Monday, July 29, 2019

Origin of the 2 Percent Inflation Target

I have made most of these comments as comments on Econbrowser and Angry Bear (an excellent post by Robert Waldman), as well as on Econbrowser in response to a serious post by Jeffrey Frankel. I note that pgl has added useful comments on this matter in the other blogs.

So it was 1990 that the New Zealand central bank became the first in the world to impose an inflation target of 0-0.002.  It worked out pretty well for NZ, and in general it has not done too badly in general where applied, well beyond the US.  Of course, global inflation has declined, with a handful of exceptions.

In the mid-90s the US grew better than it had  previously, and in the middle of the decade there was an important moment regarding policy.  There was no inflation directive but Fed Chair Greenspan was facing a de facto such directive based on central Fed estimates that there was a known "natural rate of unemployment (=NAIRU) that must not be passed.

As it was then Fed Gov Janet Yellen in the mid 90s convinced Greenspan not to raise interest rates  partly because of a paper by  her husband, Noblelist George Akerlof.  This famous paper from 1996 out of Brookings where George was due to Janet being at the  Fed,

His  now famous paper with Dickens and Perry redefined this whole debate. So the hard empirical fact is that that nominal wages do not decline. The Akerlof et al paper shows that there is  no downard movement in nominal wages. His group said that given no  wage downs, those gaining will  push wages up.

George (yes, an old very close friend), has  coauthored with his wife, Janet Yellen, on why workers do not accept nominal wage decreases.  It is a matter of social relations within workers, with A and Y publishing numerous papers on why  that no wages going down.

So, in 1990 the  New Zealand central bank worked out OK In the mid-90s Yellen convinced Greenspan to lay back because there is no NAIRU or natural rate of unemployment, although there has never been a credible argument that the"natural rate of employment equals the NAIRU."

Barkley Rosser

Friday, July 26, 2019

Why is John Cochrane Nodding to a Gold Bug?

John Cochrane gave a preview of a WSJ oped he wrote in response to something from James Grant. Permit me to be brief about the utter nonsense from Grant before noting the more worthwhile discussion from Cochrane:
Jim Grant: The Big Flaw in Ph.D-conomics: The Ph.D. standard of monetary management was the topic on the agenda at the July 15 panel at the American Enterprise Institute in Washington. Discretionary central-bank policy conducted by former tenured economics faculty, or by people imbued with the doctrines of those learned people, is the system in place today. We discussants pulled at our chins: Is the system any good at all? It’s a timely, down-to-earth question. Federal Reserve Chairman Jerome Powell, though a lawyer by trade, does business in a building infused with
Sorry but I refuse to go on with this rant as to how people trained in economics do not have perfect forecasting record especially since it is written by someone who co-authored a 1999 prediction that the DOW would soon hit 36000. The entire purpose of Grant’s rant was to advocate a gold standard. Cochrane was kind enough to provide a link to something from Grep IP entitled:
Judy Shelton, a Goldbug Who Bends to Fit Trump
This WSJ oped is worth the read. Now to what Cochrane contributed:
Pegging the dollar to gold won't stop inflation or deflation. Inflation was already quite volatile in the 19th century, and it would be worse today...In particular, if the value of gold goes up, you have deflation, which many people are worried about today. The gold standard did nothing to stop the sharp deflation of the 1930s.
Quite right and he notes that broader commodity standards face similar problems – which is something Stephen Moore apparently does not get. Cochrane instead advocates that we adopt a CPI target, which means that the Federal Reserve should target a zero percent inflation rate and not the current 2 percent target. Of course, those of us who lived through the Great Recession and also worry that the Wicksellian real interest rate might drop below negative 2 percent are advocating a higher inflation target – not a lower inflation target. Correction:It seems James Glassman is a popular name. James Kenneth Glassman is the co-authored of DOW 36000 not be confused the chief economist at JPMorgan. Now James Grant - this particular gold bug is a journalist who has his own Grant’s Interest Rate Observer and once suggest Ron Paul should head the Federal Reserve. James Grant also wrote The Forgotten Depression, which I believe has been criticized on this very blog. Glassman - Grant - we need to program to keep these monetary nutcases straight! Sorry for the confusion.

Wednesday, July 24, 2019

Pledging Zero Carbon Emissions by 2030 or 2050: Does it Matter?

We now have two responses to the climate emergency battling it out among House Democrats, the “aggressive” 2030 target for net zero emissions folded into the Green New Deal and a more “moderate” 2050 target for the same, just announced by a group of mainstream legislators.  How significant is this difference?  Does where you stand on climate policy depend on whether your policy has a 2030 or 2050 checkpoint?

I say no.  Neither target has any more than symbolic value, and what the government does or doesn’t do to prevent a klimapocalypse (can we use this interlingual word?) won’t depend on which one gets chosen.

Endpoint targets have no constraining power at all.  A 2030 target won’t be met or unmet until 2030, and by then it will be too late.  Same, and worse, for a 2050 target.  Moreover, the whole target idea is based on a misconception of how carbon emissions work.  The CO2 we pump into the atmosphere will remain for several human generations; it accumulates, and the sum of the carbon we emit this year plus next plus the one after and so on is what will determine how much climate change we and our descendants will have to endure.  (The relationship between our emissions and the earth system’s response is complex and may embody tipping points due to feedback effects.)  Every additional ton of carbon counts the same, whether it occurs today or just before some arbitrary target date.

What we need instead is a carbon budget, an announced total quantity of emissions we intend to hold ourselves to, starting right now and continuing through the end of the century.  That way, whether we’re living up to our pledge or scrapping it is put to us each year based on how quickly we’re using up our quota.  It sets the meter running now.

As a secondary point, caveat emptor about the “net” emissions thing.  Net of what?  Purchased offsets like in California?  (My emissions don’t count because I’ve given you money so you won’t increase yours by as much as you said you might, and I’m hoping no one else will step up and do your emissions instead.)  Or investments in forests, that may or may not continue to store carbon in the decades ahead, and which may or may not cause more harvesting of other forests?  A proper carbon budget isn’t net of anything; it’s an amount of fossil carbon we set aside for ourselves to burn, and that’s it.  Anything else, like bulking up our forests or pursuing other forms of carbon sequestration, should be additional, because at this point no feasible budget alone can be tight enough.

Repeat Message to the Mainstream Media: Stop Serving as Trump’s Propaganda Machine

I don’t usually like to repeat myself in these posts, but when it comes to the media getting suckered by Trump and serving as bots in his reelection campaign, I have to get shrill: no more headlines reporting on Trump’s tweets, taunts and tantrums!  Just stop!  Now!

The New York Times is one of the worst, and they would do well to read their own reportage on the matter.  Today’s edition carries an article entitled Trump Aims Words at Working Class, but Policies at Its Bosses, and the body says exactly that—which should come as no surprise to anyone who has been remotely paying attention the past two and a half years.  There is virtually no correspondence between what Trump says and what he does.  (And the exceptions, like border repression and the Muslim travel ban, are in policy realms in which he [unfortunately] enjoys majority support.)

Trumpian blather and obscenity are not an accident.  He has been doing this stuff for decades.  He gets to make his background and true agenda invisible while he slums as a dude with 1950s white working class politics, at the same time reaping the benefit of being perceived as unscripted, honest-for-better-or-worse and the opposite of every politician who has ever tried to put one past you.  But every word he utters is the opposite of what it claims to be: Trump’s themes are carefully scripted, cavalierly dishonest and political to the core.  It is all about misdirection, and like a devious martial arts move, it turns his opposition’s disdain to his own use.

The solution is simple.  The media should just stop megaphoning Trump’s mouth unless he is announcing a policy or personnel action he has actually taken.  Make Trump’s true agenda visible by stuffing everything else into the asides or back pages or just deleting it altogether.

Degeneration of Bipartisan Blog Sites: Econbrowser

This is probably just a whiny complaint of well-known and long running issues.  Indeed for a long time most blog sites (not to mention most twitterspheres and Instogram Idiotspheres) have been mono-partisan in those who participate in their discussions/debates. This has been true for a long time for most sites in the Econoblogosphere, including this site, which clearly tilts "left," even though we have always been open to comments from a wide variety of views.

I have in mind here a particular blog site that I respect and have been spending a lot of time and attention at for some time. It is Econobrowser, initially set up by Jim Hamilton, now at UCSD, and a leading time-series econometrician, long viewed as a nonpartisan technocrat. Some years ago he brought in Menizie  Chinn of UW-Madison as a co-blogger, with Menzie becoming the main poster recently, with Jim H only rarely now posting or commenting on anything.

This site has been for some time now one of the few among higher level economics sites where people from different partisan positions have been regularly posting, reasonably intelligently.  It has been for some time tilting "left," as Mr. Apolitical Jim H rarely posts, with Menzie Chinn dominating the site.  He served for both both Clinton and G.W. Bush as staffer on the CEA, giving him a cred cover of bipartisanship, although since Trump came in he has clearly been negative on Trump.

However, various pro-Trump commenters remain there, of varying degrees of intelligence and credibility.  But as even as some of them have disappeared (oh, where are you, Peak Trader?), some still hang on, even as the site has become dominated by leftist liberals, with me and this site's pgl among the most active there.

But a bottom line here is that I do not wish to see the various misinformed and trollish right wingers completely disappear from the site.   For its all its flaws, Econbrowser remains one of the few sites where one can encounter people making arguments from a variety of paradigmatic perspectives, and I am glad that they have achieved this, and I encourage them to continue with this useful public good.

Barkley RoSser

Monday, July 22, 2019

Mankiw Misrepresents a Story on Senator Sanders Campaign Worker Negotiations

Greg Mankiw reads this story and writes:
Staffers in the Sanders campaign, who are working on salary, complain that they are paid less than the $15 per hour that Senator Sanders advocates for the minimum wage. So Sanders raises their hourly wage. Does that increase their income? No, because he raised the hourly wage by cutting the number of hours they work! Of course, if a President Sanders raised the federal minimum wage, I am sure he would be confident that the change would not have any adverse employment effects. Downward-sloping demand curves may describe socialist political campaigns, but back in the actual capitalist economy, the laws of supply and demand work completely differently.
OK – he started his post by saying it is a wonderful story, which is true. But as I read the story, I saw a very different tale than the one Mankiw suggested:
Field organizers say they make a salary of $36,000 annually but work 60 hours per week, which is an average of $13 per hour ... Sanders' 2020 campaign was the first to unionize in March 2019. The union then made an agreement with the campaign that field workers were to be paid $36,000 annually. The contract, which began on May 2, also provides platinum level health care, paid vacation, sick leave and other benefits. Shakir also told Newsweek that leadership at the campaign previously offered a pay increase for field organizers, but that the offer was rejected in a formal vote. According to the Post, Shakir offered organizer pay to be raised to $42,000 annually and extend the workweek to six days. The offer was reportedly rejected because it would have elevated staff to a pay level in which they'd be responsible to pay more of their own health care costs.
Let’s note what Mankiw did not. The negotiations also involved what appears to be a decent level of fringe benefits in addition to a $36,000 per year salary. These workers are apparently working 60 hours a week, which if they did so for 50 weeks would indeed translate into 3000 hours per year at $12 per hour. Does Harvard require its faculty to put in such an incredibly demanding schedule? I hope not as we know Mankiw loves to spend time with his children. Now if one worked 6 days a week and 8 hours a day for 50 weeks, then $36,000 per year translates into $15 an hour. How Mankiw interprets this story into evidence that we are seeing a competitive labor market moving along a downward sloping demand curve is beyond me. I’m sure he can explain this all to his students at Harvard.

Sunday, July 21, 2019

Frank Ackerman, 1946-2019

The world of economics suffered a sad loss a few days ago (July 15) with the death of Frank Ackerman.  Frank was a mainstay of the activist left within the profession; he was one of the founders of the magazine Dollars and Sense and could always be found at activities of the Union for Radical Political Economics.  He was notable for being one of the most exacting of critical economists, never substituting political passion for careful analysis and documentation of his evidence.  His “cool” personal style may have made him less prominent in the public eye, but those who knew him realized what an important role he served.

I crossed paths with him many times because of our mutual interest in, and horror at, benefit-cost analysis.  Frank coauthored his influential book Priceless: On Knowing The Price Of Everything And The Value Of Nothing to demonstrate that economic methodologies that promised to replace ideology with pragmatism were in fact riddled with ideology themselves.  His final book was Worst Case Economics, which argued sensibly for a prudential approach in finance and climate change.

I hope readers who have had a closer personal connection to Frank will use the comment thread or posts of their own to tell their stories.  This is an important transitional moment for dissident economics.

Friday, July 19, 2019

Hannity Calls For/Predicts War With Iran

OK, sorry if this is just over the top, but this evening Trump's close pal, Sean Hannity, has gone over the top both predicting and clearly supporting a full blown attack on Iran, "take out all their nuclear facilities."  Curiously a sign of how over the top this is was given by one of his guests, a colonel, warned that it would take nuclear weapons by the US to fully take out the most deeply buried  Iranian capabilities.

I am reasonably certain that part of why Hannity was sounding the war trumpet rather than his usual "investigate Hillary and the Steele dossier" baloney is that today Trump put himself into a difficult contradictory situation, having gone doubtful last night on his followers in NC chanting "Send her back" to supporting those chanters today. So, much easier to distract everybody with a possible war in the Persian Gulf (sorry, not "Arabian Gulf," not yet), especially given that there has been an ongoing escalation of incidents in the Gulf over oil tankers, with Iran pushing back against the US withdrawing from the JCPOA nuclear deal.

But the bottom line is that what Hannity spouts often ends up being what his close pal Trump ends up doing.  I take this spout from Hannity all too seriously.  We may well be in more serious war with Iran soon, with such an effort accompanied by far more massive lies than the Bush admin gave us when he stupidly invaded Iraq on false pretenses, although Hannity is assuring us that "It will be all over very soon, with no boots on the ground."  Yeah, we have heard that one before.

Barkley Rosser

Thursday, July 18, 2019

Fox News Is Calling The Persian Gulf "The Arabian Gulf"

Yes.  For centuries throughout the entire world that crucial body of water has been called "the Persian Gulf," even though in 1935 the nation of Persia changed its named to "Iran."  I became aware several decades ago when I was in Saudi Arabia that they have a really big fuss that it should be called "the Arabian Gulf."  I think maybe their fellow Arab GCC members have been supporting this nonsense as well, but nobody else did, certainly not the US.

But now here it is, and I had noticed in some other US media outlets recently. Is this yet another payoff to the murderous Saudi Crown Prince Mohammed bin Salman (MbS) for funneling piles of money to Jared Kushner and the Trump Organization?  I mean, Fox News does what Trump and his flunkies want.  So, not only are we not punishing MbS for his awful war in Yemen, which even the UAE is now getting out of, not only are we not punishing him for ordering the assassination of a US-based journalist, Jamal Khashoggi, but, heck, Trump through Fox News and I am not sure who is trying to change the name of this body of water from its historical origin to kiss the ass of this disgusting murderer.

Oh, there is also the matter that Trump has gotten himself off into a totally anti-Iran schtick, with his withdrawal from the JCPOA and his imposition of massive sanctions on Iran.  But this looks like an attempted permanent punishment.  Frankly, I hope the rest of the world does not go along with this bs, but in the US, I fear he may have succeeded, so many people are so ignorant.

Barkley Rosser

Eliminate The Debt Ceiling

Two days ago in WaPo, Catherine Rampell published a highly reasonable column calling for eliminating the century-old US debt ceiling, something no other nation has ever had, a position supported by a wide array of economists including such a conservative GOP stalwart as the recently deceased Martin Feldstein, a former CEA Chair for Reagan.  I have made numerous posts here on this in the past, but the issue is hot again as once again the debt ceiling is being rapidly approached.

The latest story is that the "adults in the room," Treasury Secretary Steven Mnuchin and Speaker of the House Nancy Pelosi, may be very near an agreement to raise the debt ceiling, Reportedly Pelosi has been open to eliminating the ceiling, but in the current circumstances I certainly understand why she might be wanting to secure a two year agreement to preserve funding for social safety programs crazy right wingers want to use the debt ceiling issue to trash as well as holding off any shutdowns this fall.  This is what used to be known as "good government," but in the current environment, even this apparently reasonable deal, which also has no non-economic sideshows involving abortion or whatever, may yet not pass.  Pelosi says it must be agreed to by tomorrow evening if it will get passed properly by Congress before they all go on leave and the government might run out of money in early September (corporate tax payments have been way down due to Trump tax law).  Eliminating the ceiling would avoid all this bs, but this is not the moment for that.

This is definitely a weird and unprecedented situation.  For over a century we have had this completely indefensible debt ceiling, which has been raised so many times it is not worth counting, and when the WH and Congress have been controlled by the same party, it has been no big deal, although obviously that is what we need to get rid of the damned thing.  However, historically, when there has been split partisan control the game has been the WH pushing raising the ceiling while the opposition party in Congress has made lots of complaining noises and often made demands for raising it.  The problem this time is that the major power broker of the administration, Acting Chief of Staff Mulvaney, was part of the tea party fanatics in the House who when Obama was prez tried to block raising the ceiling.  Apparently at times he and Trump have indulged in fantasies that if there is a default he could personally control which agencies get funded and which do not.  This is not true, and maybe they are figuring it out, but Mulvaney has said nothing, and Trump must pass on this.

If he messes up the deal, it will be all his fault, as his own Treasury Secretary has cut it with the Congressional leader of the opposition party in the House, with reportedly the toadish GOP-controlled Senate ready to go along.  He may or may not have figured out that triggering a shutdown did not help him, but if he thinks triggering a default will not be worse, this will be a big mistake, to put it mildly.

Barkley Rosser

Wednesday, July 17, 2019

Will Kim Jong Un As Head Of State Move More Towards Markets?

This may be.  In April DPRK leader Kim Jong Un was finally named "Head of State," more specifically Chair of the Commission for State Affairs.  Implicitly until now that position had been held by his late father, although he has long held certain crucial ruling positions such as head of the ruling party and commander-in-chief.  Nkeconwatch now reports on a July 12 announcment that at the same time in April there was also a rewrite of the North Korean constitution. Nkeconwatch sees certain changes that indicate economic systemic changes.

The crucial wording change relates to how state-owned corporations should operate to determine the production and distribution decisions.  The former wording was that this should be based on "work team system," which is interpreted as following directives of the ruling party.  This has been replaced by focusing on "responsible management system for socialist corporations," which is seen as granting more autonomy to the managers in the firms.

The main question impossible to know the answer to at this time is whether this change points to a new direction of policy or simply ratifies and legalizes marketizing changes that have already taken place, especially in agriculture.  The coincidence of this constitutional change with Kim Jong Un finally assuming the one remaining top position he had not yet held is consistent with either view or even a combination of both.

Barkley Rosser

Tuesday, July 16, 2019

A Half Century Since Apollo 11 Launched To The Moon

On July 16, 1969, a half century ago today, a Saturn 5 rocket launched from Cape Kennedy on its way to the moon, where Neil Armstrong and Buzz Aldrin would land on the moon on July 20 before returning successfully to earth.  Recent books have made clear just how close a call it was with many things nearly going wrong that would have doomed them, including such oddities as Aldrin using a felt tipped pen to adjust a minor switch that was needed for them to return.  My late father played an important role in that event, which I have posted about here before.  At that time he and I had many disagreements, but on this matter we were in agreement, and I was pleased to watch the famous landing with him.

The recent book, _One Giant Leap_ by Charles Fishman, argues that JFK was motivated to push the project out of Cold War competition with the USSR.  My late father agreed that this was a motive that provided the support for it.  This does raise the question whether it was really worth it.  I mean, nobody has gone back since 1972, although there is much noise now about maybe going back. 

A curious way of looking at this in perspective is to think about what we thought the future would look like from that time period as compared with what has happened.  One way of looking at that is to think about how the moon and human presence there was depicted in the movie "2001: A Space Odyssey," which came out in 1968, the year before Apollo 11.  I well remember taking very seriously the forecast in that movie, which depicted fairly substantial and established US and Soviet moon bases for 20001, now 18 years in the past.  That certainly did not remotely happen, although some other things shown in that movie have come to pass, such as people being able to see each other while communicating with each other over distances (thank you, Skype!).

It may be that we did not do that because the Cold War point got made and later the US and USSR cooperated on the Soyuz orbiting lab, which has become somewhere boring and embarrassing, especially the US lack of a space vehicle to get there and back now.  I think there are reasons for eventually getting at least one base on the moon.  I do not know when that time will really come, however.

I close this by noting how heroic those initial explorers were.  Sunday's WaPo Outlook section printed a speech written by William Safire for Pres. Nixon to deliver if the mission went badly.  The accompanying verbiage noted this would probably have been the most eloquent speech he would have given ever, but fortunately he did not have to deliver it.  Here are the concluding two paragraphs of this never-delivered address:

        "Others will follow, and surely find their way home.  Man's search will not be doomed. But these men were the first, and they will remain foremost in our hearts.

        For every human being who looks up at the moon in the nights to come will know that there is some corner of another world that is forever mankind."

Again, fortunately that speech never needed to be given, and the man who made the small step and giant leap made it back alive.

Barkley Rosser

Saturday, July 13, 2019

Pence’s Potemkin Village on the Mexican Border

Merriam Webster defines a Potemkin Village as:
an impressive facade or show designed to hide an undesirable fact or condition
Mike Pence visited a Potemkin Village in Donna, Texas:
Pence also visited a tent-like temporary detention facility in Donna, Texas, that holds unaccompanied children and immigrant families. The new and mostly clean facility stood in stark contrast to the McAllen station Pence later visited.
While the Buzzfeed story focused on the McAllen station, which depicted horrific conditions, I’m sure Trump’s favorite “news” outlets will highlight the facility in Donna, Texas. In other words, part of Pence’s visit to the border was designed to con the American people that immigrants are being treated well. Leon Panetta is right:
Trump treats Americans like we’re chumps
Since Pence is a Christian, we have to wonder how he can still support Trump’s racist immigration policies after seeing how God’s children are being horribly abused. Here’s a little challenge for Mr. Pence – how many of the Ten Commandments are you violating? Certainly the first two with your idol worship of Donald Trump:
1. You shall have no other gods before Me. 2.You shall make no idols.
This abuse of God’s has led to many deaths, which of course violates the Commandment not to murder. OK – Mike Pence has not committed adultery even if his idol has many times. But cheating on one’s wife is sort of routine for powerful politicians. The serial abuse of innocent people solely based on their race and mainly for partisan purchases is not only unAmerican but also against everything Pence’s religion stands for.

Friday, July 12, 2019

Does Turkish Lira Decline Mean Turkey Leaves NATO?

Probably not, but Turkey is about to receive Russian S-400 missiles against US demands.  More signifigantly the US will kill high level US F-35 agreements, and will not fly US planes over Turkey if it uses the Russian systems.  This threatens Turkish membership in NATO.

The immediate result of this in financial markets has been a substantial decline of the Turkish lira over the last several weeks.  While pushing off the US has costs, there will be gains from favoring Russia, from Russian tourist business to other economic deals, as well as cooperation with Russia not only in Syria, but also with respect to Iran, where both Turkey and Russia disagree with US policy to pull out of the JCPOA nuclear agreement with Iran, which has led to a very bad state.

More deeply we see the limits of the weltenschaaung that Trump put forward last September at the UN GA to massive laughter by many other  national leaders, a moment not known to most Americans while unprecedented, the idea of super nationalism. Now he is facing the outcome of his folly on these matters: both Putin and Turkish leader Erdogan agree with him on this nationalist baloney, but now they are allying against him and the US. This shows that the end of this approach is not international cooperation through international organizations like the UN.  It is nationalist competition and rivalries leading to warfare.

Oh, and Erdogan seems to be imitating Trump also on economic policy, although he is playing a weaker hand, with the Turkish economy's problems one of the reasons the US Fed is looking at lowering interest rates, not only a supposed ally, but one of the G20 nations whose economic problems are serious enough to draw the attention of the US Fed.

Barkley Rosser

Wednesday, July 10, 2019

The Condition Of North Korean Conventional Weapons

This is based on essentially gossip, or if you prefer, a rumor.  I have dining in Washington again and someone there who is in fact both well known and very well informed, but whom I shall not name made a comment about the state of conventional weapons in DPRK and also said that this has not been publicly known.  According to this person their condition is much worse than publicly believed.  So out of date and out of condition are they supposedly that North Korea no longer can seriously threaten Seoul with a conventional attack as has long been taken for granted as being possible and looming over the situation there. 

The supposed implication of this, if indeed it is true (which it may not be, and this is simply not easily checked on), would be that the DPRK needs its nuclear weapons more than we have thought and will be even less willing to give them up than has been thought, not that many of us have taken too seriously the idea that they would be willing to give them up.  Indeed, there have been recent rumblings out of Washington, denied by the administration, that Trump may be willing to return to the position of earlier administrations and cease trying to get DPRK to give up those weapons while trying to put some limits on the program instead.  Needless to say, Trump has had nothing but ridicule for this position when it seemed to be that of Obama, but if he does it, well, this will sort of be like calling NAFTA the worst trade deal ever and then negotiation a new NAFTA that is only slightly different from it and proclaiming it to be the best trade deal ever.

Barkley Rosser

Tuesday, July 9, 2019

The Rise of Global Innovation by US Multinationals

Lee G. Branstetter, Britta Glennon, and J. Bradford Jensen of the Peterson Institute for International Economics provide an interesting discussion of the risks and opportunities from the following:
Total US R&D spending as a share of GDP increased slightly from 2.5 percent in 1999 to 2.7 percent in 2016.2 Multinationals are an important driver of aggregate R&D spending in the United States.3 Their share of total US R&D spending was 57 percent in 2015.4 US MNCs play a disproportionately important role in driving innovation within the United States. At the same time, US MNCs have dramatically increased their overseas R&D expenditures. Figure 1 shows that US MNCs’ foreign R&D expenditures increased from nearly $15 billion in 1997 to over $55 billion in 2015. In some industries, the growth of overseas R&D has been especially striking. R&D expenditures by overseas affiliates in professional, scientific, and technical services increased by more than a factor of 18 between 1999 and 2014, and the ratio of overseas R&D to domestic R&D by multinationals in this industry has increased from under 10 percent in 1999 to over 40 percent in 2015. While US MNCs’ foreign R&D expenditures have increased dramatically, they still conducted about 83 percent of their R&D in the United States in 2015 (down from 92 percent in 1989).
I wish to add one more wrinkle – that being the transfer pricing implications from these observations and the latest from the IRS:
Captive Services Provider Campaign … The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group. The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary. Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the U.S. tax base. The goal of this campaign is to ensure that U.S. multinational companies are paying their captive service providers no more than arm’s length prices.
So where are the foreign R&D affiliates located? The Peterson Institute Policy Brief also notes:
In 1989, US MNCs were conducting 74 percent of all foreign R&D in just five countries—the United Kingdom, Germany, Japan, France, and Canada. They were prominent R&D locations because of their historical importance as global centers of scientific research (and as lucrative consumer markets for US MNC products). By 2014, however, only 43 percent of all foreign R&D was being conducted in these five countries. Figure 2b shows the growing importance of new locations and the corresponding decline in the relative importance of traditional R&D hubs. Many of these new hubs have only recently graduated from the ranks of developing countries, and two of the most important new destinations for US MNC R&D, China and India, still have relatively low per capita incomes.
Let’s take as an example an Indian contract R&D affiliate that incurs $100 million per year in expenses. While the Indian tax authority would likely expect a 25% markup ($25 million per year in profits), the IRS is likely to argue for cost plus 5%. Of course, I have seen situations where a European parent has engaged a U.S. based affiliate to perform contract R&D at cost plus 5% whereas the IRS has insisted on much higher markups. So much for consistency I guess. How to resolve this potential double taxation? Quick call the Big Four accounting firms or some law firm like this:
Eide Bailly’s recommended approach in a captive subsidiary transfer pricing analysis is to benchmark the profitability of the entity with the less complex functions and fewer risks.
Now you might think these guys are about to charge the multinational big bucks for this kind of gibberish – and you would be right. But I should not pick on this firm as what their competitors are peddling is even more gibberish. Of course, a multinational could migrate any successful R&D to a tax haven and pay these firms even bigger bucks to essentially lie in order to make Base Erosion and Profit Shifting “perfectly legal”. But that topic will have to wait for another day as I put my thoughts together on something called the Altera litigation.

The Expansion Of Assets With Negative Nominal Interest Rates

Buried in the Weekend section of the Financial Times is a report that the aggregate value of assets that earn negative nominal yields has substantially expanded since the beginning of 2019 and has reached a new high.  So on January 1, 2019, the value of these assets was at $8.3 trillion.  As of six months later it had reached $13 trillion, a more than 50 percent increase.  There are fewer assets around that have negative yields than a few years ago, but the amount of money in them has grown, and the depth of some of the negative interest rates has deepened.  It used to be said that -0.5 percent was a lower bound, but some Swiss franc bonds are down to -0.8 percent.  The main ten year German government bond's yield has fallen to -0.4 percent.

This reflects a general decline of interest rates around the world.  This would seem to be tied to a general slowdown in the growth of the world economy.  One of the most sharply shifting economies is that of Germany, in recent years the fastest growing in the EU, but apparently in negative GDP growth territory for the second quarter of 2019.  This is not a good sign for the entire European economy.  Of course, China has also been slowing down.

This general slowdown has spilled over into US long term interest rates, which the Fed really does not control.  Indeed, for only the seventh time since 1980, the ten-year Treasury bond's yield dipped below the federal funds rare, a more dramatic inversion of the yield curve than we have seen so far, with the US economy going into recession soon after this inversion five out of the six previous times this happened. So this is not a definite sign of recession, but it is quite understandable that the Fed is now talking lowering short term rates, and not just because Trump is shouting at them to do so.

Barkley Rosser

Wednesday, July 3, 2019

Elliott Maraniss

It’s with more than average interest that I just read a review of David Maraniss’ new book about his father Elliott, A Good American Family: The Red Scare and My Father.  I knew Elliott during my years in Madison as a contributing writer to his newspaper, the Capital Times, and as an informal sounding board for his thoughts on the New Left.  The period in question was the early 1970s.

First, Elliott was the most visibly nervous person I had ever met.  He talked quickly in a loud but skittish voice, and his usual facial expression was a half-smile that seemed to reflect a deep uncertainty about everyone and everything.  Of course, he held a position of authority—editor—and he was able to make decisions rapidly and with conviction.  Still, it always seemed there was something more going on; I had no idea.

Elliott was fascinated but frustrated with the left I was a small part of.  On the one hand he genuinely welcomed it; he knew the anarchic energy of young people was necessary to clear away the detritus of decades of conservative domination.  But he also wanted us to be more reasonable, to know when to compromise and not be so damned sure we were always right.  At the time I felt this was a reflection of his ties to the “old, tired world” we were out to overthrow; today I think we should have had more common ground.

Incidentally, Elliott had a strong professional streak that I always admired.  He cared about journalism and good, clear writing.  I think it was because of my writing chops that he was so open to me, when just about everything else about me probably annoyed the hell out of him.

I Think, Therefore I Know: San Francisco Edition

Strange as it may seem, the biggest stumbling block on much of the left may be a crude philosophical error, dogmatic subjectivism.  This is a position that holds that subjective experience is the highest form of knowledge, whose claims can’t be challenged by “lesser” criteria like logical analysis or empirical observation.  To the extreme subjectivist, if I feel something to be true there is no legitimate counterargument: I think (or feel), therefore I know.

This is at the heart of the current blowup over the mural at George Washington High School in San Francisco.  It was painted in the 1930s by Victor Arnautoff, a member of the Communist Party and acolyte of Diego Rivera, under the auspices of the Works Progress Administration.  To make his point about the centrality of racism and oppression in American history, he portrayed Washington as the slaveowner he was, with a group of slaves toiling away to make him rich.  He also showed pioneers headed westward past the body of a dead Indian.  Not surprisingly, Arnautoff got into trouble during the McCarthy era and was effectively hounded out of the world of public art.

But several groups and individuals who claim to speak for today’s oppressed think the mural glorifies racist violence and makes the high school an “unsafe” environment.  The San Francisco School Board’s advisory group, The Reflection and Action Working Group, deemed Arnautoff “glorifies slavery, genocide, colonization, Manifest Destiny, white supremacy, oppression, etc.”  One of the Board members said that efforts to save the mural from being painted over were reflective of “white supremacy”, since the artwork some want to save is “white property”, while its effects are harmful to “Black and Brown ppl [people]”.  The head of the high school’s Indian Education Program asserts this and other Arnautoff murals “glorify the white man’s role and dismiss the humanity of other people who are still alive....”  Others bring up the triggering effect of images that remind us of the brutality that permeates American history.

What interests me is that none of these arguments draw in any way from an analysis of the impact of art on its viewers or empirical evidence of any sort; they are simply assertions from personal feeling.  This is not to say that feelings don’t matter—of course they do—but surely they are not the only thing that matters.

There are two fundamental problems with the subjectivism on display in San Francisco.  One is the obvious point that humans are not omniscient and infallible.  Our subjective judgments are often wrong, and as they go through life sensible people are constantly revising their reactions to the things around them and rethinking what they thought they knew.  “This is how I feel” is simply a self-report of how one feels; it has no additional value as a basis for judgment.  Even as a self-report it may be wrong, since there is a lot of evidence that people misconstrue their own perceptions and emotions.  So, not only are the claims about what the mural means dubious in light of its actual history and content, but even the claims about the feelings it engenders can’t be taken at face value.  And to go one level deeper, if people knew more about the history of the mural and the ways in which it had been viewed across the decades since its creation, perhaps their emotional response might be different.

The second problem is that subjectivities collide.  I may feel something deeply and be absolutely sure of it, and you may feel something else in exactly the same way.  If our feelings contradict each other, how do we decide who’s right?  This is even more vexing when the subjectivity in question is collectively attributed to a social group, like a racial, gender, national or other identity.  If I say that, as an older person, I know that a comment, idea or work of art makes older people feel unsafe, and another older person disagrees, subjectivity alone is not sufficient to resolve the issue; we would have to appeal to some other form of knowledge—you know, like looking at evidence—to determine who’s right.  If you are committed to the primacy of subjectivity as the bedrock of your outlook on the world, however, that solution is disallowed.  The only alternative is to propose a “true” identity, a collective subjectivity, that includes me and excludes you, or vice versa.  And this is how it actually plays out: the real members of an oppressed group know in their bones what the score is, and if other ostensible members disagree, this just shows they aren’t really part of it.  I’m sure, for instance, that if you polled all the Black or Indian students at George Washington High School, some would be upset by the mural and others not.  One way to deal with the situation would be to consider the reasons for these feelings to see which make sense and fit the objective evidence, but that is out of bounds if subjectivity can’t be questioned.  The alternative is to say that students who are really part of this identity share a common subjectivity, which eludes those who take a different side.

What I don’t get is why dogmatic subjectivism is so central to the outlook of some people.  Where did it come from?  Why is it embraced so unquestioningly?  What purpose does it serve?

Monday, July 1, 2019

Iran Nuclear Deal: Better Late Than Never?

Today has seen a curious coincidence that I have seen nobody else comment on regarding the  status of the JCPOA Iran nuclear deal.  On the one hand Iran has apparently now officially violated the agreement in terms of the amount of low level enriched uranium it has, going over the allowed limit, although it remains very far from obtaining in nuclear weapons. On the other the EU, more specifically and especially France and Germany, have gotten their alternative payment mechanism, Instex, operational.  This has been set up to allow European companies to deal with Iran without using dollars or the US-controlled SWIFT clearing system.

However, it is only initially going to deal with non-sensitive items like food and pharmaceuticals, not other goods, at least not now.  The Iranians have made it clear that for them to keep to the JCPOA the Europeans need to more fully offset the US sanctions.  That is not happening, not at least now, although the possibility is there.

So, this may be too late, but maybe Iran will not get too far above the limits.  Maybe there is still a chance to more seriously offset Trump's illegal sanctions.

Barkley Rosser

Housing: Elizabeth Warren v. John Cochrane

Noah Smith has a lot of praise for the economic policy proposals from Elizabeth Warren. I’ll mention only one:
With costs for shelter eating a bigger piece of Americans' paychecks, and local government paralyzed by incumbent homeowners, the country needs a big solution. Warren's would combine incentives for raising zoning density with increased public construction”.
This is interesting in light of John Cochrane’s rant attacking the Democrats on the housing issue. Read it for yourself. Cochrane only noted the increased public construction aspect and tried to tell his readers that only Cory Booker wanted to reform zoning issue. While Cochrane admitted increased housing supply would be a good idea – he slandered any government efforts to do so. No wonder he’s the “grumpy economist”! Update: Cochrane’s latest rant includes this whopper:
Well, I think Keynes will go the way of phlogiston, but I agree with the point, and anyway a good 19th century scientist should know what phlogiston is.
This slur is not exactly novel. Proponents of the New Classical school were calling Keynesian economic blood leaching some 40 years ago. Now someone should ask Cochrane - how well did his New Classical view of the world fare during the Great Recession?