules on oil spills, block rules on pesticide spraying, accelerate oil and gas drilling permits on public land, prohibit funding for creation or expansion of wildlife refuges, cut funding for the Advanced Technology Vehicle Manufacturing Loan Program, and … well, there are 61 items on the list.

The Senate GOP isn’t far behind: In 2015, they floated a bill to cut the EPA’s budget by 9 percent and block rules on everything from ground-level ozone pollution to climate change. There may be a few more moderate GOP senators who think global warming is a problem, like Susan Collins (R-ME). But they do not dominate the caucus: Fossil-fuel enthusiasts like Mitch McConnell and James Inhofe do.

There’s no indication that Trump will buck his party on these issues.

Overall I am more persuaded by the Niskanen analysis, but both pieces are worth reading.  Here is my earlier post on the same issues.

The reality is that clean energy has been booming in the United States for a whole bunch of reasons that don’t have much to do with climate change. Things such as health, security and innovation, which lead to high levels of support amongst Republicans – yes, Republicans – for harnessing the power of American water, wind and sun.

Those federal tax credits for wind and solar? They were passed last December by a Republican Congress with bipartisan support. Revoking them would require a legislative effort that may not be looked upon kindly by the many Republican lawmakers who have renewable energy manufacturing and development in their states. Lawmakers like Senator Chuck Grassley, an Iowa Republican, who said this summer: “If he wants to do away with it, he’ll have to get a bill through Congress, and he’ll do it over my dead body.” He won’t be the only one: looking across the country – and the electoral map – the top-10 wind-energy producing congressional districts are represented by Republicans.

Besides, much of the renewable energy boom has been driven by state policy. You might recall that back when he was governor of Texas, George W. Bush passed legislation requiring utilities to buy renewable energy.

It led to a building boom that has made the state the largest producer of wind power in the United States. Iowa, South Dakota, Kansas, Oklahoma and North Dakota lead the United States in the proportion of electricity generated by wind, and all are led by Republican governors. Ditto North Carolina, which trails only California in the development of new solar projects.

Up in New Hampshire, which also went for Mr. Trump, the newly elected Republican governor won on a platform that included support for the Northern Pass transmission line, which would move clean hydroelectricity from Quebec into New Hampshire and the New England power grid.

…Down in Florida, as Floridians delivered their support to Trump, they also voted to maintain unlimited opportunities for the expansion of rooftop solar. There are hundreds of state-level policies in red states and blue states that aren’t going to disappear, and they are driving significant investment in clean energy.

Just last year, the United States saw $56-billion (U.S.) in clean-energy investment, second only to China. That kind of investment creates a lot of jobs: Almost 210,000 Americans are now employed in the solar industry, double the 2010 figures. This represents more people than those employed in oil and gas extraction. The U.S. Bureau of Labor notes that wind turbine technician is the fastest-growing occupation in the country. Would Mr. Trump put these good jobs in jeopardy? Doubtful.

Looking at dollars and cents – and customers’ wallets – it’s also worth highlighting that the unsubsidized cost of wind and solar just keeps falling, down 61 per cent and 82 per cent respectively, between 2009 and 2015.

I’m not arguing those policies are good, bad, or “not nearly enough.”  The main point is simply that most of them are unlikely to change.

That is from The Globe and Mail, much more at the link, via Dina Pomeranz.

That is my recent Bloomberg column, here is one bit:

Measured GDP just doesn’t capture the relevant trade-offs for evaluating government spending. For instance, a lot of U.S. workers are producing organizational capital. They work on business plans, building client lists, developing marketing strategies, cultivating customer relations and performing other future-oriented activities common to service-sector enterprises. On any given day, most of us are not churning out additional widgets.

Government stimulus, on the other hand, usually is oriented toward concrete outputs such as roads and bridges or military hardware. It’s more like old-style manufacturing.

Stimulus therefore pulls workers out of producing organizational capital. In the short run, measured GDP goes up, yet the economy may or may not be doing better overall, especially in the longer run.

And this:

In Keynesian theory, fiscal policy only works well if you use it in down times and pay off the bill during a boom. Trump seems ready to do the opposite by upping spending as the economy approaches full employment. After that? Recent history suggests that many countries switch back to austerity precisely when they shouldn’t. That is a reality proponents of “spend more now” have to reckon with, and it means stimulus can bring a bigger contraction in the future than the boost it gives today.

For years, I have been reading about evidence that the 2009 fiscal stimulus promoted by the administration of President Barack Obama was good for the American economy. Study after study shows that it boosted GDP across a two- to three-year time horizon, as indeed it did. Furthermore, some parts of the stimulus truly were beneficial, for instance the aid to state and local governments that limited the need for temporary layoffs. But a serious evaluation of the Obama stimulus, and its longer-term consequences, remains to be done.

There is much more at the link.

In this post I put aside the negatives of a Trump presidency and focus on some of the positive things that President Trump could do that are still consistent with his stated goals and ideology.

First, and most obviously, infrastructure development. Trump has said he wants to invest a trillion dollars in infrastructure, mostly through public-private partnerships (PPP). As I said in Launching the Innovation Renaissance we need more and better airports, for example. Ironically, New York Governor Andrew Cuomo’s $4 billion PPP to replace LaGuardia’s Terminal B which has as a leading partner Swedish multinational Skansa, is an important model. Around the world there are a number of other successful examples of airport PPPs including in India, Australia, New Zealand, Canada and South Africa.

Fortunately, the FAA already has an airport privatization program. To date, the program has had only limited success but the tools are in place if Trump wants to push.

Governments eager for cash sometimes structure PPPs with big up front payments and low future payments. Trump could find such a bargain tempting as it would let him raise cash and encourage building today while pushing low future revenues decades into the future. Bear in mind, however, that when someone such as Paul Krugman says that now is the time to invest because interest rates are low, a corollary is that is now is the time to sell because asset prices are high.

Speaking of air travel, Trump seems like just the person to Make America Boom Again and he could do it with a small directive to the FAA to drop the ban on supersonic aircraft and replace it with a reasonable noise standard.

We also desperately need an update to our electricity grid. We have more blackouts than any other developed nation. It is a national embarrassment when millions of US residents our thrown into the dark by grid failures.

Improving the grid is not just an economic issue it’s an issue of national security. Our grid is under constant low-level attack, and some of these attacks are likely probes for an attack similar to that which brought down the Ukrainian power grid.

Electricity infrastructure, it’s worth noting, is less amenable to PPPs than airports because it’s more difficult to monetize quality improvements and the grid by its nature involves many externalities so I think Trump is relying too much on PPPs. Newt Gingrich, however, is a big proponent of improving the grid and he may help convince Trump to invest public funds.

An important byproduct of improving our electricity grid would be to improve the prospects for solar and wind power. Solar and wind are intermittent and cost effective in only some parts of the country. The better our transmission lines, however, the more useful these sources of energy become. Indeed, it might be time to begin work on a global super-grid. I could see Trump going for this (just don’t call it a hemispheric open market).

Trump also seems like just the guy to support nuclear energy. Molten salt reactors are very safe and can be much smaller than traditional reactors. These types of reactors were invented in the United States but China is rapidly developing the technology. President Trump don’t let China drink our milkshake! By the way, these types of nuclear reactors pair well with renewables because they can ramp up or down to fill in the intermittent nature of  solar and wind. Nuclear power also pairs beautifully with hydrogen.

The first new nuclear plant in decades just started producing power for commercial use last month. Trump should cut the ribbon at an opening ceremony. It would be a great signal that America is not afraid of technology, that we can still build, and that we can responsibly deal with climate change while increasing the power that drives American civilization.

There are many types of diversity.  Diversity of occupation, diversity of musical taste, diversity of outlook, diversity of residence, and of course varying kinds of racial and ethnic diversity.  You could list thousands of kinds of diversity.

The original thinking behind the Electoral College was that geographic diversity was important.  The Founding Fathers were not majoritarian, but rather they believed in placing special weight on diversity of this kind.  The prevailing view was “if too many (geographically) diverse voices veto you, you can’t get elected, not even with a majority of the votes.”  That view was a strange and perhaps unlikely precursor of today’s veto rights/PC approach on campus, but there you go.

Democrats now control at least one legislative house in only 17 states, and the reach of the party is shrinking dramatically.  So by the 18th century standards of diversity, emphasizing geography, the Democratic coalition is remarkably non-diverse.  You can see how much of Hillary Clinton’s majority came from the two states of New York and California.  That also means the Republicans are not just a “Southern rump party,” as some commentators used to suggest.

If you think of education as serving a smoothing function, the less educated are in some ways considerably more diverse than the educated.

The Democratic Party today is more likely to stress the relevance of ethnic and racial diversity, if the talk is about diversity.  (Gender diversity too, but that requires its own post, maybe later to come.)  Non-Democrats are more likely to count other forms of diversity for more than the Democrats do.  I see Democrats as somewhat concentrated in particular cities and also in particular occupations, more than Republicans are.  There is nothing wrong with that, but it is another way in which Democrats are less diverse.

When it comes to views about the relevant forms of diversity, the views of non-Democrats are more diverse than the views of Democrats, I would hazard to guess.  A non-Democrat is more likely to focus on something other than racial and ethnic diversity, compared to a Democrat.

Correctly or not, many Americans do not think racial and ethnic diversity is the diversity that should command so much attention.  That is one place to start for understanding why so many 2012 Obama voters switched to Trump this time around, or maybe just stayed home.

A few days ago I saw figures that 29 percent of Latinos voted for Trump (possibly that number has been revised).  I suspect many of those voters do not see Latino vs. non-Latino as the diversity line that interests them most strongly.

I haven’t offered any criticism of the Democratic point of view on diversity, even though you may feel that my description of it is trying to lower its status.  (You are right, noting I don’t wish to defend the R. point of view, but the R view does not need as much status-lowering either.)  It may well be correct to have a less diverse view of diversity.  If you were to start with an argument for that view, you could cite the long history of American slavery and segregation, plus continuing racial wealth inequality, as reasons for focusing so much on one kind of diversity rather than others.

Still, when I speak with Democrats, and with Progressives in particular, they view themselves, as a kind of assumption, as the people concerned with diversity.  That is a significant cognitive mistake.

When Donald Trump was elected President of the United States, it was the forces of diversity — some diversities, many diversities — that won.

It was the people less concerned with diversity overall that lost.  Again noting that some important notions of diversity do cut the other way, most of all racial diversity.  And I do wish to stress that the presumptive argument for “diversity” simply isn’t there, although that conclusion is hard to swallow that if you have imbibed too much contemporary political rhetoric.

In fact, I view the amazing diversity of the election and the electorate as having gotten the better of us.  It is an example of how diversity can go wrong.

I believe that until Democrats and Progressives can grasp their lack of diversity intuitively, they will struggle to make their way forward in the new political climate of the United States.  They will not understand how anyone could view them as divisive, since they automatically think of diversity as being on their side, rather than something they oppose.

7.18-16 7.18-16

There is another reason why the Republican Party could not contain Trump, a perhaps deeper reason. Michael Oakeshott, an under-read political thinker in the mid-20th century, remarked in his exquisite essay, “Rationalism in Politics,” that one of the more pathological notions of our age is that political life can be understood in terms of “principles” that must be applied to circumstances. Politics-as-engineering, if you will. Republicans themselves succumbed to this notion, and members of the rank and file have noticed. Republicans stood for “the principles of the constitution,” for “the principles of the free market,” etc. The problem with standing for principles is that it allows you to remain unsullied by the political fray, to stand back and wait until yet another presidential election cycle when “our principles” can perhaps be applied. And if we lose, it’s OK, because we still have “our principles.” What Trump has been able to seize upon is growing dissatisfaction with this endless deferral, the sociological arrangement for which looks like comfortable Inside-the-Beltway Republicans defending “principles” and rank-and-file Republicans far from Washington-Babylon watching in horror and disgust.

That is from a very interesting Politico piece by Joshua Mitchell of Georgetown.  As for me, let’s just say I am a big fan of what Mitchell calls “book club”!

Devangshu Datta has a good run down of the basic facts of India’s demonetization of Rs 500 and Rs 1,000 notes:

About 85% of all currency in circulation has just been turned into coupons that can only be exchanged in specific places. These notes can be converted into currency again only with identity proofs (which hundreds of millions don’t have) and the additional hardship of standing in many queues for many hours.

Over half of India’s population doesn’t have any sort of bank account at the moment and about 300 million don’t have basic ID such as Aadhaar either and hence, cannot access the banking system at all. About 130 million Indians have mobile wallets (about 25 million have credit cards) and there are maybe 550-600 million debit cards in circulation. So access to cash is very, very important for average Indians.

…India is a cash economy. Well over 90% of all transactions are done in cash.

So how is India responding? Lineups at banks and ATMs are long. Tourists at the Taj Mahal have had minor troubles because ticket collectors aren’t accepting the demonetized notes. Demand for gold is up giving some jewelers a temporary albeit welcome windfall. Perhaps most telling is that at Zaveri Bazaar in Mumbai old notes were going at a 60% discount–that is a very heavy discount and indicates that the demonetization is, as I argued earlier, working as a tax on the black market. Other sources, however, indicate that discounts can be had for as low as 20%. Discounting, however, is illegal and the government is cracking down.

What, however, is the point? As Amit Varma argues:

…most truly rich people don’t keep their wealth in the form of cash, but in the form of real estate, gold, deposits in foreign bank accounts and other benaami investments. They will be largely unhurt…it is the poor who will be hurt the most by this.

And Ajay Shah notes:

Controlling corruption is not about blocking access to a non-traceable store of value. There will always be precious metals, US dollars, bitcoin, and jars of Tide…. Solving the problem of corruption requires deeper changes to institutions.

I see this as the main point of the exercise (quoting Datta):

The Income Tax and Excise Departments’ ability to gather data will increase exponentially. So will their discretionary powers, when they can query people who pay large sums in cash into their accounts.

That is not necessarily a bad thing. A key point is that only 1% of India’s population pays income tax–India would be a libertarian paradise if it had a libertarian government but it doesn’t. As a result, what low income tax payments mean is that India is forced to raise money in less efficient ways and to govern through regulation. Some of the only people who pay tax, for example, are those working in large multinational corporations but those are precisely the high-productivity sectors that need to grow.

India’s dilemma is that its high productivity sectors are taxed while its low-productivity sectors aren’t, so valuable resources are trapped in low productivity sectors. Modi knows this and if he is serious then his surprise demonetization will be followed by more efforts to bring India’s informal sector into the formal sector, leveling the playing field, and increasing total wealth.

AddendumMostly Economics has a discussion of two early demonetization in India, one in 1946 and one in 1978, both were focused on the larger bills unlike the current demonetization.

I can therefore see the emergence of a grand bargain in which the US accepts China’s political and social structure and commits not to disrupt it in any way in exchange for China’s commitment not to challenge the status quo in Asia. It may not be a spoken agreement but a tacit understanding that guides the relations in the years to come.

James Woolsey Jnr is a senior adviser of US President-elect Donald Trump on national security, defence and intelligence

Here is the full piece, from the South China Morning Post.  But is such a deal time consistent?