The Great Divorce

You might be interested in this post at Evergreen Gavekal on the tremendous gap between the financial markets and the economic data. Here’s a snippet:

It’s no doubt been one heck of a run this year for investment portfolios, and even more remarkable is the winning streak paired with deteriorating economic data. A logical question from here is what will give way first? I think going back to why this happened is critical to understanding the larger picture. For the Fed and its pause, they basically conceded that the economy cannot handle higher rates. This is rather dubious with short-term rates at a piddly 2.5%. We’d argue that past shifts like this are reminiscent of 2000 and 2007, and tend to telegraph an upcoming recession. For now, markets continue to embrace a looser Fed. But rates are still up over the last few years and the Fed will continue to pare back its balance sheet, which still means tighter conditions. As for China, the cyclical industries most tied to trade have recouped their losses from late 2018. This situation seems like a classic case of “buy the rumor, sell the news”, and the market is certainly not pricing in any risk of a deal failing.

The post is chockful of interesting charts and graphs.


Who’s Qualified for the Federal Reserve?

I’m seeing quite a bit of kvetching about President Trump’s appointment of Stephen Moore to be a governor of the Federal Reserve. I carry no water for Mr. Moore. I find his writing a bit obnoxious and disagree with him as often as not.

I became a little curious when I read charges of his being unqualified. What do you think the qualifications for being a member of the Federal Reserve Board of Governors are? Basically, there are none.

I read the biographies of as many present and former governors going back right to the beginnings of the Fed as I could lay my hands on. I found three career paths academic, legal, and party apparatchik, sometimes all three. I found very few with practical banking experience other than having been a Rolodex hire. That’s pretty odd for an institution that’s tasked with regulating the banking industry. It’s almost as though it were constructed to facilitate regulatory capture.

Given our lousy experience with public-private hybrids like the Fed or FNMA and their enormous power I would think there would be more of a hue and cry for reform or at least some basic qualifications for the job. A PhD in economics qualifies you to teach at the college level. Full stop.

Or maybe we need to rethink what the function of the Federal Reserve should be.

In conclusion I have no idea whether Stephen Moore is qualified for the Federal Reserve or not or even how you’d make the determination.


I See the Future

Inspired by Kara Swisher’s prediction in the New York Times that owning a car will soon be as quaint (her words) as owning a horse, I will make some predictions of my own.

  • I will not live to see high-speed rail travel from New York to Los Angeles.
  • More automobiles will be sold in the United States in 2020 than in 2018 and more will be sold in 2025 than in 2020.
  • Most of those automobiles will have internal combustion engines.
  • Transcontinental and intercontinental air travel may decline slightly.
  • Air travel will remain the primary means of transcontinental and intercontinental travel for the foreseeable future.
  • In 20 years most people will still be commuting to work in automobiles that they own or carpool with someone they know. That’s true of 85% of people today (the rest either telecommute, take public transport, or cabs, Uber, or Lyft).

Why is it that those predicting the future see what they predict as being more imminent than it actually is? The persistence theory while imperfect is actually a better guide.


Waiting for Barr-ot

Robert Mueller has concluded his investigation and delivered his report to AG Barr. Now we’re waiting for Mr. Barr to release the report and its supporting material, as demanded by Democratic Congressional leaders, release the report with some or none of the supporting material, release a summary of the report, or release nothing. We have also been told that Mr. Mueller will bring no more indictments.

IMO the best commentary to date has been from Benjamin Wittes of Lawfare:

Attorney General William Barr now has the Mueller Report, and the world looks a heck of a lot like it did yesterday, when Barr did not have the Mueller Report. At least, it appears to. The major difference is that the mystery before us has slightly changed form. Before today, we asked what Mueller was going to do, what indictments he was going to bring, and what allegations he was going to make. Today, we ask a subtly different question: What is it that he has written? What allegations has he made? And why has he decided not to make those allegations in the form of additional cases?

We don’t, at this stage, know anything about what information the Mueller Report contains. We don’t know what form the document takes. We don’t even know how many pages comprise it. We don’t know when we will learn what Mueller has found. Speculating about these questions is not useful. A huge amount depends here on how Mueller imagines his role—and on how Barr imagines his.

and concludes

Vindication for the president will take place only when we learn that the facts contained in the report exculpate him. The end of the Mueller probe could well prove tomorrow to be merely the creation of a factual record for the next act of this drama.

Is there anything in any report that would “exculpate” President Trump? I can’t imagine what it would be. Those most vehemently opposed to Mr. Trump will never accept absence of evidence as evidence of absence. Some of those are already citing the indictments that have come down as definitive proof of the material of the claims against the president. What would convince them otherwise? I don’t know.

We don’t know a lot at this point. Here’s how I would summarize what we do know:

  • Robert Mueller has completed his investigation.
  • He did not subpoena the president or the members of his family.
  • He has delivered his report to the Attorney General.
  • The next steps are up to the AG.
  • The president did not fire Mueller or obstruct justice with respect to his investigation.
  • President Trump is surrounded by toadies, sycophants, low-lifes, and nogoodniks.

Presumably, you’re aware of my view of government and politics by now, i.e. that last bullet point is not unique to the Trump Administration.

I’m not sure whether James Joyner, following Chris Cilizza, is correct in his observation this has been “the last week of the Trump presidency as we know it”. As I have said in the past I have no insight whatever into Mr. Trump’s thought processes. I think he’s a boor and an ignoramus who speaks of what he would like to be true as though it were true. I think he’s a counter-puncher. I also think that he’s been subject to a persistent barrage of criticism of a style and tone I can only compare to that which was levied against Richard Nixon, not merely after Watergate but right from the beginning of his presidency, indeed, from before it.

In the light of that how would Trump’s presidency be changed? He would be subjected to more criticism, more investigations? Is that possible?

In the past I have said that I was content to wait for the findings of the Mueller investigation. I’m still waiting. But I may not have to wait for long.


The Case Against Renewables

Michael Shellenberger, founder of the organization Environmental Progress, and one of the driving forces behind the move to renewables over the last couple of decades, concludes his op-ed at Quillette on why and how renewables have failed to achieve their objectives with this:

I think it’s natural that those of us who became active on climate change gravitated toward renewables. They seemed like a way to harmonize human society with the natural world. Collectively, we have been suffering from an appeal-to-nature fallacy no different from the one that leads us to buy products at the supermarket labeled “all natural.” But it’s high time that those of us who appointed ourselves Earth’s guardians should take a second look at the science, and start questioning the impacts of our actions.

Now that we know that renewables can’t save the planet, are we really going to stand by and let them destroy it?

His article consists of a bill of particulars on the shortcomings of renewables. I’ll add one: in moving towards compressed wood pellets for home heating the Germans have actually increased carbon emissions. Compressed wood pellets are only zero net emissions if you don’t cut down old growth trees to produce them but that’s exactly what has happened. Oops.

His basic message is, if you want to save the planet, go nuke.


John McCain’s “American Greatness”

Donald Trump is a boor. I doubt there is a single American who doesn’t realize that. He should honor the ancient dictum, de mortuis nil nisi bonum—speak nothing but good of the dead.

I respected John McCain but I disapproved of his version of “American Greatness” deeply. It meant war without end. When he stood before a microphone chanting “Bomb, bomb, bomb, bomb, bomb Iran” he was jesting in earnest.

It is possible to disagree with someone and still respect them. President Trump should cultivate that skill. Meanwhile let’s not forget just how wrong Sen. McCain’s views were. His supporters should stop conjoining the man with those views.


Second Amendment Libertarians

I also wanted to make a brief remark about the over-the-top praise of New Zealand’s reaction to the murders of Muslims last week. In the United States a considerable number of the people are First Amendment libertarians. That’s why we don’t have an official secrets act and why libel requires actual malice. First Amendment libertarians take the First Amendment very seriously.

We also have Second Amendment libertarians. They are just as genuine, authentic, serious, and legitimate as First Amendment libertarians. They are not just “gun nuts”. Dismiss them at your peril, political and otherwise.


Do the Golan Heights Belong to Israel?

I don’t have much to say about President Trump’s blurted assertion yesterday that the Golan Heights belonged to Israel. It is Syrian sovereign territory as asserted by multiple UN Security Council resolutions. We are obligated by treaty to honor these resolutions. I think we should abrogate any treaty we don’t intend to honor.

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Let’s Call the Whole Thing Off

Things have come to a pretty pass
Our romance is growing flat,
For you like this and the other
While I go for this and that,

Goodness knows what the end will be
Oh I don’t know where I’m at
It looks as if we two will never be one
Something must be done:

You say either and I say either,
You say neither and I say neither
Either, either Neither, neither
Let’s call the whole thing off.

You like potato and I like potahto
You like tomato and I like tomahto
Potato, potahto, Tomato, tomahto.
Let’s call the whole thing off

The editors of The Economist think some adjustments need to be made to maintain the health of NATO:

NATO’s success holds lessons for the transatlantic relationship as a whole. To flourish in the future, it must not just survive Mr Trump, but change every bit as boldly as it has in the past.

First, this means building on its strengths, not undermining them: removing trade barriers rather than lapsing into tariff wars, for example. Mr Trump is right to badger his allies to live up to their defence-spending promises. But he is quite wrong to think of charging them cost-plus-50% for hosting American bases, as he is said to be contemplating. Such matters should not be treated like a “New York real-estate deal”, a former vice-president, Dick Cheney, told the current one, Mike Pence, last week. Those European bases help America project power across the world (see article).

Second, realism should replace nostalgia. Europeans should not fool themselves that America’s next president will simply turn the clock back. Instead, to make themselves useful to America, Europeans need to become less dependent on it. For instance, in defence, they have taken only baby steps towards plugging big gaps in their capabilities and avoiding wasteful duplication. Their efforts should extend beyond the eu, whose members after Brexit will account for only 20% of NATO countries’ defence spending.

A more capable Europe would help with the third and biggest change: adjusting to China’s rise. America’s focus will increasingly be on the rival superpower. Already China’s influence is making itself felt on the alliance, from the nuclear balance to the security implications of, say, Germany buying 5g kit from Huawei or Italy getting involved in the infrastructure projects of the Belt and Road Initiative. Yet the allies have barely begun to think seriously about all this. A new paper from the European Commission that sees China as a “systemic rival” is at least a start.

That is fanciful to the point of being delusional. Some changes need to be made but most of them will need to be made by the countries of Europe.

First, NATO is a military alliance—a mutual defense pact. At present the defense of the “new” NATO countries—those that have become members since the original 12 members—is completely dependent on U. S. deterrence. That must end. That means that the European countries need to be able to defend Estonia, Latvia, and so on, soon to include Macedonia, from a land attack until the United States could arrive in force. We’re not going to maintain a million more soldiers in Europe. I would assume that would require the European countries to hold out for at least a week and probably more like a month. I feel confident in saying that would require them to spend more than 1.3% of GDP on defense. How much would it take? It might require them to spend a lot more than 2% until their militaries are up to the level that decades of inattention have produced.

Second, U. S. needs are different from European needs. As just two examples we’re not an ethnic country and we have a 1,500 mile land border with a country a quarter of ours. Our population is extremely diverse. Not only do we have more people of European descent than most European countries, we have more people of sub-Saharan African descent than most African countries do, and more people of Hispanic descent than most Latin American countries do. Neither we nor they should assess our performance by European standards.

Third, the biggest threat to NATO continued existence isn’t the U. S. It isn’t even Russia or China. It’s Germany. Example: the U. S. didn’t cause a flood of migrants from Turkey into Europe. Germany did.


What’s Wrong With a High Deficit?

Martin Feldstein is on the warpath about the federal deficit in an op-ed in the Wall Street Journal:

To avoid economic distress, the government either has to impose higher taxes or reduce future spending. Since raising taxes weakens incentives and further slows economic growth—worsening the debt-to-GDP ratio—the better approach is to slow government spending growth. Defense spending and nondefense discretionary outlays can’t be reduced below the unprecedented and dangerously low shares of GDP that the CBO projects.

That the federal government deficit (the difference between income and spending) has increased should not come as a surprise to anyone. It’s been in all the papers. Sadly, Dr. Feldstein never explains why a big deficit is a problem. This is the closest he comes:

The higher long-run debt-to-GDP ratio would crowd out business investment and substantially reduce the economy’s growth rate.

but that’s not true. Since the federal government is a monetary sovereign federal deficit spending is not in competition with business for capital. The government doesn’t borrow from banks. It just issues itself more money. Paying interest (largely to itself) is a policy rather than requirement.

You know what is in competition with businesses for money? Paying interest on reserves, a policy the Federal Reserve began in 2008 in reaction to the financial crisis and which I can only characterize as evil. It means that banks can make money without bearing any risk. It discourages lending (that used to be the business that banks were in). What should have happened is that the federal government should have stepped in and closed insolvent banks. That is the way that capitalism is supposed to work. What we have is the socialization of losses and the privatization of profits.

The present level of the deficit already exceeds the growth in the economy, not a sustainable condition, so we do need to restrain the deficit.

There are also critical flaws in Dr. Feldstein’s proposed solution—raising the Social Security full retirement age to 70. The first is that most Americans aren’t college professors or bankers. People who perform physical work which includes not just factory or construction workers, miners, and truck drivers but the fastest-growing labor categories like the hospitality industry and low-wage hospital work just get tired. Their bodies wear out. And employers are aware of it. It’s increasingly difficult to be allowed to work past 60 let alone to 70.

The second is that, given the differences in life expectancy and income by race, it’s a racist policy.

The third is most damning. The Social Security actuaries have already told us that would not be enough.

The real increase in entitlement spending to which Dr. Feldstein must turn his attention is health care spending.