Friday, February 19, 2016

The South Carolina Primary

I still plan to vote for Rand Paul.   The Republican leadership claims that they told the South Carolina Election Commission that Paul suspended his campaign, which means that my vote for him will be counted.  I saw an email from the Election Commission saying that he "resigned" from the election, which means that he will be on the ballot but the votes won't count.   I guess I will see tomorrow.  (P.S.  Just voted.  No signs saying that anyone withdrew.)

Why stick with Paul?  I sure don't see eye-to-eye with him on every issue.   But there are no other good options.

Cruz claims that he should inherit the "Liberty vote."   I actually heard him speak in person, I spoke a few words with him face to face, and Kathy and I have a picture with him.  He was at The Citadel a few years ago at an event for the Free Enterprise Foundation.   I don't remember too much, but his remarks sounded good to me.

Also, the attack ads on Cruz saying that he is "anti-defense" make me want to vote for him.   Is willing to cut excessive defense spending?  Good.    Has some concern for the 4th amendment?  Good.

But it is not enough.  (Also, it sure suppresses my willingness to vote for the candidates of the campaigns that generate the attacks--Rubio, Bush and Kasich.)

In my view, Cruz seems to be too much of a hawk, but he has said a few things that sound at least slightly realist in his foreign policy views.

My problem with Cruz is that he panders too much to the Christian Coalition/Moral Majority or whatever we call that faction these days.   He is running to be President of Evangelical Christians.

It is a bit humorous that he began his campaign at Liberty University.  It didn't do Cruz much good.  I received a robo-call from President and son of the founder, Jerry Falwell, supporting Donald Trump.   My wife is from Lynchburg, Virgina and I once waited on Falwell's uncle Gene (twin of Liberty University founder Jerry) at my father-in-law's feed and seed store.   But I visit Peakland Baptist when I am up there, not Thomas Road Baptist Church.

When can we expect there to be a Donald  Trump Chair of Free Enterprise (or more accurately, of crony capitalism) at Liberty University?

None of the other candidates are much better on the social issues.   They all are fully committed to a futile effort for government to promote traditional moral values by using law enforcement to punish sin.   But Cruz wears this on his sleeve.   Cruz leads with these social issues.   It makes him impossible for me to stomach.   He won't let me forget that I believe in personal liberty and he doesn't.

I don't like Cruz's position on immigration.   I appreciate his earlier support for legalization of  status (guest worker program) without citizenship (voting and welfare "rights.")   But he says that his support for that was just a legislative ploy and that he really doesn't favor providing for some kind of legal status for illegal immigrants.   So, either he is a liar or else he supports having an permanent illegal workforce here.

I am not too concerned with Republican political strategy.   But I think this is one of the problems that most Republican elected officials have with Cruz.   They don't think motivating Christian conservatives even more to vote Republican is a good strategy.   It will chase away other, more moderate voters.  (Which on these issues, they are clearly right about me.)   They also don't like Cruz because of his history of claiming that he is the only "true" conservative and the others are all sell outs.   It hurts their feelings.  I sometimes think that this is a case where the truth hurts, but it sure won't help Cruz "unite the party" and win in November.

Also, the fact that Cruz stood by while Trump acted the fool for months was awful.  It seemed as if as long as Trump insulted Bush, Cruz had no problem.   That Cruz has finally begun to stand up to Trump's nonsense, particularly his effort use his corporate lawyers to threaten suits to violate the first amendment, is great.   Finally.

What about Rubio?

When I see the attack ads claiming he is soft of immigration, that makes me want to vote for him.   I don't favor a pathway to citizenship--welfare "rights" and voting rights.   I do favor legalization of workers (guest worker status.)   I can understand a compromise, and if the path to citizenship is long and hard enough, it might be worth it to get legalization.  

The problem with Rubio is that he is a neo-con's neo-con.   No evidence of foreign policy realism.   Instead policeman of the world and nation-building.   I think it is delusional.    A futile effort to remake all of the world in America's image by military force.     I have no interest in having my students be killed, or worse, come back maimed, due to grandiose visions of what is possible in Iraq, Syria, Libya or Iran.  I have even less interest in that happening to my son.  In my opinion, one tour in Afghanistan was enough.

I am not at all pleased that Rubio has remained silent about Trump and has joined in with Trump to claim that Cruz is a liar and using dirty tricks.   An alliance of convenience, no doubt.

I can understand why Rubio is irritated with Cruz when Cruz makes out that there is a big difference between them--Rubio is the sell out, while Cruz is the principled conservative.  Of course, there isn't really that much difference.

Bush?  Kasich?

I appreciate Bush finally challenging Trump a bit.   Watching ad after ad bashing Rubio (for well over a month now,) when there is not much difference between Bush and Rubio was a bit sickening.  What a waste.   Aside from Trump, Bush has the most Republican voters who will never support him and the highest unfavorability rating from the general public,   Maybe it is immigration (and Bush's record on immigration is no problem for me) or common core.  But I think it is the Bush name.

But Bush keeps it up.   If Trump wins the Republican nomination, or worse, it will be the fault of Bush and his ego.

I did look at Kasich.   I remember him from when he was in Congress years ago.  I had a positive impression.   I don't like his campaign approach.   No problem with being positive, I guess.   But his emphasis of his "establishment" approach to foreign policy is only marginally better than Rubio's full-frontal neo-conservatism.    And his attacks on Cruz as being anti-defense because of a hint of applying fiscal conservatism to defense (something Kasich used to do,) turns me off.

Trump.  You must be kidding.

There is no doubt, I will put a good bit of effort fighting Trump if he is the Republican nominee regardless of who opposes him.

OK.  He is not the least bit neoconservative on foreign policy.  Good.

But what is he?   Invade and take their oil?    Kill their families?   Torture works?   It is like the return of Genghis  Khan.   Normal for the pre-modern era.   And, of course, that was what was "special" about the Axis powers in World War II.   A return to the "ethics" of international relations from an earlier era.   The winners exploit the losers and are proud of it.   Open and uncompromising evil--Donald Trump.

So, Rand Paul it stays.

Sunday, February 14, 2016

Negative Interest Rate Naysayers

Maybe I will turn into a Marxist.

Just kidding.

Still, when I read Bill Gross attacking negative interest rates, it makes me wonder.

I am a free market economist, and as far as I am concerned, the interest rate is a price.   The correct interest rate is the one that equates quantity supplied and quantity demanded.   If the supply of apples is so great compared to the demand that market clearing requires that people be paid to haul them away, then that is the least bad option.  

With interest rates, however, the relevant coordination is saving and investment.   Saving is that part of income not spent on consumer goods and services.   And investment is spending on capital goods.   If the interest rate that results in saving and investment matching up is less than zero, then that is the "right" interest rate.

Now, I certainly would agree that if there are government policies that discourage investment, then repealing them is a good idea.   That should raise investment demand and so raise the interest rate that coordinates saving and investment.   But I don't see how using monetary policy to keep nominal interest rates high, even above zero, is ever helpful.

And make no mistake--the Fed's policy of paying interest to banks for holding reserves is a policy aimed at keeping nominal interest rates up.

Situations where some real interest rates need to be less than zero for some period of time seem entirely plausible to me.    Since I don't see persistent inflation as desirable, that means that some nominal interest rates should sometimes be less than zero.   Situations where all real interest rates should be persistently negative seem pretty implausible to me.  In fact, I think excessive focus on a steady state, or worse, for those of the "Austrian" bent, thinking about the evenly-rotating economy, misses the point as to why negative nominal interest rates are sometimes coordinating.

It is the short and safe ones that should sometimes be negative.   It is pretty unlikely that the long and risky ones (or the expected rate of return on the typical real capital investment) should be negative.

Why Marxist?

Because negative interest rates mean that the wealthy can earn no income from merely holding wealth--postponing consumption--when this occurs.    And I wonder if the complaints we hear from people like Bill Gross are not gripes about the need to make risky commitments to earn capital income.    The "capitalists" are promoting their "class" interest in creating an economy where they can earn a riskless real rate of return.

But really, (as usual) I blame the Fed.   And, of course, their new Keynesian enablers.   The Fed likes to manipulate interest rates, so new Keynesian macro is about manipulating interest rates.   They are seeking to keep inflation and unemployment low.   So new Keynesian macro is a kind of social engineering about manipulating interest rates to optimize an objective function of deviations of inflation from target and real output from potential.  

Bill Gross can say that negative interest rates will fail to create jobs.   Isn't that what the Fed says it is trying to do with low interest rates?  Create jobs?

What the Fed can do and should be trying to do is control total spending on output.  Nominal GDP is probably the least bad measure.   Keeping spending growing at a slow, steady rate is the least bad goal.

There is good reason to believe that a drop, or even a slowdown, of spending on output will result in the "destruction" of jobs.  Or, more exactly, a tremendous slowdown in new hires, which results in net decreases in total employment and a rapid run-up of the unemployment rate.

If that has happened, there is good reason to believe that a prompt reversal and recovery of spending will result in a rapid increase in new hires and a reduction in the unemployment rate.   There have now been three recessions that have occurred with the Fed's policy of inflation targeting, which means no reversal and catch-up.  The recoveries have been very slow and gradual.   (I believe it is the misnamed "jobless" recoveries can be blamed for both Sanders and Trump.)   Fed thinking was little different during the Great Depression.  Sure, they wanted the deflation to end, but then they wanted prices to stabilize at the new low level.   Having prices recover would be "inflation."   Stagnation for years.

Maintaining or returning to an appropriate path of spending on output should never be understood as trying to create jobs or even control inflation.    Market forces must be allowed to control employment as well as the variety of prices and wages in the economy and the levels and rates of changes of indices of consumer or other prices.

In traditional monetary orders, chiefly metallic standards, the market process that generated recoveries from recession involved negative real interest rates and reflation.   Spending on output falls off, prices fall, with deflation causing a lower price level.   As the price level falls below its long run equilibrium, it is expected to rise again.  That is, there is expected inflation-- a reflation of prices.   Even if nominal interest rates cannot fall much below zero, the expected reflation makes real interest rates negative.   Now, this might not be all interest rates.  Risky long term bonds might have positive real interest rates.   But short and safe real interest rates might well be very negative.  This is the market force that causes the economy to bounce back rapidly.

A central bank that seeks to provide paper currency or deposit accounts that are perfectly safe and "free" keeps nominal interest rates from falling as low as they would if the only alternative was gold or silver coin. Worse, if the central bank pays interest on deposits, they can create an arbitrary floor on nominal interest rates well above zero.

And, if the central bank is committed to preventing any reflation, which it can do, even under a gold standard by accumulating sufficient gold reserves--then it keeps real interest rates from turning negative as well.   Inflation targeting under the sort of regime we have today is a commitment to prevent reflation.

I am aware that there is a market process that adjusts to a permanent increase in the equilibrium relative price of gold.   The level of prices and wages are permanently lower.   With an outside money like gold, it can even result in a permanent increase in the interest rate that coordinates saving and investment by a permanent decrease in saving supply.   Wealth held in the form of gold is worth more, and so there is less reason for saving.  

At one time, that was the key to my understanding of the market forces that generated recovery from recession.  (I haven't favored the deflationary wringer as an actual policy for several decades now.)  It is not clear that this market process works when there is no gold or silver base money and there is inflation targeting.   In my view, there is no real outside money.  It is all inside money--some mixture of government and private debt.

Today, I definitely take the view that negative nominal interest rates are better than allowing deflation and then reflation to generate the appropriate changes in real interest rates.    Sure, keeping expected nominal GDP on target might allow for long run price stability with even the shortest and safest nominal interest rates never falling to less than zero.   But it is better that all nominal interest rates be free to adjust with supply and demand.    Having an interest rate targeting central bank keep interest rates above market clearing levels is a bad policy.   Making sure that those holding wealth can always earn a risk less rate of return is not a goal that justifies price fixing.

The "Jobs" Fallacy and Trumpanomics

According to Bryan Caplan, average people make the mistake of focusing on "jobs" as a primary good.  

Years ago, the Wall Street Journal reported on a poll where the responses of average people were contrasted with the answers of economists.   One of the questions was about the purpose of economic activity:  Is it to create good jobs or produce consumer goods and services.   While I think the correct answer (and the one most consistent with economics) is to promote human welfare, of the two options, producing consumer goods and services is the least bad.   And that is the one that economists chose.  In contrast, the general public went for creating good jobs.   

I sometimes lampoon that result by proposing the perfect economy.   Everyone can have the choice of a good job requiring manual labor--digging holes and filling them up.   Or else, they can have a great office job--moving paper from the left side of the desk to the right side and then back again.   Each job will pay $100,000 per year.   Once everyone has these good jobs, will we be in utopia?   Of course not, we will all promptly starve to death because no consumer goods and services are being produced. 

Now tell me, what is the point of having people do work?   Is it to keep them from being bored?  Is it to provide an excuse to hand out paper money to them?   Or is it to produce useful goods and services?

Anyway, consider the notion of "a job" to be nothing more than an entitlement to get some money.    That somehow there must be goods and services to buy if the money is to have value is ignored.   Or, perhaps "jobs" are entitlements for manna from heaven.

Now, assume that jobs are limited.   

If the Chinese use their sneaky, unfair trade practices to steal "American" jobs, then they have more of these jobs and Americans have less.   They are richer, and Americans are poorer.   Elect Trump, and he will use his clever bargaining techniques to win back these jobs for Americans.   The Americans, now having more of the limited quantity of jobs, will be richer and the Chinese, having fewer of the jobs, will be poorer.

With illegal immigration, the same principle holds.  Foreigners, chiefly small brown people from Mexico and Central America, come in and steal jobs from regular Americans.  These foreigners are better off and the Americans are worse off.   If the foreigners can be rounded up and deported, then they will no longer be taking American jobs.   Americans will get the jobs and so Americans will be better off.  The foreigners won't have he jobs, and so they will be worse off.

And now you should understand Trumpanomics.    Appeal to economic ignorance.

In reality, jobs are about producing goods and services.   There is not a limited number of jobs available.   When the Chinese produce goods and services, that does not prevent Americans from producing goods and services.   When people come to the U.S. from Mexico and Central America, they produce goods and services.   That doesn't prevent native-born Americans from producing goods and services.] too.

We can and should have as many jobs as there are people who want to work.

However, it is true that imports from China or immigration of people from Mexico or Central America might result in a redistribution of income among people in the U.S.--including native-born Americans.   For some Americans, the Chinese or immigrants will be customers for their products.   For others, businesses will need their services along with the labor of the immigrants, raising their incomes.   For some Americans, cheaper prices for imported goods or the products of immigrants will raise their real incomes.   And, sadly, for some Americans, the competition of foreign labor will result in lower incomes.   

For the economically ignorant, Trump is promising to take from foreigners and give to Americans.  In reality, what his rhetoric suggests is taking from some Americans and giving to other Americans.   Sure, it will also hurt the foreigners.   Mexicans and Central Americans will produce less and earn less in their home countries.   If China cannot sell to the U.S., what Chinese workers produce will be of less value and they will be poorer.   And, as a whole, so will Americans--even if we only count native-born Americans (and legal immigrants.)   But some native-born Americans might well get a bigger piece of a smaller pie.    But the more these sorts of policies are followed, the more likely they are to end up with about the same share of a smaller pie--that is less.  

And that is the story of countries like Argentina.   They were one of the highest income countries in the world.  And then they listened to the "strong leaders" who would help the average Argentine get his fair share instead of allowing them to be exploited by the British Imperialists.   And Argentina, step-by-step sunk into the third world.  And that is what Trump is offering to Americans.

Of course, Trump will still have his gold-plated bathroom fixtures.   There are some very rich people in Argentina even today.   But most of us will suffer.   Economic ignorance is never a good idea.