Modeling the Impact of Vote Share

At RealClearPolitics Sean Trende and David Byler present a handy tool for looking at the effects that voter turnout and what percentage of different demographic segments are carried by each party will have on the outcome of the 2016 elections:

So we’ve developed a tool, embedded below, that allows you to simulate the outcome of the 2016 elections, both in terms of the popular vote and the Electoral College. You can read the complete description of our methodology here. In the interest of space and readability, we’ll just give a general overview in this article.

We’d like first, however, to emphasize two things about the tool that are important to keep in mind if it is to be used appropriately. First, there is some estimation involved here, both within the datasets upon which we draw and in the way in which we adjust for differences in datasets.

Because of this, we envision this as more of a heuristic device than a literal tool. In other words, if you put in an outcome and the Democrats win the Electoral College, but that win is dependent upon a state where the Democrat wins by 0.1 percent, you shouldn’t become convinced that Democrats would actually win with the outcome that you input.

Second – and this gets into our explanation of how the model works – we assume “uniform swing” across states. In other words, if the non-Hispanic white share of the electorate increases in the model by a point, it does so in every state. In reality, however, these swings will likely not be uniform. While we have some ideas about where the white vote might improve more for Republicans than the national margin would indicate (Iowa, for example), as well as for Democrats (perhaps Arkansas, if Hillary Clinton is the nominee), there’s simply no way to incorporate that objectively into a model.

In any event, the key to operating the tool is the dashboard on top. It defaults to 2012 levels of turnout and support, by racial/ethnic group. Note that we’ve combined “Asian” and “Other,” which was necessitated by the different datasets we’ve used. You’ll also notice that the Democratic lead using the default numbers is about six-tenths of a point larger than the actual result was in 2012; this is demographic change at work.

Mark my words: this is going to be an election that hinges on turnout. Whoever the candidates, the party with the more highly motivated voters will win.


Until the Bitter End

The Washington Examiner muses over how long Hillary Clinton will stay in the presidential race before bowing out?

Why is Clinton struggling? Because she broke the rules and then repeatedly offered false explanations and excuses. Is she electable? It should be easy to give a resounding “no” in answer to that question, but Democratic primary voters may not come to that conclusion in time.

Even so, there is also the possibility, as Vice President Joe Biden smells blood in the water and considers a presidential run, that Clinton herself will prefer a semi-dignified early exit from the race rather than a battle to the end and ignominious defeat.

I demur. Sec. Clinton’s lead for the nomination dwarfs her lead in 2007. Even if Bernie Sanders carries both the Iowa Caucus and the first in the nation New Hampshire primaries, there’s always Super Tuesday and beyond.

It is in her financial interest to remain in. A prospective president rakes in a lot more dough than a former Secretary of State. The moment that Sec. Clinton pulls out of the race if she ever does her speaking fees will plummet.

Sec. Clinton will be in until the very end come what may. There is no next year for her.


Incentives and the Cities

Over at City Journal Steve Malanga makes a point that should be obvious:

The ultimate resource, economist Julian Simon once declared, is human innovation. Many states and cities have taken him at his word, increasingly trying to lure those citizens most likely to beget innovation—especially the highly educated, knowledge-based workers dubbed the “creative class” by urbanist Richard Florida. But just how to bring those workers and the economic activity they produce to a state or city has been a subject of dispute. Florida himself suggests that the creative class is largely drawn by a certain urban lifestyle, an “indigenous street-level culture—a teeming blend of cafes, sidewalk musicians, and small galleries and bistros.” Creative-class advocates argue that taxes matter little to this group.

A new study suggests they’re wrong, and that state tax rates do affect the migration of highly paid workers—in this case, coveted “star scientists.” The study, by University of California-Berkeley economist Enrico Moretti and Daniel Wilson of the Federal Reserve Bank of San Francisco, and published by the National Bureau of Economic Research, estimated that a nearly 1 percentage point decline in New York State’s top tax rate produced a 2 percent gain in net migration of scientists—with fewer leaving a place and more willing to come there. State taxes thus have a significant influence on the “location of star scientists and possibly other skilled workers,” the authors contend.

Yes, members of the “creative class” do respond to incentives just like everyone else. However, taxes aren’t the only incentive. There are other things like climate, geography, culture, and cachet.

Why do I point this out? Chicago is not San Francisco. Not only does San Francisco have a benign climate going for it, you can go to the ocean in the morning and be in the mountains in the afternoon. As it turns out that was precisely the advertising pitch during the first California real estate boom more than a century ago.

That kind of a pitch isn’t attractive only to people who take advantage of those natural assets. There are millions of Californians who rarely go either to the beach or the mountains but they still like the idea of it.

Chicago doesn’t have a benign climate or the ocean or the mountains. While it does have some world class cultural assets many cities do, including San Francisco, Los Angeles, and San Diego. It doesn’t have the cachet of New York. The “City of Broad Shoulders” doesn’t have the attraction of the “Big Apple”.

That means that a Chicago where housing prices are as high as in other large cities and that has taxes as high as Los Angeles or New York (or higher) will find itself unable to compete.


The Crazies

Apparently, general officers are crazy 6:1:

A group of nearly 200 retired generals and admirals will send a letter to Congress Wednesday urging lawmakers to reject the Iran nuclear agreement, which they say threatens national security.

The letter is the latest in a blizzard of missives petitioning Congress to either support or oppose the agreement with Iran, which lifts sanctions if Iran pares back its nuclear program. Letters have been sent by ad hoc groupings of rabbis, nuclear scientists, arms control and nonproliferation experts — and now, retired senior military officers, many of whom have worked in the White House during various administrations dating back to the 1980s.

The letter, addressed to Republican and Democratic leaders in the Senate and the House, is a response to one sent last week by three dozen retired senior military officers who support the nuclear deal.

My point in this post is not to argue that the Iran deal is good or bad but only to point out that intelligent people can differ. Calling people who disagree with you “crazy” is unlikely to persuasive.

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Theory of Everything

Impelled by the problems with China’s economy that people have been speculating about subsequent to the declines in the Chinese stock market, I’ve been thinking a lot about the inadequacies of present economic models. Consider, for example, total world GDP, illustrated in the graph above, which was sampled from this post in The Economist from March of 2014. It depicts the rate of change in the world economy over time.

Here’s how I interpret that graph. The U. S. economy has been growing at a depressingly slow rate for the last half dozen years. It’s been growing but just barely. More of the increase in the rate of growth has come from China, which has contributed just about a full percentage point, year after year. By far the greatest amount of the increase, however, has come from “other emerging economies”. What does that mean? I interpret it to mean Brazil, Russia, and other countries from which China has been importing the raw materials they need to fuel the over-production they’ve been relying on for their own growth. Without that growth would have been very phlegmatic indeed.

But what if the Chinese growth has been systematically overstated? Or, as seems to be happening, China slows its purchases from “other emerging economies”? Now consider this graph:

It already looks very much as though 2015’s growth will be substantially below the projection and, with China’s growth slowing, projections farther into the future will drift ever further from the projected path.

IMO globalization has put us very much in the bad old days of boom and bust. Our economy can’t be managed in isolation from the rest of the world and we don’t have the tools to regulate the world’s economy and it’s hard for me to imagine that we will do so in our lifetime.

Being the risk averse person that I am my predisposition is that we should be attempting to mitigate the risks posed by the actions of people half a world away over whom we have practically no influence. That involves insulating ourselves from their actions. Of course no great fortunes will be made that way. What’s happening is that the great fortunes are being concentrated while we all share the downside risks.


The Flood of Articles on China

With the continuing drop in the Chinese stock market which the Chinese authorities are apparently unable to stop and the attendant drop in world stock markets, there has been a flood of articles on the Chinese economy, of varying quality. There were two I found particularly interesting I wanted to share with you.

The first is an op-ed in the Boston Globe in which the author takes the position that the “Chinese model” of economic growth is reaching its end:

China’s growth model is one in which the role of the state in the economy has become more intrusive. For years, many US observers hailed China’s government-led and investment-heavy model as a pillar of strength. Their favorite comparison is between the spunky new airports in Beijing and Shanghai and the supposedly dilapidated New York JFK and Los Angeles airports. While comparison has an element of convenience to it — you have to depart from a US airport and arrive at a Chinese airport when you visit China — the “airportology’’ is flawed, because it doesn’t take into account that China has clearly overbuilt, and at a considerable cost to its middle class.

According to the author the greatest benenficiaries of this model have been Western consumers. I think I’d say that the greatest beneficiaries were party officials and people living in countries that have supplied the raw materials for China’s over-production, e.g. Brazil, Canada, Australia, Russia. We’ll probably be working through the distortions created by the misallocation of resources for decades.

The other article is an editorial in The Telegraph. See how things look from the other side of the pond:

Paradoxically, the immediate impact of the Chinese slowdown could be mildly stimulative for the UK, in that it is fuelling a further collapse in energy and commodity prices. This will increase the amount of disposable income households have to spend, thereby helping to sustain Britain’s consumer-led recovery. Turmoil in financial markets may also further delay the point at which the Bank of England feels obliged to start raising interest rates.

Read the whole thing.


Will Hillary Clinton Be the Democratic Nominee?

Every week the members of the Watcher’s Council of which I am a holdover from a time when the Council was much more centrist than it is now, each express their opinions on a single subject. I only participate in about one in four of these forums and don’t link to them as frequently as I should.

This week’s forum considered the question of whether Hillary Clinton would be the Democratic nominee for the presidency in 2016. I was almost alone in believing that she would. I believe that for a number of reasons.

First, Sec. Clinton has more support in the black community than any other candidate and the black vote is essential to the Democrats. Second, she has 50 state organization that’s been in place for decades that includes governors, mayors, and so on. No other Democrat can match that.


Martin Feldstein’s Vie en rose

The world in which Martin Feldstein lives must be very pleasant indeed:

The Fed’s strategy worked, causing household net worth to increase by $10 trillion in 2013. Households responded by spending more, leading to an accelerated rise in gross domestic product and a decline in unemployment.

The increase in network was highly concentrated; debt has been rising, much of it student debt; the labor force participation rate has plummeted to what it was 40 years ago. As Bernie Sanders points out in his stump speeches, if the LFPR was what it was in 2007, unemployment would be 10%.

Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation. They know therefore that interest rates must rise, and that a return to normal levels will reverse the mispricing of assets. The Fed cannot hide that realization by postponing rate hikes for a few months. And so the Fed should get on with the task of normalizing rates, particularly so that investors and lenders are no longer tempted to sink deeper into mispriced assets.

I’m not sure the market participants know any such thing. The CPI is closer to 0% than it is to 2% and MIT’s Billion Price Project, an actual empirical measurement of prices across the economy and, consequently, inflation already shows deflation.

I agree with Dr. Feldstein that the Fed shouldn’t gauge their reactions by stock prices but that’s what they’ve been doing for the last eight years. Even less should they gauge those results by stock prices in China but there are those urging just that.

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Policies Have Implications

The editors of the Wall Street Journal, observing the fall of China’s stock markets and the attendant decline in stocks elsewhere in Asia, in Europe, and, yesterday, in the United States, recognize that China has a problem:

hose advantages have also created new vulnerabilities, however. Since capital controls kept domestic savings from seeking better returns abroad, the government was able to harness savings to keep interest rates artificially low. That created higher levels of investment, about 50% of GDP, and faster growth than the world has seen in a major economy.

This growth and a highly motivated workforce also attracted global capital. In order to keep these inflows from forcing up the value of the yuan and creating inflation, the People’s Bank of China bought foreign currency with yuan, and then removed those yuan from circulation. It did so by issuing bonds or raising the level of reserves banks are required to keep, a process known as sterilization.

The result was a Goldilocks economy that for much of the 2000s grew quickly without overheating. The sterilized inflows drove the deepening of the financial system and expansion of the money supply. That underpinned loans for investment as well as speculation, especially in real estate. And the pressure on the yuan to appreciate created a virtuous cycle of more capital inflows.

This investment boom on steroids started to unravel during the 2008 crisis, after which Beijing extended it with financial stimulus and then a stock market bubble. But as confidence in rapid growth has ebbed, capital flows have reversed and begun moving out, turning a virtuous cycle into a vicious one.

but I doubt they have apprehended the scope of the problems. Too much of China’s “internal demand” has been directed towards building airports in which no planes land, roads to nowhere, cities without populations, and idle factories whose capacity not only exceeds China’s needs but the world’s needs. IMO what China’s economic slowdown and its stock market crash reveal is that China has reached the end of the road on the approach they have taken towards growth over the period of the last 35 years or, said another way, they know no other way.

The end of that road will have implications not only for the Brazils and Australias of the world that have supplied the raw materials for China’s capital malinvestment but for Germany which has supplied its factories and industrial tools. Look for Germany’s economy, powered too long by China’s industrial build-up, to decline as well.


Another Precinct Heard From

Lars Christensen, in a very good post, makes four distinct observation. First, China and the U. S. are in a de facto currency union. That is something that policy makers here have completely failed to take into account, one of the many reasons why policy here has been so flawed.

Second, it is not a good policy union. I wish he had fleshed this out more in the post. I suspect that it’s suboptimal for several reasons including drastically different fundamentals in the two economies and policies that are pulling in opposite directions.

Third, China should de-peg. I think this has been obvious for a decade but the Chinese authorities have clearly seen it as being in their favor to leave the two currencies semi-pegged, so why the heck not?

Fourth, the Fed should not increase interest rates. His argument is, essentially, that the Chinese economy may well circle the drain if the Fed doesn’t postpone its rate increase. I can only speculate he’s making a “stay with the devil you know” argument, i.e. a stability-based argument. We haven’t been doing stability lately.