Commonwealth Club Talking Points (January 25, 2019): Forecasting and Steve Moore Edition
The Shutdown: Let's review the bidding: Pelosi, Ryan, McCarthy, Schumer, McConnell, Trump reached a deal. Deal passes Senate unanimously. Trump watches "Fox and Friends". Trump announces he won't sign the deal. Paul Ryan—desperate not to embarrass Trump more—won't let the House vote on the deal. Ryan goes out and Pelosi gets in on January 4, and Pelosi passes the deal through the House. But because it is a new congressional session, the Senate's approval has expired. And McConnell—desperate not to embarrass Trump more—is now holding things up in the Senate.
From Pelosi and Schumer's standpoint, the big problem is this: they reach a new deal with Trump, Fox and Friends finds some reason to slag it, Trump backs out again.
The right, rational response to this situation is for Pelosi, McCarthy, Schumer, and McConnell to strike deals and then pass them with veto-proof majorities. But McCarthy and McConnell are too scared of Trump and not concerned enough about the well-being of the country to do that.
2.5 million people aren't getting their paychecks and 800,000 are getting very little work done. That's about a 0.5%—10 billion over the past month—hit to the economy. We won't see that because of oddities in the how the public sector is folded into official statistics, but it is there. Will there be a multiplier applied to it? In a year I will have the data so that then I will be able to look back and tell you. I cannot tell you now...
GDP Forecast: Because of the shutdown we are now largely flying blind—we are not getting the dataflow that we would have normally gotten over the past month. There is an 80% probability that Europe is in a small recession. The Chinese government says China is not in recession but somehow 6% fewer cars were bought in China in late 2018 than in late 2017.
The reliable recession signal is yield-curve inversion signals in 1966, 1969, 1974, 1978, 1989, 1998, 2000, 2006—8 in the last half-century or so. 1966 was followed by a near-recession. 1998 was a false alarm. Otherwise—yield curve inversion calls it, 6 of 8, with no unforecast recessions. The Federal Reserve's current plans are to invert the yield curve in June, and we do not undertstand why they are doing this—then they did this in 1989 and in 2006 they were worried about inflaiton, when they did this in 2000 they were worried about the stock price bubble, but nothing like that is relevant now.
There are people saying that the Fed will back off, and there are people saying that this time it really is different. Give each of those a 25% chance, and you got to say there is a 50% chance the U.S. will be in recession in a year and a half. We hope it will be a small one. We hope that somehow we will dodge the bullet...
Deficit: Back when interest rates were high, people like me convinced Democratic legislators to move heaven and earth to reduce the deficit. It required votes they saw as tough and unpopular, and those votes contributed to some of them losing their seats. Their appetite is gone. And the need is gone too—you need to reduce the deficit when, as they were in the 1980s and 1990s, interest rates are high or when there is a good chance that interest rates are soon going to become high. That is not where we are. The deficit is a problem—it would be nice to have a lower fiscal deficit with its effects on employment balanced by lower interest rates—but it's not one of our biggest twenty problems, and won't be until we can see a future of much higher interest rates...
Tax Reform of 2017?: Four times since 1980 Presidents have sold tax bills as things that will boost investment in America and generate a lot of supply-side economic growth. Reagan 1981, Clinton 1993, Bush 2001, and now Trump 2017. Adjusted for the effects of the short-run business cycle, investment in America fell after Reagan 1981 and Bush 2001 and rose sharply after Clinton 1993.
It looks like Trump 2017 is going to be a lot more like Reagan 1981 and Busch 2001. The jump in cycle-adjusted investment as a share of production is not jumping up. The people with models are not forecasting any jump—in fact, the people with models were never forecasting any jump. The boosters without models—the John Taylors, the Mike Boskins, the John Cochranes—who were forecasting a big jump a year ago are now all very, very quiet. The people who track financial flows are now saying that any boost to U.S. production is going to be outweighed by lower taxes collected on profits earned by foreigners who have invested in America.
If you and yours are each making more than 500,000 a year and are going to keep on making that, you are winners. If not, you are losers...
Trade War?: Not yet hurting much—unless you are a steel user or a soybean farmer here in the United States, or Microsoft (it looks like China's response has just been to ban its search engine Bing).
Is it hurting China? China appears to be reacting by snarfing up U.S. intellectual property to a much greater extent. They wanted to do this anyway, but were unwilling to start a fight to do it—but now that they are in a fight they are happy to proceed. Why is the Trump administration doing this? I think the answer is that Trump is not a wise man, that Navarro is a delusional man, and that Lighthizer is a corrupt man. I tell you, what the people who are wise, reality-based, and uncorrupt in the Trump administration really wish right now is that Trump had signed the TPP—then we would be negotiating with China over IP issues with 11 other countries backing us up and willing to impose penalties on China for misbehavior. As it is, we are going it alone.
California Real Estate?: God, what a mess...
After Howard Jarvis and Prop 13, the fact that property taxes were capped meant that local governments started looking at developments with fear: where are we going to find the money to provide services to all of these projects? The switch from local governments being boosters to local governments being NIMBYists has been the biggest governance disaster to afflict California in the past generation. If you own property, it's great. If you can easily get permits, it's great. Otherwise—we really need to fix this.
It doesn't look like tax reform is going to have big effects, however...
Employment?: California will not have a jobs shortage or a job quality problem over the net decade. We will and we already have a housing problem.
The country as a whole, however, has and may well have a big job quality problem. David Autor has a three-part classification of where the new jobs will come from, as "shop floor" jobs ebb away: frontier, wealth, and "last mile". Frontier jobs will, by and large, be good: people taking advantage of technology to do new things and to do things better. Wealth jobs—serving the wealthy—will be more important as people and as heirs and heiresses begin spending more out of the great wealth accumulations of the past generation in lots of ways (for example: tourism, housing, and personal enrichment—including funding things like the Commonwealth Club. So we like those). It's "last mile" jobs—the husks left behind because the real work has been automated and computerized and there is only a small, boring part left—that's the problem. The hope is that unemployment stays low enough that even those trapped in these "last mile" jobs have bargaining power. And that—keeping unemployment low—is, I think, the best way to deal with the employment problem...
California Jobs?: It's a race between tech employment generation and housing construction. If we can make housing construction win, it's a huge win for everyone. If not, we have problems...
The Kansas Republican Governance Experiment. Or Is That "Governance 'Experiment'"? Or Is That "'Governance' Experiment"?: No sooner does Sam Brownback manage to plant his behind in the Governor's chair in Topeka, KS than does Kansas's share of American nonfarm jobs and people start to drop like a stone. It is not so much absolute net flight—there were 1.397 million nonfarm jobs in Kansas at the last business cycle peak in April 2008; there are 1.400 million nonfarm jobs in Kansas today. But Kansas has seen none of the country's net employment growth over the past decade: the jobs it lost in the 2007-2009 recession it has barely recovered, while the country has recovered what was lost and has added on almost as many more in addition...
Jared Bernstein: "Steve Moore, a key trickler that pushed the plan in Kansas, didn’t see that coming: 'Sometimes it was legitimate, and sometimes it was a gaming of the tax system to pay the zero rate, so that loophole has to be closed', he said. 'Unless you have some rules about this, people really will shift income and they’ll find ways to legally avoid paying tax, and that was never the intention'. Who’d a thunk it?...
Hoisted from the Archives: Cranks and Charlatans: Stephen Moore and the Club for Growth
Jonathan Chait: Guy Who Gets Paid to Say Obamacare Doesn’t Work Can’t Find a Single True Fact to Support His Case
Deron Lee: Why one editor won't run any more op-eds by the Heritage Foundation's top economist: "A reply to Paul Krugman on state taxes and job growth made some incorrect claims...
Note to Self: Now that Stephen Moore has signed up with Donald Trump, he is opposed to the Trans Pacific Partnership.... On Trish Regan's show with him, he made four points about TPP: 1. The agreement is long, and has lots of pages in it. 2. The agreement does not commit the Asians to stop copying our intellectual property. 3. The agreement does allow the U.S. to impose retaliatory penalties on other signatories if they do copy our intellectual property, but they will copy anyway. 4. The agreement is unlike NAFTA, which is a good thing. But... short months ago...
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