Archive for April 2016


Masterpieces at bargain prices

I’ve always been interested in the visual arts, especially painting, film and architecture.  For some reason, painting has much more prestige than the other two.  Many film masterpieces from the first half of the 20th century are lost forever, as no one spent the small amount of money necessary to preserve them.  Buildings such as the Imperial Hotel in Tokyo were torn down and replaced, despite being widely recognized as masterpieces.

A relatively high income professional (doctor, business executive, etc.) cannot afford to buy even a mediocre painting by a famous painter from the 1890s, but can easily afford to buy and live in an architectural masterpiece.  I recently ran across a good example, as Frank Lloyd Wright’s excellent Winslow House from 1893 recently saw a price cut to $1.375 million, a price that would not bat an eye in my home town of Newton, MA, even if it were an ugly colonial.  And let’s not even talk about LA.
Screen Shot 2016-04-24 at 5.49.54 PMAt first I thought the low price might reflect a run down interior, which was out of step with the times.  Wright’s buildings often deteriorated over time, due to poor quality construction.  But a slideshow over at Huffington Post shows a beautiful interior, with a nice updated kitchen.  (It’s worth checking out).

Part of the low price reflects the fact that Chicago suburbs are cheaper than Boston suburbs.  And yet, there are obviously lots of affluent people in the Chicago area, and many fans of Wright’s architecture.  The house has been on the market for years, with no takers.  Why don’t I buy it?  I could never convince my wife to move to Chicago.  But if you already live in Chicago, that’s not a valid excuse.

PS.  I wrote this a few days ago, but it looks like a sale is now pending.  The house is over 5000 sq. feet.Screen Shot 2016-04-24 at 6.10.11 PM

Does debt slow growth?

Maybe, but I’m not too clear on exactly how.  Here’s the Financial Times:

Others believe the People’s Bank of China will retain its ability to ward off crisis. By flooding the banking system with cash, the PBoC can ensure that banks remain liquid, even if non-performing loans rise sharply. The greater risk from excess debt, they argue, is the Japan scenario: a “lost decade” of slow growth and deflation.

Michael Pettis, professor at Peking University’s Guanghua School of Management, says rising debt inflicts “financial distress costs” on borrowers, which lead to reduced growth long before actual default.

“It is wrong to assume that ‘too much debt’ is bad only if it causes a crisis, and this is a typical assumption made by almost every economist,” Prof Pettis wrote in a draft of an forthcoming paper shared with the Financial Times.

“The most obvious example is Japan after 1990. It had too much debt, all of which was domestic, and as a consequence its growth collapsed.”

Distress costs include increased labour churn as employees migrate to financially stronger companies; higher financing costs to compensate for increased default risk; demands for immediate payment from jittery suppliers; and loss of customers who worry a company may not survive to provide aftersales service.

Many are now concerned that China’s debt could lead to a so-called balance-sheet recession — a term coined by Richard Koo of Nomura to describe Japan’s stagnation in the 1990s and 2000s. When corporate debt reaches very high levels, he observed, conventional monetary policy loses its effectiveness because companies focus on paying down debt and refuse to borrow even at rock-bottom interest rates.

The final paragraph discusses the ineffectiveness of monetary policy.  Obviously I don’t agree with that; monetary policy is always and everywhere highly effective. So if the mechanism is supposed to be “less AD”, then I’d say debt is nothing to worry about.

The preceding paragraph discusses some possible supply-side mechanisms, but they don’t seem powerful enough to have large macroeconomic effects.  I suspect that Japan’s slow growth has been a mixture of tight money (low NGDP growth), low population growth, and low productivity growth.  Only the productivity growth could be plausibly linked to debt, and even there the connection is tenuous.

The article also has a graph putting China’s debt in perspective, total debt as a share of GDP:

Screen Shot 2016-04-24 at 9.13.03 AMNotice that China’s debt ratio is almost identical to the US.  But the FT also mentions two reasons to worry:

1.  Their debt ratio is quite high for a developing country.

2.  Their debt ratio is increasing rapidly.

I’m not too worried about the first point, as China is a very unusual developing country. But the second point does seem like a cause for concern.  Will the economy be able to shift away from high levels of debt formation, without triggering a recession?  I honestly have no idea.  My best guess is that China will have a financial crisis and recession at some point in the next 20 years, but I have no idea when.

As always, NGDPLT would make the debt crisis (if it does occur) much less severe.

PS.  Note that China bears have been concerned about debt for many years now, and so far their predictions have not proved accurate.

PPS.  Here’s the debt breakdown by sector:

Screen Shot 2016-04-24 at 9.31.08 AM

PPPS.  Over at Econlog I have a new post, explaining what would make me doubt the truth of market monetarism.

How much longer can America rely on minority voters?

[There’s a certain type of right-winger that I don’t care for.  He (it’s usually a man) views some races as superior at governing.  There’s a certain type of left-winger I don’t care for.  She seems to blame almost all the world’s problems on white people, especially white men.  Given how my past political posts have occasionally been misinterpreted, I’d should probably encourage people to read the following post as an attempt to satirize both groups.]

America is a great country, but it does have one flaw—too many white voters.  In 2000 and 2004, white voters gave us George Bush.  In 2008, whites wanted Hillary Clinton, but blacks insured that the nomination went to the less militaristic Obama. Then in the general election, white voters opted for McCain (by a near landslide margin of 12%), but minority voters saved us from electing a President that never saw a Middle Eastern war that he didn’t want the US to enter.

This time around, Hillary was the less objectionable Democrat, running against a socialist with loony views on economics. White voters like Sanders, but the more sensible African-American community saved America from socialism.  (Polls showed Sanders easily beating Trump, had he gotten the nomination).

In the general election, it’s quite possible that whites will go for Trump, perhaps the most appalling buffoon to ever run for the presidency, at least since the Civil War. And let’s not even talk about white males, the dumbest of the dumb.  I’m once again counting on sensible African-Americans to bail us out in November. Fortunately, there is good news on that front:

Gov. Terry McAuliffe today signed an order restoring the voting rights of 206,000 ex-felons, a sweeping action the governor said was aimed at rectifying Virginia’s “long and sad history” of suppressing African-American voting power.

Virginia is a swing state, so this is really good news.  And here is more good news:

Garvey, vice president of the Harvard Republican Club, is one of many conservative college students dispirited with the presidential race because of the GOP’s controversial front-runner, Donald Trump. Now faced with the prospect of a Trump nomination, Garvey and other college Republicans say they may do the unthinkable in November: Vote for Hillary Clinton.

Whites seem to have appallingly bad judgment when it comes to presidential politics.  Fortunately, we are getting a steady flow of Hispanic and Asian and African immigrants, and so the electoral strength of my “problematic” ethnic group will become diluted over time.  I hope it happens fast, as we can’t keep relying on African American voters to bail us out every single election cycle.  This madness must end.  We need a “minority majority” now!

PS.  Donald Trump’s top aides now claim that he’s a fraud, that he has just been pretending to be a buffoon:

Donald Trump’s chief lieutenants told skeptical Republican leaders Thursday that the GOP front-runner has been “projecting an image” so far in the 2016 primary season and “the part that he’s been playing is now evolving” in a way that will improve his standing among general election voters.

PPS.  Say what you will about my over-the top trashing of Trump, but even Trump’s supporters cannot deny that when I say one of his political position is insane, it’s an excellent predictor of Trump abandoning the position.  Last week Trump was committed to paying off the national debt in 8 years.  Today he’s abandoned that commitment, as he will later abandon almost all of his other commitments.

Douglas Holtz-Eakin, a former director of the Congressional Budget Office and economic policy adviser to Republican John McCain’s 2008 presidential campaign, cast doubt on the viability of Trump’s old and new positions.

“Under current law, the debt will rise by 50 percent ($14 trillion to $21 trillion) by 2024,” he said in an e-mail. “He has proposed an enormous tax cut, promised to not touch either Social Security or Medicare, and is committed to bigger defense spending. His initial promise was preposterous and would not happen. This one is dubious as well.”

The best predictor of Trump’s positions once he becomes president is to consider his political views at the time when he was a big fan of Nancy Pelosi, only disappointed by her failure to impeach Bush.  In other words, Pelosi wasn’t left wing enough for Trump. Perhaps Rush, Fox News, et al, are secret socialists.

Whom should you trust?

A few weeks back I pointed out that the Japanese yen plunged in value in response to news of negative IOR.  Much of the media and blogosphere seemed to have the opposite reaction.  A few days after the announcement, the yen appreciated strongly on news that the BOJ was backing off from further rate cuts.  The media interpreted this as evidence that negative IOR led to currency appreciation.  Who was right?  And how would we know?

In the long run, you want to rely on a worldview that allows you to make sense out of the myriad news events that are reported each day.  I believe that framework is market monetarism.  Let’s take an example, a headline from today’s FT:

Yen dives on talk of negative rates on loans

If you relied on the mainstream media, that headline would make no sense.  “Wait, weren’t we told on Twitter that Sumner was foolishly attached to the notion that negative IOR was expansionary, despite all indications to the contrary?  If so, how are we to understand this headline?”  On the other hand if you relied on market monetarism, there would be no cognitive dissonance to deal with.  It would all make perfect sense.

Do yourself a favor and start relying on MM for your worldview, it makes life much less painful.

PS.  Nick Rowe has a very good new post on some odd claims made by the Bank of Canada.  They suggested that fiscal stimulus by the new Trudeau government would have an expansionary impact.  The BOC governor suggests it will work because inflation in Canada is “low”.  But it’s not clear why that matters, as interest rates in Canada are not at the zero bound.  Just one more example of the creeping advance of old Keynesianism—something I expected to happen, but hoped would not.

HT:  Benn Steil

The American Dream lives (in Texas)

Back when I was young, America was an optimistic country that grew rapidly. Before NIMBYism got out of control, builders could build vast new housing developments, and the government would supply brand new expressways. Housing was cheap, and the workforce grew fairly briskly.

That America is mostly gone, except in Texas.  Many liberals thought Texas would have a recession when oil prices collapsed last year.  After all, back around 1986 Texas had a fairly steep recession, after a similar collapse in oil prices.  But not this time; indeed unemployment just fell to 4.4% in February, which is only slightly above the all time low of 4.0%, which occurred during the boom year of 2000.  Nor can this be attributed to people leaving the state; Texas continues to lead the US in population growth (total), and indeed growth actually picked up in the most recent 12 month period.

Of course Texas economic growth has slowed sharply due to the dramatic downturn in the fracking industry, but just look at how different the unemployment picture is compared to 1986:

Screen Shot 2016-04-13 at 11.02.35 AM

I’d love to hear some thoughts as to why.  I can think of three possible reasons:

1.  In 1986 Texas was also suffering from the hangover effects of the S&L fiasco, but this time its banking system is in better shape.

2.  Oil is now a smaller share of the Texas economy (but that can’t explain the entire difference).

3.  The explanation I like most is that in 1986 the rest of the country was still doing sort of OK, so the the attraction of moving to Texas was less obvious than today.  Now the rest of the US is stuck in The Great Stagnation, which makes Texas look good by comparison:

Liberal Governors, tired of looking bad next to Texas, may have hoped to catch a break as the full impact of cheap oil hit the Lone Star State in 2015. And Texas is creating jobs more slowly this year””1.1% growth through May versus 3.6% in the same period last year. Lower-paying positions in hospitality have substituted for higher-paying energy jobs.

But the overall economic resilience is a far cry from the Texas recessions that followed previous oil busts. Unemployment in the state, 4.3% in May [2015], was still well below the national average of 5.5% that month.

Some credit goes to the foresight of energy companies that made themselves less vulnerable with better balance sheets. In a report specifically focused on the energy capital of Houston, the Dallas Fed notes recent improvement in job growth and says that “refining, petrochemicals and service industries are managing to offset oil-producer woes.” Statewide, education and health services employment has also been strong.

Meanwhile in Austin, which has little exposure to the energy industry, business other than government is booming. May job growth surged at an annual rate of 6.6%, including “a significant increase in high-paying scientific and technical services jobs.” Texas is now America’s top technology exporter, surpassing long-time leader California.

Notice that the boom in Austin is helping to offset a slowdown in places like Houston, so that overall job growth continues to be positive.  Back in 1986, Austin was not yet an important tech center.

Here, as in so many other recent cases, the pragmatic progressivism of Matt Yglesias (a Texas bull) and proved far more accurate that the ideological progressivism of Paul Krugman (a Texas bear).  Progressives might not like the small government model of Texas, but wishful thinking won’t make the Texas miracle go away.