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Arrival: Xi Jinping, Davos man, by Scott Sumner

Sun, 22 Jan 2017 14:16:14 -0500

Last night I saw the sci-fi film "Arrival". (Spoiler alert.) At the beginning of the film, 12 alien spacecraft visit Earth, and there are attempts to communicate with the aliens. The film mostly takes place in Montana, where one of the ships is stationed, but there are occasional references to China, where a nationalistic general threatens to attack one of the spacecraft if they refuse to leave Chinese territory. In the end, the Chinese leader turns out to be a hero, and ushers in a new era of international cooperation and peace. It's one of those films that have the hokey message (common in sci-fi) of how from the perspective of 20,000 miles up the Earth is a single fragile planet and that nationalism is foolish. (Actually, the film is much better than I made it sound.) It felt slightly surreal seeing this film one day after the Trump inauguration, where the President struck an "America First" theme. Even more so, when I read the Financial Times this morning: China's president launched a robust defence of globalisation and free trade on Tuesday, drawing a line between himself and Donald Trump just three days before the US president-elect's inaugural address in Washington. "The problems troubling the world are not caused by globalisation," Xi Jinping said in an address at the World Economic Forum in Davos. "They are not the inevitable outcome of globalisation." The spectacle of a Chinese Communist party leader in the spiritual home of capitalism defending the liberal economic order against the dangers of protectionism from a new US president underscored the upheaval in global affairs brought about by the election of Donald Trump. "Countries should view their own interest in the broader context and refrain from pursuing their own interests at the expense of others," Mr Xi said without mentioning Mr Trump by name. "We should not retreat into the harbour whenever we encounter a storm or we will never reach the opposite shore." There was no need to mention Trump by name: "As the Chinese saying goes: People with petty shrewdness attend to trivial matters while people with great vision attend to governance of institutions," Mr Xi said. Of course real life is not like a Hollywood film, and China falls far short of Xi's lofty rhetoric, as for instance when it ignored the International Court of Justice's ruling in favor of the Philippines' sovereignty over some disputed islands. And America still has a far more open economy (and society) than China. Even so, one can't help noticing that the recent trajectories of these two countries are quite different from each other. China is gradually opening up its economy, while the US seems determined to move in the opposite direction. Mr Xi argued that China's economic growth had global benefits, with the world's second-largest economy expected to import $8tn worth of goods and services over the next five years. He added that Chinese outbound investment over the same period would reach $750bn, exceeding expected foreign direct investments of $600bn. As he was speaking, China's State Council announced it would further open the country's mining, infrastructure, services and technology sectors to foreign investment. "China will keep its doors wide open," Mr Xi said. "We hope that other countries will also keep their doors open to Chinese investors and maintain a level playing field for us." Despite recent trends, I predict that Trump's trade policies will not be successful, and that the current wave of protectionism will peter out after a few years. Still, it certainly feels like we are in a completely different world from what I grew up in. I never would have imagined a American inaugural address full of highly charged nationalistic rhetoric, followed a day later by the Chinese leader at Davos, vying with Angela Merkel for the title "leading advocate of global economic liberalization". I feel like I'm in a Twilight Zone episode. (Maybe I am.) (1 COMMENTS)[...]



Ominous Inaugural Addresses, by David Henderson

Sat, 21 Jan 2017 15:28:44 -0500

WASHINGTON--President Donald Trump delivered what historians and speechwriters said was one of the most ominous inaugural addresses ever, reinforcing familiar campaign themes of American decline while positioning himself as the protector of the country's "forgotten men and women." In a speech that his predecessors had famously used to inspire Americans to place country before self and urged them to fear only fear itself, Mr. Trump on Friday described the nation as a landscape of "rusted-out factories scattered like tombstones" and inner cities infested with crime, gangs and drugs. "The American carnage stops right here and stops right now," Mr. Trump said, using a noun never before uttered in such a speech. These are the opening three paragraphs of Michael C. Bender, "Trump Strikes a Nationalist Tone," Wall Street Journal, Saturday/Sunday, January 21-22, 2017. It's hard to evaluate these historians' and speechwriters' claims without seeing their case for their claims. And it's also hard to evaluate their claims without reading, and thinking about, every previous inaugural address, something that I'm unwilling to take the time to do. I see how it was ominous in some ways. The most ominous part I found in it was this: We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength. It shows what I've been saying for some time now: Donald Trump does not understand gains from trade. Countries don't "ravage" us by making products that we voluntarily buy. Not to understand that is like not understanding the difference between consensual sex and rape. The sentence just preceding this part I quote is this: Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families. If Donald Trump understood trade and immigration, that would not be ominous at all. Because if he made every decision on trade and immigration "to benefit American workers and American families," he would decide to move in the direction of lower tariffs and import restrictions and fewer restrictions on immigration. Remember that "American workers and American families" includes pretty much all Americans, including those who gain from buying cheap imports (which, by the way, is all of us) and those who gain from hiring cheaper labor. The fact of gains from trade and immigration is not controversial in the economics literature. What makes this statement ominous is that Trump doesn't understand trade. As I said above, I'm not willing to read every past inaugural address. But there are two such addresses that I know best and that I found quite ominous. They are those of John F. Kennedy in 1961 and Franklin D. Roosevelt in 1933. First, the ominous part of JFK's address: Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty. This was an open-ended commitment to intervene around the world. And: And so, my fellow Americans: ask not what your country can do for you--ask what you can do for your country. Here's what Milton Friedman said about that, on page 1 of his modern classic, Capitalism and Freedom, published a year later: It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your government can do for you" implies that the government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own destiny. The organismic, "what you can do for your country" implies that government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals [...]



AS/AD: Another suggested interpretation, by Scott Sumner

Sat, 21 Jan 2017 11:27:25 -0500

Nick Rowe has a post entitled "AS/AD: A Suggested Interpretation". I'm going to offer a very different interpretation, which (interestingly) has almost identical implications. I'm not quite sure why. In my view, the "classical dichotomy" lies at the very heart of macroeconomics. It's the central organizing principle: This is the view that one set of factors determines nominal variables, and a completely different set of factors determines real variables. Both Nick and I agree that monetary factors are what determine nominal variables. If that's all one had to say about the classical dichotomy, then the AS/AD model might look something like this: Monetary factors would determine the position of the AD curve, and hence the price level, but would leave real output unchanged. BTW, this view of things makes no assumptions about how the money supply or velocity change over time. It simply looks at the economy in terms of factors that determine nominal variables (AD) and factors that determine real magnitudes (position of long run aggregate supply.) After teaching the classical dichotomy, textbooks usually explain that wages and prices are sticky, and hence that the classical dichotomy does not hold in the short run. That's the overlap in the Venn Diagram above. But there's no follow up; the textbooks don't explain what any of that means. The chapter with MV=PY and the classical dichotomy and money neutrality just sort of drifts off into nowhere, like a Chinese river than ends up in the Taklamakan desert. Instead, about 5 chapters later the textbook will start discussing a mysterious AS/AD model, which seems sort of like a S&D model, but is actually completely unrelated to supply and demand. Instead, the AS/AD model is finally explaining to students what we meant 5 chapters earlier when we talked about the classical dichotomy and money neutrality and sticky prices and MV=PY, but of course no student would see the connection---and why should they? There's a slightly better chance that students would understand what's actually going on here if you called the AD curve the "nominal spending" (NS) curve, or even the MV line. Movements in the line (caused by M or V, it makes no difference) would be called "nominal shocks" not demand shocks. They have nothing to do with "demand" as the concept is taught in microeconomics, but the unfortunate terminology explains why so many people (wrongly) think that "if consumers sit on their wallets then aggregate demand will decline". In fact, sitting on your wallet means saving, and saving equals investment, and attempts to save will reduce interest rates which might reduce velocity, which could reduce AD, except it won't because the central bank targets inflation . . . or something like that. Then the Short Run Aggregate Supply curve would be introduced. Students would be told that the purpose of the SRAS curve is to show how (because of sticky wages) nominal shocks are partitioned into a change in both output and prices, in the short run. (Long run money neutrality is still assumed.) I don't have quite as strong an objection to calling the SRAS curve a "supply curve" as I prefer the sticky wage version of AS/AD, which is the version where the term 'supply' fits best. But as a favor to those that don't like the sticky wage version, it might be better to give it a different name, such as the "real output" (RO) line. If you believe in sticky prices, or money illusion, or misperceptions, then it's not really a supply curve. Thus the AS/AD model is simply a way of showing how nominal shocks have real effects in the short run, but the classical dichotomy holds in the long run. (David Glasner would quibble about the last point, so perhaps we could say monetary neutrality "almost" holds true in the long run.) Even better would be if you introduced AS/AD immediately after discussing why the classical dichotomy holds in the short run but not the long run. All in one chapter. You dispense with the "three reasons t[...]



Trumpism in China, by Scott Sumner

Fri, 20 Jan 2017 17:36:17 -0500

Trump's ideas are increasingly popular around the world. Here's an example from Shanghai, China, discussing China's version of Uber:

Didi Chuxing, China's dominant car-sharing company, is gutting its fleet of drivers in Shanghai to comply with the city's new regulations restricting car-sharing platforms to the use of local drivers and locally-registered cars.

The removal of drivers and cars from outside the city is Didi's first major capitulation to regulators after enjoying years of laissez-faire treatment in China.

Less than 3 per cent of Didi's 410,000 drivers in Shanghai have a local hukou (household registration) that would allow them to continue picking up passengers via the platform, according to the company.

Starting from Saturday, drivers using cars without a Shanghai licence plate will begin being removed from the Didi platform, according to three drivers who received a text message from the company notifying them of the regulatory demands.


This is actually a much bigger deal than banning Uber in America, as the urban Chinese are much more reliant on delivery services:

After the rules of "local cars, local drivers" came into effect in Shanghai last month, Didi initially allowed migrant drivers with out-of-town licence plates to continue using the platform. Many risked fines of up to Rmb50,000 ($7,300) -- as much as their annual earnings -- to do so.

Migrants from rural China usually drive their own cars registered outside Shanghai. They make up a majority of the urban workforce for car-sharing platforms as well as the delivery services that support the country's booming e-commerce sector.

Now China's top cities are cracking down on migrant drivers in order to protect local taxi companies and restrict urban population growth.


The goal is to keep people from the countryside out of the biggest cities. Unfortunately, city residents won't do this work:

Mr Ren, a manager at a company that rents out Beijing licence plates who wished to remain anonymous because plate rentals are a "grey area", said that about 20 per cent of his business comes from Didi drivers. Once the new regulations take effect, he estimates that number will drop to zero.

"No local resident would rent a plate to be a Didi driver. It is a tough job, very tiring, and Beijing residents [with Beijing hukou] have much more better choices," he said.


Similarly, if we deport illegals from America, then Americans would still not be willing to pick fruits and vegetables in the hot sun. Instead, the farmers would stop producing, and we'd buy our fruits and vegetables from Mexico.

(11 COMMENTS)



The Most I'll Admit, by Bryan Caplan

Thu, 19 Jan 2017 17:21:18 -0500

Since I think that most news is overblown fluff, I have little sympathy for the endless pieces about "What we've learned about the world in 2016."  Against the background of all of human history, 2016 taught us next to nothing.  If you just discovered that horrible people often gain vast political power with widespread popular support, you're in dire need of remedial history.  If you've just discovered that politicians' personalities matter at least as much as their policy views, you're in dire need of remedial political science.  If you've just discovered that demagogic appeals to national identity work, you're in dire need of remedial psychology.  I am only a messenger.

Still, if you compelled me to articulate what I learned in 2016, here is the most I'll admit.

1. American voters are at the moment even more irrational than I thought they were in 2015.

2. Republicans are at the moment even more nationalist than I thought they were in 2015.

3. Democrats are at the moment even more socialist than I thought they were in 2015.

4. My ability to discern human nobility is markedly worse than I thought in 2015.  I've probably always been this bad, but 2016 helped me see my limitations clearly.

5. While I'm confident we'll muddle through, my odds of a major disaster (nuclear war or something comparable) have risen from 1% to 2% for 2017-2021 (cumulative, not annual).

Since tomorrow is a major news day when people are even less interested in serious thinking than usual, I'll delay my next post until Monday.

(21 COMMENTS)



China trade has been a boon to the US, China, and the world., by Scott Sumner

Wed, 18 Jan 2017 16:18:27 -0500

Here's Ryan Avent: ECONOMISTS are realising that they have got some things about trade wrong in the past. Just because trade can make everyone better off, doesn't mean it will, for instance (at least without some help from politicians). That new research, and this year's political ructions, are generating some reflection on these issues among economists is a good thing. But it is important to maintain one's perspective. Tim Duy has not done that, I think, in this stemwinder of a post on the effects of American trade policy. He quotes Noah Smith, who says: [I]n the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China's accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages. But this sacrifice on the part of 90% of the American populace enabled China to lift its enormous population out of abject poverty and become a middle-income country. And then writes: Was this "fair" trade? I think not. Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough. To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers on the theory that a.) the marginal global benefit from the job gain to a Chinese worker exceeded the marginal global cost from a lost US manufacturing job, b.) the U.S. was shifting toward a service sector economy anyway and needed to reposition its workforce accordingly and c.) the transition costs of shifting workers across sectors in the U.S. were minimal. Before closing: I don't know how to fix this either. But I don't absolve the policy community from their role in this disaster. I think you can easily tell a story that this was one big policy experiment gone terribly wrong. I think Mr Duy is getting the story wrong in a few important ways.I'm not too happy with the way Ryan frames the issue. The first sentence seems to imply that economists didn't understand the second sentence of his post. But virtually every EC101 textbook published in the past 50 years tells students that trade benefits the US overall, but that specific groups in import-competing industries are hurt by trade. That's not a new insight. Otherwise I think Avent's post is excellent, and well worth reading. My only other quibble is that I think the Smith/Duy posts are much weaker than even Ryan suggests, for reasons I'll discuss below: 1. Much of the recent discussion, including posts by Noah Smith, are based on a misinterpretation of research by Autor, Card and Hanson, which I discussed in multiple posts. Autor, et al, provide cross-sectional evidence that areas of the US that were most affected by competition from China did relatively poorly. Many people (including, at times, the authors) misinterpreted that finding as suggesting that the overall impact on the US was negative. But you cannot draw macroeconomic conclusions from a cross-sectional study. They showed that areas most impacted by China trade did relatively poorly (a finding I accept) but their study told us nothing about the macroeconomic impact. It would be like trying to draw macro conclusions about fiscal multipliers by looking at state level multiplier effects. Monetary offset anyone? 2. At times, Autor seems to suggest that China trade might have hurt the US by boosting our trade deficit. First, it's not clear that China trade does boost our trade deficit (which is based on saving and investment flows), but let's suppose it did. What then? Here it might be worth comparing the US to the Eurozone, which has a massive current account surplus, far larger than China's surplus. I did so in this post, and found that Europe has experienced almost exactly the same[...]



The Great Californian Bag Surplus, by Bryan Caplan

Wed, 18 Jan 2017 13:41:45 -0500

I just got back from a long vacation in my home state of California.  The bad news about California is that its people and government have unusually severe economic illiteracy.  The good news is that their severe economic illiteracy provides enough illuminating examples to fill a textbook.  This trip, my favorite case in point has been California's law requiring stores to charge at least ten cents per bag.  Economically speaking, what is this law?  Most non-economists call it a "tax on bags," but it's totally not.  A seller is legally allowed to absorb a tax if he is so inclined.  If the government imposes a  $1 tax on a $10 product, for example, a seller is legally free to cut the list price to $9 so the price with tax stays at $10.  But California merchants are not allowed to charge customers less than $.10 a bag.If the law isn't a tax, what is it?  A price control.  What kind of price control?  A minimum price, also known as a price floor.  And since bags used to be free, this is clearly a binding floor.The primary effect of a binding price floor is to create a surplus.  At a price of $.10 per bag, sellers want to sell a lot more bags than customers want to buy.  This may sound strange to California residents: "It's really hard to get bags now.  What do you means there's a 'surplus'?"  But that only shows they don't understand the textbook concept.  A surplus doesn't mean abundance; it means abundance from the seller's point-of-view, combined with scarcity from the buyer's point-of-view.  In fact, textbook econ implies that the bigger the surplus, the less human beings consume.But binding price floors also have a secondary effect: they raise quality.  If merchants can't make their bags more attractive to consumers by cutting their price, the next-best strategy is to make their bags better.  This abstruse textbook prediction was uniformly fulfilled in every grocery store I saw in California.  Indeed, I've never had better bags in my life!  Every bag was sturdy, pristine, and decorated.  This bag says it all:But aren't high-quality bags a good thing?  The general answer is: not necessarily.  Quality costs more; markets let people decide for themselves whether the extra quality is worth the extra cost.  When price floors spur higher quality, however, the extra quality is normally not worth the extra cost.  How do we know?  Because before the law was passed, sellers were free to offer higher-quality, higher-cost bags, but rarely did, demonstrating that consumers place little value on extra quality.Defenders of California's law who know a smattering of economics will no doubt appeal to the negative externalities of plastic bags.  But in this case, a little knowledge is a dangerous thing.  If you're doing practical policy analysis, you can't just point to a negative externality.  You've got to do quantitative cost-benefit analysis: How much cleaner will the $.10 bag law make the planet - and much aggravation will it inflict on consumers?  I can't find any decent numbers on Google or Google Scholar, but it's pretty obvious that bags are a tiny fraction of all plastic, and plastic a tiny fraction of all potentially hazardous trash.  And it's even more obvious that bringing your own bags to shop is a pain in the neck.Even if environmental costs heavily outweigh convenience benefits, however, price floors are almost always inferior to simple taxes.  See any decent intro econ textbook: When firms can't efficiently compete on price, they inefficiently compete on everything else.  Taxes change behavior, too, but only by changing prices - leaving firms and consumers free to flexibly and creatively adapt.  And instead of burning up resources on inconvenience and overly fancy bags, taxes cha[...]



Munger on the Basic Income Guarantee, by Amy Willis

Wed, 18 Jan 2017 11:24:54 -0500

(image) In a very lively EconTalk episode this week, listener favorite Mike Munger returns to discuss his support for a basic income guarantee, or BIG. It's a pretty heated conversation, especially for BFFs Munger and Roberts...We'd like to know where you stand on the issue.

Munger advocates a BIG primarily on grounds of efficiency and transparency. But he and Roberts disagree as to what the effect on the size of government would be under a BIG regime. Nor do they see eye to eye on where the greatest DISincentive effects of a BIG would fall.

The conversation ends on a philosophical note. Munger makes a characteristically startling claim (to be fair, he makes several throughout), that "Jobs are overrated." It's an important point, and one on which Roberts seems to agree. That is, throughout recent history, we seem to have defined ourselves in reference to our jobs. Isn't that what people mean when they ask, "What do you do?" It's refreshing to imagine a future in which we respond with answers like "spending time with my children," "volunteering at the animal shelter," "building gardens," etc. How would you like to answer? And how might a BIG (or another policy alternative) help to effect such a change?

The conversation in the Comments section is as lively as the episode, and we've an Extra coming soon. You can find both, and join in the conversation, at EconTalk. We'd also be really grateful if you'd take a few minutes to complete our annual listener survey and help us make EconTalk better!

(2 COMMENTS)



The Economics of the Affordable Car Insurance Act, by David Henderson

Tue, 17 Jan 2017 16:56:40 -0500

"The Affordable Car Insurance Act (ACIA), which President-elect Donald Trump and the Republican-controlled Congress have vowed to repeal, was crafted to overcome two basic problems in the provision of car insurance in the United States. First, the costs are incredibly skewed, with just 10 percent of drivers accounting for almost two thirds of the nation's spending on cars that have been in accidents."

This is from Dean Baker, "The Economics of the Affordable Car Insurance Act," January 17, 2017.

Actually, it's not from Dean's article. I've changed a few words.

But before you go and find his article, think through whether this 10 percent of drivers accounting for 2/3 of spending is a problem with car insurance. Once you've thought through that, go and read Dean's article.

HT2 Mark Thoma.

(20 COMMENTS)



My End-of-the-World Bet with Eliezer Yudkowsky, by Bryan Caplan

Tue, 17 Jan 2017 14:45:33 -0500

Famed futurist Eliezer Yudkowsky fears the imminent end of the world at the hands of Unfriendly Artificial Intelligence.  I find this worry fanciful.  Many people in Eliezer's position would just dismiss my head-in-the-sandedness, but he's also genuinely impressed with my perfect public betting record.  To bridge the gap and advance our knowledge, we've agreed to the following bet, written in the first person by Eliezier.  Since I've just Paypaled him the money, the bet is now officially on. Short bet: - Bryan Caplan pays Eliezer $100 now, in exchange for $200 CPI-adjusted from Eliezer if the world has not been ended by nonaligned AI before 12:00am GMT on January 1st, 2030. Details: - $100 USD is due to Eliezer Yudkowsky before February 1st, 2017 for the bet to become effective. - In the event the CPI is retired or modified or it's gone totally bogus under the Trump administration, we'll use a mutually agreeable inflation index or toss it to a mutually agreeable third party; the general notion is that you should be paid back twice what you bet now without anything making that amount ludicrously small or large. - If there are still biological humans running around on the surface of the Earth, it will not have been said to be ended. - Any circumstance under which the vast bulk of humanity's cosmic resource endowment is being diverted to events of little humane value due to AGI not under human control, and in which there are no longer biological humans running around on the surface of the Earth, shall be considered to count as the world being ended by nonaligned AGI. - If there is any ambiguity over whether the world has been ended by nonaligned AGI, considerations relating to the disposition of the bulk of humanity's potential astronomical resource endowment shall dominate a mutually agreeable third-party judgment, since the cosmic endowment is what I actually care about and its diversion is what I am attempting to avert using your bet-winning skills.  Regardless, if there are still non-uploaded humans running around the Earth's surface, you shall be said to have unambiguously won the bet (I think this is what you predict and care about). - You win the bet if the world has been ended under AGI under specific human control by some human who specifically wanted to end it in a specific way and successfully did so.  You do not win if somebody who thought it was a great idea just built an AGI and turned it loose (this will not be deemed 'aligned', and would not surprise me). - If it sure looks like we're all still running around on the surface of the Earth and nothing AGI-ish is definitely known to have happened, the world shall be deemed non-ended for bet settlement purposes, irrespective of simulation arguments or the possibility of an AGI deceiving us in this regard. - The bet is payable to whomsoever has the most credible claim to being your heirs and assigns in the event that anything unfortunate should happen to you.  Whomsoever has primary claim to being my own heir shall inherit this responsibility from me if they have inherited more than $200 of value from me. - Your announcement of the bet shall mention that Eliezer strongly prefers that the world not be destroyed and is trying to exploit Bryan's amazing bet-winning abilities to this end.  Aside from that, these details do not need to be publicly recounted in any particular regard, and just form part of the semiformal understanding between us (they may of course be recounted any time either of us wishes).Notice: The bet is structured so that Eliezer still gets a marginal benefit ($100 now) even if he's right about the end of the world.  I, similarly, get a somewhat larger marginal benefit ($200 inflation-adjusted in 2030) if he's wrong.  In my mind, this is primar[...]