Nightcap

  1. Tea and capitalism and China too Andrew Liu, Aeon
  2. America’s immigration paradox David Nasaw, New York Times
  3. Covid-19 and the power transition from the US to China Meisel & Moyer, Duck of Minerva
  4. “The Jakarta Method” (American foreign policy) Branko Milanovic, globalinequality

In Defence of Economics Imperialism

Under the guise of the end of “Neoliberalism”, economics is losing its grip. Troubles had begun with the 2008 financial crisis. As people had once lost their faith in the Gold Standard, by 2008 the consensus upon the self-regulation of the markets slept away. Even some of the most notorious free-marketeers -like Alan Greenspan- became renegade from their lifelong beliefs.

The COVID-19 crisis seems to complete that process. However, it is not a process of the end of Neoliberalism, but of the end of what Gary Becker called the “economic way of thinking” -and this is truly bad news. The end of the imperialism of economics is, in some way, the end of rationality and universalism in political thinking.

The demise of economics in politics, in fact, had begun just some months before the 2007-2008 Crisis: when Tony Blair stepped down from Downing Street. Or even before: when George W. Bush, trying to avoid losing his re-election as his father had done in 1992, crushed the superavit inherited from Bill Clinton’s administration and created twin deficits. But Bush’s misfortunes were at least generated by an ill-understanding of economics. We are in danger of the near future being ruled by a not-understanding of economics at all. That is why we should not renounce the use of the economic way of thinking.

The key is not to leave the task only to the economists. Philosophers, lawyers, sociologists, historians, and all sorts of social scientists should get involved. Milton Friedman was the scapegoat of the Left, but the 1980’s and 1990’s came after decades of works of thinkers of all nationalities and sorts, like Karl Popper, Robert Nozick, Friedrich Hayek, Bruno Leoni, Max Weber, Raymond Aron, T. S. Ashton, Gary Becker, Robert Mundell, James M. Buchanan, Gordon Tullock, Anthony Downs and many more.

Nightcap

  1. On Scialabba’s How to be Depressed Morten Høi Jensen, American Interest
  2. More on the Jersey surge (philosophy and journalism) Irfan Khawaja, Policy of Truth
  3. Big government is not the solution, it’s the problem Scott Sumner, EconLog
  4. The future that we won’t have (bitter) Arnold Kling, askblog

Nightcap

  1. When do emergency measures turn into dangerous government overreach? Jonathan Wolff, Times Literary Supplement
  2. A philosophy of fear – and a society of scolds Daniel McCarthy, Modern Age
  3. The perils of lockdown living Sayed Kashua, New York Review of Books
  4. It’s time to take UFOs seriously Alexander Wendt (interview), Vox

Nightcap

  1. A tale of two lockdowns Mick Hartley, Politics and Culture
  2. Who is the “public” in “public choice”? Henry Farrell, Crooked Timber
  3. Machiavelli and his enduring appeal Tony Barber, Financial Times
  4. The economist who thought too fast Anthony Gottlieb, New Yorker

Nightcap

  1. Coronavirus and uncomfortable truths about Japan Philip Patrick, Spectator
  2. Love in the Time of Capitalism Dan Hassler-Forest, LARB
  3. Sunday morning quarterbacking Scott Sumner, MoneyIllusion
  4. Good things (leaving words out) Stephen Cox, Liberty

Wats On My Mind: the state of the economy

I wrote the following update for my Principles of Macroeconomics students and thought it might just count as an update for Wats On My Mind.

In the first two minutes of class, I asked you how you would know how the economy is doing. Let’s focus on our three big areas: GDP, unemployment, and inflation.

Initial estimates are that GDP decreased by 4.8% in the first quarter (Jan-Mar). Let me comment on that a bit:

  1. That number is almost certainly inaccurate. It will be revised 3 months from now, 6 months from now, and be finalized 9 months from now. That is totally normal – as more and more data rolls in, our estimates get better. My bet is that the number is worse than that because closed firms won’t be reporting anything yet.
  2. The number for the second quarter will certainly be worse than that. We were only closed for 2-3 weeks in March, so the fact that we’re done that much in such a short window is a bad sign. We have already been closed longer in this quarter and the careful, measured opening we’re doing right now – which I think is wise to prevent a new spike of cases – won’t make for an instantaneous rebound.
  3. This is as bad as we saw during the Great Recession, but faster. Again, my hope and expectation is that our recovery will also be faster.
  4. GDP dropped in the EU by 14%. So it could be a lot worse!

The Bureau of Labor Statistics also released new numbers. So far 30 million Americans have filed for unemployment. That is roughly 18-19% of the workforce. This is officially, as expected, the highest unemployment rate since the Great Depression in the 1930s. The good news is that the number of new applicants has been going down each week, from 6.8 million at the end of March to “only” 3.8 million last week. (Recall: That’s still 4x larger than the previous high set in the 1980s.) The other bit of good news is that 90% of unemployed workers expect to return to their old job, while that number is usually only 40%. That gives me more encouragement that we could quickly bounce back.

Inflation is DOWN. If this were primarily a supply shock, we would be seeing overall higher prices. That means the drop in aggregate demand is bigger than the supply shock. To a Keynesian or a Monetarist, that also means that all the fiscal and monetary stimulus we have done so far is not enough and more needs to be done. To a Classical economist, the thing that needs to be fixed is still supply – demand itself is not terribly important. A Hayekian, of course, thinks all this stimulus is making things worse – it messes with the price signals markets rely on.

To get a rough estimate of where inflation is going, I have been recommending comparing TIPS bonds to nominal bonds because the difference between the interest rate on those bonds (the TIPS spread) is the market’s best guess of inflation. As you can see here the TIPS spread fell from 1.8% in 2019 to 0.5% at the end of March. During April, it has recovered slightly to 1-1.2%. A very rough guesstimate based on that suggests we would need a stimulus 3x as large as we have done right now to return inflation expectations to normal. !!!

The very idea of having Congress spend an extra $5 trillion on top of what is already being done is more than my little fiscally-conservative heart can comprehend just now. Politically, though, I expect Congress will find it in their hearts/re-election campaigns to have another round of stimulus. The Federal Reserve has even called on Congress to spend more, so have no fears of monetary offset hampering anything. Here is a monetarist arguing the Fed needs to do a great deal more to ensure spending expectations don’t fall. One of the points, though, is that we should not expect hyperinflation is around the corner.

On that first day, most students suggested looking at the stock market. From Feb 21-Mar 23 the Dow lost 10,000 points – 1/3 of its value. Since then it has recovered more than half. Notice that the drop came BEFORE quarantine and that the stock market has been recovering even as unemployment has climbed to record heights. This is another reason I don’t recommend imagining that the stock market gives a clear and unbiased view of what’s going on in “the economy”! The situation right now is clearly much worse than it was a month ago, so trying to figure out current conditions would not make sense. If I wanted to give it the best spin possible, I’d say the stock market is predicting better times ahead despite how bad things currently are.

 A few other data points:

  • 59% of Americans say they can social distance as long as needed, which is up from a few weeks ago. (Gallup)
  • Western European countries started reopening earlier than we have and they are starting to see an increase in cases and deaths again. Now, so far that’s only a 3-day trend and it could just be a blip, but it’s not encouraging.
  • Most people are actually behaving like decent, responsible people during the crisis – and they usually do.