Jair Bolsonaro: the Devil?

Scott Sumner wrote recently on The Library of Economics and Liberty a piece in which he apparently buys into Reason’s understanding that Brazil’s president Jair Bolsonaro is “the most extreme and repellent face of a resurgent, evangelical-driven right-wing attempt to drag the country backwards by decades”. Reason, on its turn, is buying into The Intercept’s understanding of Bolsonaro.

There is little new on the piece: Bolsonaro is a racist, a misogynist, a homophobic, a fascist… All the accusations that mainstream media is used to throw at him, mentioning no clear examples or just inventing ones. And once again, it is my job to defend not Bolsonaro himself, but the truth.

Bolsonaro was born in 1955. He is in many ways a typical aging Brazilian man. Coming from a lower middle-class family, as a young man, he joined the army. He was very young but lived the years in which the military took over power to defend Brazil from the communists. Many people today might think that the communist threat didn’t call for that. Nevertheless, this is not what common people in the 1960s understood. They were afraid and begged the Army to defend the country. Most people were happy to give up democracy in the name of security. Bolsonaro was among them. Maybe they were very wrong, but one should try to empathize with them.

Because of the environment in which he grew, statism and protectionism are in Bolsonaro’s blood. Actually, that’s how we all grew up in Brazil. We expect that the government will solve the problems, and we are not used to asking where the money will come from. We also believe that the government has to protect the Brazilian workers and businesspeople against foreign competition. To become economically conservative in Brazil is crazily hard. You have to fight against a deeply established culture. Bolsonaro seems to be fighting against his best instincts that tell him that he should protect the Brazilian market and promote development.

I seriously doubt that Bolsonaro is corrupt. In any functional democracy, this should be a given, but sadly in Brazil, especially after the PT years, to have an honest president is a great relief. I’m certainly not saying that he is incorruptible. Also, Bolsonaro was not virtuous enough to give up many of the privileges he had over the years as a politician. Nevertheless, compared to much of the Brazilian political class, he stands as an honest guy.

In a sense, all this talk is pointless. Bolsonaro was elected. He is the president. He is profoundly against all that the PT government did. The PT government brought Brazil into its deepest economical, political and moral crisis. Bolsonaro and the people around him are trying to revert this. I’m certainly not saying that he shouldn’t be criticized. But he needs help. And Brazilians need help as well. Our real enemy is certainly not Bolsonaro.

Watson my mind today: culture change

That, and spring time: that mystical time of year when a young student’s fancy turns to their neglected grades and wonders if there is anything they can do once the semester is over to raise them.

Culture is an emergent order. It cannot be owned, so you can’t have a “right” to a culture. It can’t be controlled, and while it can be influenced, it’s a complex system so beware lest your efforts backfire.

— Change doesn’t come, until it comes quickly. This serves as another reminder of the importance of keeping true ideals alive even when they are unpopular and they seem doomed to obscurity.

— It is also a warning about other changes, such as the growing anti-natalism of the left, brought in through environmentalism.

Caplan’s review of Moller’s Governing Least. “Instead of focusing on the rights of the victims of coercion, Moller emphasizes the effrontery of the advocates of coercion.” Even if “exceptions abound” to the “common-sense morality … that rights to person and property are not absolute … Moller sternly emphasizes … that these exceptions come with supplemental moral burdens attached.” Highly recommended.

— Responding to Ambassador Araud’s claim that the culture of neoliberalism and free trade are dead, Sumner says “Intellectuals focus too much on interesting rhetoric and too little on mundane reality.”

— On the importance of a culture that allows people to repent and change, that allows someone to apologize, make amends, and receive public forgiveness.

Watson my mind today

Apart from grading, reviewing, and my soon-to-be 5-yr-old’s birthday, that is…

–  A good question from Don Boudreaux. “Assuming (contrary to fact) that American trade deficits do necessarily cause Americans’ indebtedness to foreigners to rise, why do you bemoan these deficits? Why not instead cheer them? … Being indebted to foreigners means that we Americans must repay these debts, which in turn means that we Americans must in the future work to produce more goods and services for export. Isn’t this situation precisely what you and other protectionists want? Isn’t a rise in the demand for American exports – especially a rise not derived from, or offset by, a simultaneous rise in American imports – your very ideal?”

–  Speaking of protectionism, Tyler Cowen on Elizabeth Warren’s agriculture proposal: “a disappointment on two fronts: too wonky to be considered a purely political document, but not nearly wonky enough to be defensible in terms of substance.” It fails to understand inflation and food price data, calls for more protectionism, and doesn’t remove subsidies. He says he might be persuadable on a “right to repair” law, but worries about copyright infringement.

–  One of the issues Ludwig von Mises himself, I am told, never fully settled in his mind was over patents and copyright. It seems a necessary evil to encourage innovation, but granting someone a government-sanctioned monopoly just grates the wrong way. Now we’ve got “patent trolls” to add to the mix, who do not innovate themselves but buy up patents to collect licenses and sue or threaten to sue others. A paper finds that patent trolls encourage more upstream innovation while discouraging downstream innovation.

–  Why does Scott Sumner simultaneously support the Federal Reserve’s interest rate hike last year and expect a cut this year? As a market monetarist, he would like the market to dictate Fed policy and “the fed funds futures market forecasts a rate cut. … Because markets continue to forecast slightly below 2% inflation, even as the economy slows, the market forecast of an interest rate cut should be taken as evidence that a rate cut is probably needed at some point this year.” I also enjoyed the picture that goes with the article – he is an owl, neither a hawk nor a dove.

–  There’s a dictionary, detailing how Africans speak about politics, including some fascinating idioms. “Three-piece suit voting” refers to supporting the same party for all elected positions. On the contrary, “skirt-and-blouse voting” means to vote for different parties for presidential and legislative elections.” Other enjoyable examples at the link.

–  538 has an interesting piece on the perceived fairness of kidney donation systems, and the real struggle that still exists trying to get people to accept slightly less-regulated systems (let alone actually compensating donors’ families).

–  David Henderson: Occupational Licensing is a Bad Idea. Still. Really.

Some Thursday afternoon love

I’ve been busy with real life for so long that I haven’t been able to produce shorter blog posts that give you a snapshot into my daily thinking routine. That should change now, but for today I wanted to give a shout-out to a bunch of bloggers who have put NOL on their blog rolls. Please be sure to check them out and add them to your daily feeds!

  • Catallaxy Files: “Australia’s leading libertarian and centre-right group blog”
  • Farmer Hayek: A group blog of agricultural economists based out of the American midwest
  • Maggie’s Farm: A group blog of non-conformists based out of the American northeast
  • The Money Illusion: The infamous-though-prestigious economist Scott Sumner’s personal blog
  • Policy of Truth: Irfan, David, and the gang discuss philosophy, Israel/Palestine, and American politics and culture (amongst other interesting things)
  • Popehat: a law blog that is much more than that
  • Samizdata: A (mostly) British group blog of libertarian-ish bad asses

These guys are all on our blog roll, too, so don’t feel like you have to save this page in order to find them in the future.

These guys are also really cool, obviously, so feel free to jump into their ‘comments’ threads and introduce yourselves. They’ll talk back.

I’ve noticed a trend over the past few years of blogs getting rid of their blog rolls altogether, and I think it’s stupid. People think it makes their blog look sleeker, and that blogging as a form of communication between like-minded people has come to an end, but that’s all hogwash.

Show these guys some love!

NGDP 3% per year; NGO much less!

A few days ago, Scott Sumner blogged about the “new normal” of NGDP trend (3% a year) (here and here). Overall, I tend to agree with him that the aggregate nominal expenditures are now at a new and historically low trend growth rate. I think that he is way too optimistic! 

As readers of this blog are aware, I am not convinced that NGDP is the proper proxy for nominal expenditures. I believe that Nominal Gross Output (NGO) is a better proxy as it captures more goods and services traded at the intermediate level (see blog posts herehere and here).  The core of my argument is that NGO will capture many “time to build” problems that will not appear in GDP as well as capture intangible investments which are now classified otherwise (see literature on intangible investment as capital goods here).  Thus, my claim that NGO captures more expenditures (especially between businesses). (Note: I am in the process with some colleagues of finalizing a paper on the superior case for NGO – more on this later.)

Are we at a new normal point where growth in nominal expenditures is slower than in the past? Yes! But according to Sumner and others, this is 3%. If we use NGO we are much lower! Again, using the FRED dataset, here is the evolution of NGO and NGDP since January 2005 (the start date of the NGO series in a quarterly form). The graph shows something odd starting in mid-2014 : NGO is growing much more slowly.

NGDPNGOaug2016geloso

To see this better, let’s plot the evolution of NGO as a percentage of NGDP in the graph below. If the ratio remains stable, then the trend is similar for both. As one can see, the recession saw a much more pronounced fall of NGO than NGDP with a failure to return to the initial levels. And since 2014, the ratio has started to fall again (indicating slower growth of NGO than NGDP).

NGDPoverNGOgeloso2016aug

So what is happening? Why is there such a difference? I am not one hundred percent sure about the causes of this difference. However, I am willing to contend that NGO is fitting better than NGDP with other indicators indicating a tepid recovery. If we look at the labor force participation rate in the US, it continues to fall in a nearly mechanical manner. Fewer and fewer workers are at work (or looking for work) in comparison to the population that could be working while investments are disappointing.

CivilianLaborForceParticipation

Maybe Scott Sumner is being overly optimistic. The new trend might simply be substantially lower than he believes.*

 

*Readers should note that I believe that monetary policy is, at present, too restrictive. However, I believe the culprit is not the Federal Reserve but financial regulations that restrict the circulation of “private money” (the other components of broad money found in divisia indices – see my blog post here). 

BC’s weekend reads

  1. Saudi-Iran Conflict Is Not America’s Fault
  2. Gains from trade: China and the United States
  3. How Bad Is Trump’s Brand of Authoritarianism?
  4. How Hiroshima Became A War Crime
  5. Art and Porn in Edo Period Japan
  6. The [True?] Meaning of Marxism

Why Britain, in the Great Depression, is the best example in favor of NGDP targeting

A few weeks ago, I finished reading Scott Sumner’s The Midas Paradox. As an economic historian, I must say that this is by far the best book on the Great Depression since the Monetary History of the United States. Moreover, it is the first book that I’ve read that argues simply that the Great Depression was the result of a sea of poor (and sometimes good) policy decisions. However, coming out of the book, there was one thing that came to mind: Sumner is underselling his (very strong) case.

In essence, the argument of Sumner looks considerably like that of Milton Friedman and Anna Schwartz: The Federal Reserve allowed the money supply to contract dramatically up to 1932, turning what would have been a mild recession into a depression.  However, Sumner adds a twist to this. He mentions that after the depth of the monetary contraction had been reached, there was a reflation allowing an important recovery during 1933. This is standard AS-AD macro of a (very late) expansionary policy to allow demand to return to equilibrium. Normally, that would have been sufficient to allow the rebound. Basically, this is the best case for NGDP targeting: never let nominal expenditures fall below a certain path because of a fall in demand.  The problem, according to Sumner, is that the recovery was thwarted by poor supply-side policies (like the National Industrial Recovery Act, the Agricultural Adjustment Act etc.). The positive effects of the policy were overshadowed by poor policy. And thus, the depression continued.

To be fair, Sumner is not the first to emphasize the “real” variables side of the Great Depression. I am especially fond of the work of Richard Vedder and Lowell Galloway, Out of Work, which is a very strong candidate for being the first econometric assessment of the effects of poor supply-side policies during the Great Depression. I was also disappointed (but not too much since Sumner did not need to make this case) to see that no mention was made of the Smoot-Hawley tariff as a channel for monetary transmission (as Allan Meltzer argued back in 1976) of the contraction. Nonetheless, Sumner is the first to bring this case so cogently as a story of the Great Depression. Thus, these small issues do not affect the overall potency of his argument.

The problem, as I mentioned earlier, is that Sumner is underselling his case! I base this belief on the experience of England at the same time. Unlike the United States, the British decided to apply their piss-poor supply-side policies during the 1920s – well before the depression.  The seminal paper (see this one too) on this is by Stephen Broadberry (note: I am very biased in favor of Broadberry given that he is my doctoral supervisor) who argued that the supply shocks of the 1920s caused substantial drops in hours worked and although the rise of unemployment benefits played a minor role, the vast majority of the causes were due to the legal encouragement of cartel formation. As a result, there were no supply-side shocks during the depression to create noise. However, England did have a demand-side expansionary policy in 1931. Even if it was by accident more than by design, England left the gold standard in September 1931. This led to the equivalent of an easy monetary policy and the British economy stopped digging and expanded afterwards. The Great Depression was not a pleasant experience for the British, but it was not even close to the dreadful situation in the United States. As a result, we can see whether or not it was possible to exit the Great Depression by virtue of a monetary policy. I’ve combined the FRED dataset on monthly industrial production and the monthly GDP estimates for inter-war Britain produced by Mitchell, Solomou and Weale (see here) to see what happened in England after it left the gold standard. As one can see, the economy of Britain rebounded much more magnificently than that of the United States in spite of supply-side constraints.

GBUSA

Sumner should expand on this point! To be fair, he does talk about it briefly. Not enough! A longer discussion of the British case provides him with the “extra mile” to cover the distance against competing theories. The absence of supply shocks in Britain during the Depression confirm his story that the woes of the United States during the 1930s are due to initially poor monetary policy and then poor supply-side policies. In my eyes, this is a strong confirmation of the importance of the NGDP level target argument!

With such a point made, it is easy to imagine a reasonable counterfactual scenario of what economic growth would have been after monetary easing in 1933 in the absence of supply-side shocks. Had the United States kept very unregulated labor and product markets, it is quite reasonable to believe (given the surge seen in 1933 in the Industrial Production data) that the United States would have returned to 1929 levels. In the absence of such a prolonged economic crisis, it is hard to imagine how different the 1930s and 1940s would have been but it is hard to argue that things would have been worse.

UPDATE: From the blog Historinhas, Marcus Nunes sent me the graph below confirming the importance of the NIRA shock on eliminating all the benefit from easy money after 1933.

J Goodman (1)