Maybe Not So Big a Mystery

In his Washington Post column this morning Robert Samuelson muses about the mystery of low inflation:

From 2010 to 2018, the CPI has increased only about 2 percent annually. In turn, the collapse of inflation has transformed political debate. We have gone from worrying about “stagflation” — the coexistence of high inflation and high unemployment — to arguing about economic growth and inequality. On the whole, this is a better place to be.

Recall the “misery index.” It combines the unemployment rate and inflation. In 1980, the index was 19.6 percent (7.1 percent unemployment rate and 12.5 percent inflation). In 2018, it was 5.8 percent (3.9 percent unemployment and 1.9 percent inflation). There won’t be much anti-inflation rhetoric in the 2020 campaign. Indeed, low inflation is one reason the current economic expansion is the longest in U.S. history. Despite the running feud between President Trump and the Federal Reserve, there has been no sharp increase in interest rates to dampen the recovery.

But there is one gaping hole in this otherwise happy story: We don’t know what has caused inflation to drop so low and to stay there. It’s a “puzzle,” as economist Janet Yellen, former chair of the Fed, recently put it at a Brookings Institution conference on inflation. The explanation matters. If we don’t fully understand low inflation, we may misinterpret its consequences.

The inflation mystery poses a simple question: Why haven’t wage gains increased faster as the economy has approached “full employment,” which is crudely put between 4 percent and 5 percent? Expressed technically, the question becomes: Why isn’t the Phillips Curve working? That’s economist A.W. Phillips, who argued in the 1950s that, as unemployment fell, wage gains would rise. Firms would have to pay more to attract workers. Some wage gains would feed into higher prices, a.k.a. inflation.

I don’t think it’s that big a mystery. Mr. Samuelson points to globalization, monetary policy, and a misinterpretation of the labor force as potential explanations and I think that’s partly right. My explanation would include four factors:

  1. An enormous proportion of the economy is either grey or black and not included in the official statistics. When you have an illegal population as large as we do—officially about 14% of the population but actually possibly much higher—the statistics are just wrong.
  2. For the last couple of decades China has been exporting goods and deflation and importing employment and inflation. There’s lots of inflation but in a globalized economy you can’t see it if you only look at one country.
  3. The CPI is broken. It represents the economy of 50 years ago not the economy of today. The problem may well be in the weighting. In particular now that health care is a sixth of the economy and education (public and private) may be as much as 10% of the economy is that reflected in the CPI? Keep in mind that not only health care and education but military spending, police and fire, and other components of government spending including public pensions, particularly at the state and local level, are consumption and that spending is increasing at a ferocious rate. There may be lots of inflation; it just isn’t reflected in an obsolete CPI.
  4. Monetary policy is working. It’s creating enormous inflation in the prices of equities. Evidence for that are the price/earnings ratios, unlike anything seen in the past. That’s also reflected in sharp increases in things closely tied to the prices of equities, e.g. executive compensation.
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Creative Accounting

Chicago Mayor Lori Lightfoot has presented her budget for the city of Chicago which closes Chicago’s nearly $1 billion deficit. The Trib reports:

Chicago Mayor Lori Lightfoot offered an $11.65 billion budget plan for 2020 on Wednesday, laying out a path to dig the city out of a daunting $838 million deficit without relying on steep property tax increases.

Lightfoot’s plan hinges on getting help from the General Assembly, which enters its fall veto session next week.

This is basically a “Hail Mary”. To the best of my knowledge the state has never ponied up money for Chicago unless it was sued for it.

The new taxes she’s proposing as well as the ones have been left unstated fall most heavily on the poor. Expect the exodus from Chicago to accelerate. Just in time for the decennial census.

If you go back to the cow too many times, it eventually runs dry. That’s true of cash cows, too.

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Dead Last

Just as a reminder. Illinois is 50th of the 50 states in the state’s contribution to public education. That’s dead last. Most of the money spent in the public schools comes from local taxes, i.e. property tax and sales tax.

That is true despite wording in the state’s constitution (“the state shall have a primary responsibility for public education”), a state lottery supposedly devoted to education, and several advisory referenda in which the people said that the state should be providing more.

I publish this every so often. Illinois has been last or next to last for years. The state has been sued by districts to provide more funding. Multiple times.

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A House Divided Against Itself

I found this interesting. The Huffington Post reports that the brash first-term Congresswoman Alexandria Ocasio-Cortez has endorsed a challenger to the incumbent Democratic representative in a Texas district:

Rep. Alexandria Ocasio-Cortez announced Tuesday that she is endorsing Jessica Cisneros, an immigration and human rights attorney who has launched a progressive primary challenge against Rep. Henry Cuellar, a Texas Democrat.

The New York representative’s blessing is a major boost for Cisneros, who stands to benefit from Ocasio-Cortez’s national recognition and fundraising prowess. If she is successful, Cisneros, 26, would supplant Ocasio-Cortez, 30, as the youngest woman ever elected to Congress.

This is obviously a skirmish in the ongoing struggle for control of the Democratic Party between the Democratic establishment and newcomers, many of them supporters of Bernie Sanders.

From my vantage point Bernie Sanders isn’t a Democrat and neither are his supporters. The DNC would be fools to allow him to be the party’s standard-bearer in 2020 and they very surely are not fools.

It all reminds me of an anecdote about Will Rogers. When asked if he were a member of an organized political party, he responded “No, I’m a Democrat.” Some things never change.

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More the Rule Than the Exception

Last week in reaction to Hillary Clinton’s claims that Tulsi Gabbard was a pawn of the Russians, Rep. Gabbard declaimed:

Hillary Clinton throughout her career has espoused, advocated, and championed a very interventionist foreign policy, pushing for regime-change wars, toppling dictators in other countries, being the world’s police, using draconian sanctions to accomplish these things, and they have proven to be incredibly destructive…

thereby establishing that Hillary Clinton was, indeed, of presidential caliber. Nearly every president’s foreign policy has proven to be incredibly destructive. The last president whose foreign policy wasn’t was Dwight Eisenhower. Of course, some presidents should be singled out for extraordinary destructivity, e.g. Lyndon Johnson, Richard Nixon, Jimmy Carter, George H. W. Bush, Bill Clinton, and George W. Bush.

If Americans paid more attention to candidates’ foreign policies, maybe our present foreign policy wouldn’t be such a mess.

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It’s Complicated

I can’t help but wonder how Donald Berwick can be so confident in making the claims he does in his piece about “Medicare For All” at USA Today:

With costs rising painfully, insurance companies denying care and nearly 30 million people still uninsured, America desperately needs an honest health policy discussion. That’s why it has been so disappointing over the past several weeks to watch multiple candidates parrot right-wing attacks on “Medicare for All,” like claiming that it will greatly increase spending on health care or ringing alarms about raising taxes on the middle class.

The truth is the opposite: Medicare for All would sharply reduce overall spending on health care. It can be thoughtfully designed to reduce total costs for the vast majority of American families, while improving the quality of the care they get.

I think it’s a lot more complicated than that and when you’re dealing with real people and real money in a real world it’s a lot different than when you’re drawing diagrams on a whiteboard. And “thoughtfully designed” sounds uncomfortably like “no true Scotsman” to me.

It all depends on your assumptions.

I’ve already pointed out that providers don’t have the excess capacity to provide 6% of 10% more care than they do know without changing how care is provided. What will it take to accomplish that? How long? How much will it cost?

What will providers be paid? That they will be paid at Medicare rates is an assumption in which I don’t have the slightest confidence. If “Medicare For All” were actually enacted into law, I can say with metaphysical certainty that there would be a furor of lobbying to increase the reimbursement rates beyond present Medicare reimbursement rates. The failure of lawmakers year after year to hold the line on Medicare reimbursement rates (remember the “doc fix”?) strong suggests that they won’t hold the line with M4A.

Who is “all”? All citizens? All legal residents? All residents? Anybody passing through?

Keep in mind that all of the present Democratic presidential candidates have said they would decriminalize entering the country without approval and several have said they would abolish our present enforcement agency. Under the circumstances I have no idea how you can even predict how many people “all” might be.

What are the metric for “improving the quality of the care they get”?

If you cannot answer all of those questions and back your answers up with facts, you cannot make confident predictions.

I recognize that the idea that bringing everyone within a single system would result in lower spending with better care is an article of faith but, frankly, I doubt it. We are an enormous, diverse, complicated country that is changing at a ferocious pace. Not only do simple plans not work well here, everything the government does is more expensive here than it would be in other, simpler, smaller countries and always more expensive than planners predict.

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Limited Wars Are Losing Propositions

I disagree with the definition of “limited war” put forward in this article at RealClearDefense by Adam Wunische:

Therefore, a limited war is any war in which regime change is not being sought.

Using that definition both Afghanistan and Iraq were not limited wars which is rather obviously not the case. The definition I would use is quite different. A limited war is just that—limited. The objective is not limited to regime change. The only objective of a war that is not limited is unconditional surrender. The reason that our military is unable to achieve the objectives of our limited wars is that those objectives are not achievable. We cannot eliminate the Taliban from Afghanistan by limited means because they are Afghans and Taliban is just a role. Those adopting that role may just flee into Pakistan where they will be beyond the limitations we have place on that war. We cannot turn Iraq into a liberal democracy allied with the United States because a majority of the people in Iraq do not seek liberal democracy or alliance with the U. S. for that matter.

All of our wars of the last 70 years have been limited wars and we have lost nearly all of them. The lesson I take from that is do not go to war unless there is no other alternative.

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Of Course You Realize This Means War

By joining the picket lines of the Chicago Teachers Union, presumably trolling for a union endorsement, Elizabeth Warren has declared war against the people of Chicago, particularly Chicago’s poor.

The interest rate that the City of Chicago pays to borrow is the highest of any major city; the interest rate that the Chicago Public Schools pays to borrow is the highest of any major school district. One more downgrade and they will be unable to borrow at all. Borrowing is not really an option.

That means that any additional spending must be matched by additional taxes. The only taxes within the city’s power to enact are regressive, i.e. they fall most heavily on the poor. They pay for higher sales tax which means they are able to buy less food and clothing and higher property taxes in the form of higher rents which may threaten their ability to remain in Chicago at all.

There is a fantasy that is widely believed, the “roomful of money theory”. Adherents to this belief hold that somewhere there is a roomful of money and whenever you want to spend more you only need to find that room and take it. Refusal to spend more, consequently, is always motivated by selfishness or malice.

The members of the CTU clearly hold this belief and Elizabeth Warren is telling us that she does, too. So far Mayor Lori Lightfoot has handled the teachers’ strike with considerable grace. In her shoes I would have handled things differently. I would have said “This is the CPS budget. That’s it. The cupboard is bare. We’ll allocate that budget according to your priorities. Want more nurses and school librarians? Fine. We’ll hire them and reduce teacher salaries to pay them.” The CTU supported a different candidate, another adherent of the “roomful of money theory”.

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Meanwhile Around the Block

While our attention is focused on impeachment inquiries, Brexit, and the withdrawal of U. S. forces from Syria, portentous events are taking place much closer at hand. Consider this report from Reuters:

CULIACAN, Mexico (Reuters) – Mexico sent in special forces troops on Monday to patrol a northern city in the wake of a cartel assault that freed Joaquin “El Chapo” Guzman’s son in a hail of bullets, and also won a U.S. promise to help stop gun-smuggling at their shared border.

More than 400 soldiers turned up in Culiacan over the weekend after gunmen from the Sinaloa cartel briefly took control of the city and forced security forces to free the drug lord’s son from a botched arrest attempt last week.

“We are going to protect the citizens, that is our mission,” said General Carlos Ramon Carrillo de Villar, who oversaw formations of soldiers marching at a media event. “We are fighting insecurity.”

The convoys of army trucks with mounted machine guns rumbling through Culiacan’s streets were meant to instill confidence. However, a national poll on Monday showed two thirds of respondents believe drug lords and mobsters are more powerful than the government after the gunbattles last week that forced an army retreat.

Sinaloa public safety director Cristobal Castaneda told news anchor Joaquin Lopez Doriga that 13 people were killed during the disturbances that ran late into Thursday night.

That doesn’t really cover the seriousness of the situation. What happened is that cartel forces armed with military weapons and equipment defeated Mexican regulars in a pitched battle and took control of a regional capital, displaying better training, morale, and force cohesion that the regulars did. That the Mexican government needed to send in “elite” forces to retake the city is not a good sign.

That is not merely organized crime. It is a genuine civil war and a destabilized Mexico is terrible news for us. Not only could it bring a resurgence of Mexican migrants fleeing the violence but a weakened Mexico is less able to staunch the flow of migrants from Central America. An uncontrolled border with a part of Mexico that is ungoverned or under the control of criminal cartels does not sound like a benign development to me.

It has always been obvious that our situation, with weak, passive aggressive neighbors on the north and south and fish on the east and west, would not persist indefinitely. I have always thought that our considered strategy of weak neighbors has been an error. What we should have sought was something much more challenging to achieve: strong, friendly neighbors.

But the situation is what it is and developments in Mexico certainly sound dire.

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After the Landslide

If you think the furor over leaving Syria and outrage over “abandoning the Kurds” is something, wait until we leave Afghanistan. In a piece at Foreign Affairs Carter Malkasian contemplates that eventuality:

A Taliban advance would likely follow a U.S. withdrawal. The events of the years 2014 to 2016 offer a cautionary tale. During those years, the United States minimized airstrikes, because it believed that doing so could allow the Afghans to learn to fight on their own. Instead, the Taliban all but captured several provinces, including Kunduz and Helmand. Heavy casualties and desertions thinned the ranks of the Afghan military and police. In 2016, the United States went back to permitting airstrikes and thus stemmed the Taliban advance.

If the president decides, whether in 2021 or before, to fully withdraw from Afghanistan, those airstrikes would cease. The United States would close all its bases and stop conducting surveillance in support of Afghan forces. All U.S. drones and troops would depart, including special operations forces and advisers. U.S. allies and coalition partners would undoubtedly pull out their 8,700 troops, too. Washington could continue to provide funding to the Afghan military at a reduced level, but Congress would be sorely tempted to eliminate such support once U.S. troops were out of harm’s way. Just how long a withdrawal would take is a matter of debate: the Obama administration once planned for a timeline of 30 months, but some have called for one that is even shorter.

Toward the end of the withdrawal process, the balance of military force within the country would tip. The Taliban’s leader, Mawlawi Haibatullah, would probably attack provincial centers such as Kunduz and Lashkar Gah. The Afghan army and police would not be able to defend these cities without U.S. air support. The following year, Haibatullah could escalate, striking big cities such as Kandahar and Jalalabad. Afghan special operations forces, the National Directorate of Security, and certain hard-bitten tribal leaders would fight tooth and nail. But chances are good that a significant number of soldiers and police would flee, leaving the Taliban tide to overwhelm the big provincial cities’ defenses.

Kabul itself could then spontaneously fall. Once tribal leaders, police, soldiers, and farmers sense which way the wind is blowing, the whole edifice of the Afghan state could collapse. Such was the sequence of events in 2001 and many times before, as Professor Thomas Barfield writes in Afghanistan: A Cultural and Political History: “The war did not have any decisive battles. Just as the Taliban had come to power by persuading people that they were winners without fighting . . . they lost the war in a reverse process.”

But Kabul also stands a decent chance of surviving. Afghanistan’s army might concentrate on defending the capital, and Tajik, Uzbek, and Hazara warlords—who once made up the Northern Alliance—could mobilize militias to help. Outside powers could oppose the Taliban: Russia, in defense of long-standing Uzbek and Tajik friends; Iran, to protect the Shiite Hazaras; and India, in order to contain Pakistani influence. None of these countries can be assumed to step in fully behind the government, but a total Taliban victory would be in none of their interests.

Regardless of Kabul’s fate, however, the Taliban would control at least half the country, including several cities, fertile croplands, and mineral deposits. Under such circumstances, al Qaeda, ISIS, and like-minded groups would gain access to territory and resources. Other foreign terrorists would join them in Afghanistan, where a perceived Taliban victory over the United States would serve as a beacon to foreign extremists.

I do not believe there is any way to “win” in Afghanistan. The Afghan military and government have demonstrated no ability to stand on their own against the Taliban. We cannot eliminate the Taliban without antagonizing Pakistan and supporting our military efforts within Afghanistan would be prohibitively expensive without Pakistan’s cooperation. Consequently in order to “win” we would not only need to eliminate the Taliban within Afghanistan but pursue them into adjacent parts of Pakistan against Pakistani opposition and be prepared to fight the Pakistanis as well as the Taliban. And Pakistan has nuclear weapons.

If winning and successful counter-insurgency are beyond our reach, what’s left in Afghanistan? As I see it there are two viable alternatives. We could just leave, to massive domestic opposition of which the present opposition to withdrawing from Syria is a mild foretaste.

Or we could prepare to remain forever, keeping what has been characterized as a “small, lethal force” in Afghanistan on an indefinite basis with a strategy of counter-terrorism to prevent the contingency mentioned by Mr. Malkasian:

Under such circumstances, al Qaeda, ISIS, and like-minded groups would gain access to territory and resources. Other foreign terrorists would join them in Afghanistan, where a perceived Taliban victory over the United States would serve as a beacon to foreign extremists.

That essentially mimics Alexander’s strategy more than two millennia ago and he was the most successful invader of Afghanistan in history. If such a strategy were adopted, I think there would be a moral not to mention political necessity of selling it to the American people. IMO a significant fraction of Americans would just as soon obliterate Afghanistan utterly as remain there.

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