Unconventional Wisdom - April 27 2019 EconVue Spotlight

EconVue is about the Gettier Problem which to simplify means that just because one is justified in drawing a conclusion, doesn’t mean that it is true. For example, we certainly could be justified in thinking that racial hatred has increased in the US based on media and news reports.  However, a fascinating University of Pennsylvania study says that this isn’t true, and that actually racial prejudice has been declining.

In economics, fiscal restraint is no longer fashionable, but Timothy Congdon’s review of an important new book titled simply Austerity explains that there is more than one type of austerity, and not all are good or bad.  Christina and David Romer’s latest paper about fiscal responses to financial crisis says that debt levels and policy matter too. Breaking new ground, Edward Pinto finds that 30-year mortgages are riskier than 20-year mortgages. Large cities are losing population, but does this mean that mobility is increasing? Why haven’t low interest rates helped emerging market economies?  These issues are complicated, and analysis needs to be rigorous, and well, without prejudice.

Even happy surprises need to be analyzed for their potential weaknesses. GDP growth was far above consensus on Friday, but in order to decide if this is sustainable, we need to peel away the onion to see if this was actually linked to inventory stockpiling due to trade uncertainties. I really loved Greg Ip’s piece in the Wall Street Journal about the need for clear thinking at the Federal Reserve rather than a PhD in economics, and the real value of economics, a field which has seemed out of touch to many. 

Finally, on this snowy evening in Chicago, I am pleased to answer a question I have received many readers: how can we buy a subscription to your newsletter?  We have thought long and hard about this, but we don’t want to create a paywall to exclude any reader, or include advertising.  So following in the footsteps of several friends, we have joined Patreon.  If you would like to support and sustain our efforts, in any amount, please click here for details. And to answer a second question, yes, we are happy for you to forward Spotlight to your friends and colleagues. 

RESEARCH BY OUR EXPERTS

Shortcomings of Fiscal Activism Exposed in Important New Book 
Tim Congdon

This book could cause a revolution in macroeconomic thinking. Nothing in the Keynesian textbook orthodoxy about fiscal policy remains safe and unchallenged.

Core PCE Inflation Lull Should Be Short-Lived
Michael Lewis

While this morning’s +3.2% rush in 19Q1 real GDP growth beat all estimates handily, the markets’ attention and that of many analysts has been focused on another number: meager +1.3% annualized core PCE inflation for the quarter. (Lewis’s forecast had been 2.75% --still far above consensus.)

U.S Sanctions, Oil Markets and Geopolitics
Karim Pakravan 

The dilemma facing the Trump administration is that shutting off Iran, the second largest OPEC oil producer, from global oil markets will create a  supply shock and could lead to significantly higher oil prices--a tricky outcome in the current election cycle.  Offsetting the loss of Iranian oil production requires a complex balancing of economic and geopolitical interests, with significant unexpected consequences. Podcast to follow next week.

STORIES IN OUR SPOTLIGHT

U.S.

What You Need to Be on the Fed...and It Isn’t a Ph.D.
Greg Ip 4/14/2019 Wall Street Journal

The economics profession isn’t licensed, for a reason. It’s not about a test, a degree, or even a body of knowledge it’s a way of thinking about and seeing the world.

Why the Universal Use of the 30-Year Mortgage Is Dangerous
Edward Pinto 4/22/2019 Real Clear Market

The short answer is that the 30-year mortgage amortizes extremely slowly, making it nearly twice as risky as a similar loan with a 20-year term. 

Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why
Christina D. Romer and David H. Romer 4/2019 the National Bureau of Economic Research

In OECD countries over the period 1980–2017, countries with lower debt-to-GDP ratios responded to financial distress with much more expansionary fiscal policy and suffered much less severe aftermaths. Two lines of evidence together suggest that the relationship between the debt ratio and the policy response is driven partly by problems with sovereign market access, but even more so by the choices of domestic and international policymakers. 

The Rise of Trump, the Fall of Prejudice? Tracking White Americans' Racial Attitudes 2008-2018 via a Panel Survey
Daniel J. Hopkins and Samantha Washington 4/25/2019 SSRN

In his campaign and first few years in office, Donald Trump consistently defied contemporary norms by using explicit, negative rhetoric targeting ethnic/racial minorities. Did this rhetoric lead white Americans to express more prejudiced views of African Americans or Hispanics, whether through the normalization of prejudice or other mechanisms? We assess that question using a 13-wave panel conducted with a population-based sample of Americans between 2008 and 2018. 

I've been puzzled why the dovish Fed hasn't helped EM currencies more. After the IMF-WB meetings, I understand this better. 
Robin Brooks 4/14/2019 Twitter Threads

It could also be that for example, institutional weakness, inflation and 15% unemployment in emerging markets such as Turkey are giving investors pause. It’s not all about the Fed.

Association of Cannabis Use in Adolescence and Risk of Depression, Anxiety, and Suicidality in Young Adulthood
Gabriella Gobbi, Tobias Atkin, and Tomasz Zytynski 2/19/2019 JAMA Psychiatry

In this systematic review and meta-analysis of 11 studies and 23 317 individuals, adolescent cannabis consumption was associated with increased risk of developing depression and suicidal behavior later in life, even in the absence of a premorbid condition. There was no association with anxiety.   Investors are jumping on the marijuana bandwagon. Will this new industry go up in smoke?

Food Is Medicine—The Promise and Challenges of Integrating Food and Nutrition Into Health Care
Dariush Mozaffarian, Jerold Mande and Renata Micha 4/22/2019 JAMA Internal Medicine

A very Chinese point of view.

Chicago is still losing population
John Pletz 4/17/2017 Crain's Chicago Business

Post-recession, mobility has resumed. It’s not just Chicago it’s NY and LA.

Technology

Narratives About Technology-Induced Job Degradation Then and Now
Robert J. Shiller 2/27/2019 Cowles Foundation Discussion Paper, RRSN

Concerns that technological progress degrades job opportunities have been expressed over much of the last two centuries by both professional economists and the general public. These concerns can be seen in narratives both in scholarly publications and in the news media. 

Forget about artificial intelligence, extended intelligence is the future
Joi Ito 4/24/2019 Wired

Thinking outside the singularity bubble about the limits of artificial intelligence by the head of the MIT Media Lab.

1 million new IoT devices every hour every day in the world… and soon this number will appear ridiculously low
Fabio Moioli 1/15/2019 Linkedin

The coming global techno-surveillance state will mean no one is unplugged.

I've never seen a compelling case for a private/enterprise blockchain. Not once. Ever. All noise.
Stephen Cole 4/20/2019 Twitter threads

The idea of a blockchain is that it is public, so not surprising. By an engineer and professional in the field.

Benefits and Concerns of the Sharing Economy: Economic Analysis and Policy Implications
Min Jung Kim 2/28/2019 KDI Journal of Economic Policy 2019, SSRN

This paper analyzes the benefits and concerns of the sharing economy and derives policy implications that could help to achieve the expected benefits and respond appropriately to any concerns. 

Why the Cook County Assessor’s Office made its residential assessment code and data public — voluntarily
Robert Ross 4/17/2019 Medium 

Europe

U.K. Retail Sales Surge as Consumers Defy Brexit Turmoil
David Goodman and Lucy Meakin 4/18/2019 Bloomberg

The UK economy is doing fine. So is the US. Trade shocks don’t tank countries anymore if their domestic markets are strong. The world is full of easily available supply alternatives for most goods and commodities.

CER Podcast: Europe and Saudi Arabia after Khashoggi
Sophia Besch, Beth Oppenheim 4/24/2019 Centre for European Reform

Sophia Besch asks Beth Oppenheim whether the European-Saudi relationship has changed after the murder of Jamal Khashoggi last October. This is even more important in a world where Iranian oil is increasingly, fenced off. 

Franco-German questions on Europe
David Marsh 4/24/2019 OMIFF

The longest-running conundrum in the European Union is: 'Who runs Europe – France or Germany?' The next few weeks will see further questions – but no ultimate answers.

Asia

Filling the post-Heisei void
Jeff Kingston 4/27/2019 East Asia Forum

On May 1st  Japan begins Reiwa, a new imperial era, after the abdication of Emperor Akihito. What can we expect of the new emperor?

Who Is (and Who Isn't) Attending China's 2nd Belt and Road Forum?
Shannon Tiezzi 4/27/2019 the Diplomat

The Second Belt and Road Forum is officially underway in Beijing, bringing with it a host of government leaders from around the world. But who, exactly, is coming — and just an importantly, who isn’t? And what does the attendee list say about the Belt and Road Initiative as a whole?

Who Owns Huawei?
Christopher Balding and  Donald C. Clarke 4/17/2019 SSRN

Two well-respected scholars of China’s modern economy conclude that Huawei is basically state-owned. Former Australian Prime Minister Kevin Rudd recently said that 60% of China’s economy is not private.  Perhaps not, based on how China’s economy is structured.