Tuesday, August 22, 2017

Free Trade, the Primrose Path, and the Blinkered Blindness of macroeconomists

 - by New Deal democrat

Here's what I learned today: the origin of the phrase "being led down the primrose path." 

It turns out that in medieval times, one meaning of the word "primrose" was the "prime," or first or loveliest, rose.  Thus taking the primrose path was a particularly lovely journey. At least by the time of Shakespeare's "Hamlet," where Ophelia speaks of the "primrose path" to Laertes, the connotation developed of the use of a lovely and seductive experience to lure a mark to their misfortune or doom.

The doctrine of free trade is macroeconomists' primrose path.  Today's example comes from Tim Haab's blog "Environmental Economics," in the below post entitled "Quote of the Day: Both sides win from free trade . . . sheesh," which I am reproducing in full:

That moment you realize the Chinese administration understands economics better than the U.S. administration...
"In reality, China and the United States' long term cooperation has brought about real benefits for both countries' peoples, any unbiased person will clearly see this fact," [Chinese Foreign Ministry spokeswoman Hua Chunying] told a daily news briefing in Beijing.
"We have also said before, a trade war has no future. A trade war does not serve the interests of any party, as fighting a trade war will not produce a winner. We hope that relevant parties can stop viewing issues of the 21st century with a 19th- or 20th-century mentality."
 Hua's quote is in reaction to Steve Bannon's claim that the U.S. is losing the trade war with China:
"It's in all their literature. They're not shy about saying what they're doing. One of us is going to be a hegemon in 25 or 30 years and it's gonna be them if we go down this path," he was quoted as saying.
"If we continue to lose it, we're five years away, I think, 10 years at the most, of hitting an inflection point from which we'll never be able to recover."

Now, I am no fan of Steve Bannon, but alas in this case it is economist Tim Haab who has the worse argument. Here's why.

Let's assume that Haab is completely right in what he says: that free trade in the aggregate absolutely benefits both countries which engage in it.  End of story?

No, and here is where macroeconomists' blinkered blindness to human behavior is on full display.

Wealth is, generally speaking, not accumulated for its own sake, but rather to be spent of stuff that you really want. So Country A and Country B can use the increased wealth from free trade to fund the stuff they really want.  

So let's suppose that while both Countries benefit from free trade, Country A's wealth increases by an additional 5% a year, while Country B's wealth increases by an additional 1% a year. By the magic of compounding, over 10 years Country A's wealth increases by 63%, and over 20 years by 265%. Meanwhile Country B's wealth has only increased by 10% in 10 years and 22% in 20 years.

Suppose further that what Country A really wants to do with this wealth is invade and take over Country C, which alas is an ally of Country B, meaning that Country B will have to go to war to defend it.

Is Country B's 22% increase in wealth worth the loss of life and destruction it will incur defending Country C?  This calculation nowhere appears in any of the arguments by free traders.

Meanwhile, if I am the leader of Country A, I am more than happy to lead Country B down the primrose path of free trade, knowing what I have in store at the end.

What's worse, we have already been through this exercise  once before, with calamitous results,  In 1909, Norman Angell's "The Great Illusion," argued that countries that trade with one another would never go to war, because it was so illogical.  At the time, free trade had burgeoned among the countries of Europe.

But it turns out that wasn't the priority of Kaiser Wilhelm or other European monarchs.  Only 5 years later, all of that wealth was poured into a catastrophic war.

Even though the historical facts devastatingly rebut the macroeconomic theory, macroeconomists ignore the facts. Since the uses to which ocountries might put the increased wealth obtained by trade lays outside their theory, they are blinkered and blind to it, and assuming that it does not exist. That World War I rebuts their argument is waved away as ancient history, even though human nature has not changed one wit.    In their blinkered blindness, macroeconomists fail to see that  free trade can be used as the primrose path.

Monday, August 21, 2017

Revisiting the Apartment Boom

 - by New Deal democrat

The entry of the large Millennial generation into the housing market should have generated more permits and starts in condos and apartment complexes than we have seen.

What's going on?  Factoring in the number of units under construction appears to give us at least a partial answer.

This post is up at XE.com.

Saturday, August 19, 2017

Weekly Indicators for August 14 - 18 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

If you are looking for DOOOOOM, you are looking in the wrong place.

Thursday, August 17, 2017

Industrial production: once again, the hard data fails to confirm the sof ... ofertheluvofgaud

 - by New Deal democrat

This morning's report on industrial production confirms that the economy remains on autopilot, and that's a good thing.

Overall production increased again, and the trend of rising production since spring of last year is clear:

When we break it down by manufacturing (blue, left scale), mining, and utilities (red and green, right scale), we get pretty much the same picture:

While it's true that the manufacturing subindex is below its April peak, I am not terribly concerned. There were very volatile readings in March, April, and May, and if we smooth the readings out via a three month moving average, July is only slightly below June, and both June and July are above every other 3 month average reading.

So the Doomers will have to move on from their "soft data/hard data" argument to something else.

Housing is still going sideways

 - by New Deal democrat
Although June got revised higher, July housing permits and starts continue to fail to impress

This post is up at XE.com.

Wednesday, August 16, 2017

On the erection of Confederate memorials: in which I have to get this off my chest

 - by New Deal democrat

Below is a photograph of the World War Two Memorial on the National Mall in Washington, D.C.

Keep it in the back of your mind. I'll return to it. 

I am a data nerd, and leaping to conclusions about data is a pet peeve of mine. I really hate it when anyone, and particularly my own side, falls for groupthink, jumping to instant conclusions which then become the only acceptable opinion. In the last 48 hours, without consideration of other possibilities, or looking for contrary vs. corroborating data, it seems that just about everyone on the center and left has become an instant expert on the fact that Confederate statues were erected because of Jim Crow.

In support of that, a number of graphics, such as this one, have been used:

So, has it occurred to nobody that there might be a more straightforward reason why there would be a huge spike in Memorials (cough, cough, hint, hint) ***50*** and ***100*** years after the Civil War?

Yes there were a number of racial incidents that occurred in the 1910s.  But before the last 48 hours, the general consensus was that there was a resurgence in violence associated with white supremacy in the 1920s, not the 1910s.

But 1910-1915 marked 50 years sine the Civil War, and those 20 year old soldiers who fought it  had dwindled to a band of 70 year old men, who did not want themselves or their cause to be forgotten after their generation had passed.

For (huge) example, on July 2-4, 1913, on the 50th anniversary of the Battle of Gettysburg, there was a reunion of both northern and southern armies who camped out at the site. That reunion was commemorated by the Eternal Light Peace Memorial erected on the 75th anniversary during another encampment of the last few survivors:

In our own time, we have had a demonstration of the exact same psychology: the World War Two Memorial shown at the beginning of this piece was championed as the 50th anniversary of the war approached, as a monument to the "Greatest Generation," particularly by veterans such as Bob Dole who did not want their sacrifice  to be forgotten after they shuffled off to the Last Great Muster in the sky.   Bill Clinton signed the authorizing Act for the memorial in 1993.

I am sure speeches were made lionize Jim Crow when the statues were dedicated, and none of this affects the debate on what should become of them. But can our side please not succumb to leaping to conclusions?

Here's a good test: when were monuments to Union soldiers and leaders erected? I haven't found any information onlline on that subject. Was there a similar spike in the vicinity of the 50th anniversary of the Civil War? If there wasn't, then there was something "special" about what the South did. But if there was, then the more straightforward explanation is probably the correct one.

Thank you for letting me get that off my chest.

UPDATE: Oh, good, I'm not the only one.  Here's a data analyst and neurocognitive researcher replying to Kevin Drum