America’s Xenophobia: An Honest Account

With over a dozen legitimate GOP candidates vying for their parties nomination, immigration has become the primary policy battleground. Donald Trump, Ted Rick Santorum, and Ted Cruz are signaling their toughness with anti-immigrant remarks. In opposition are more libertarian candidates, notably Jeb Bush and Marco Rubio. The debate on the Left is much more muted, probably on purpose, because Hillary Clinton is shamelessly unprincipled and Bernie Sanders has a troubled history on the issue.

Yet there is a claim, almost conventional wisdom, that the Republican party is more racist and xenophobic and anti-immigrant that is not only oversimplified (wrong) but ahistorical. In short, there’s a fantasy among far too many Americans today that the Democratic party is and always has been “good” on race issues. Let’s remember, this Democratic party is the same party that went to war for slavery. It’s not as if the old party went out of business and sold the logo to some upcoming SuperPac in 1924. Or 1964.

POLITICO’s Mike Kazin warns us that an anti-immigration GOP is likely to lead to Democratic dominance for decades, just like in 1924 when “a Congress dominated by Republicans enacted equally harsh policies against immigrants. Their success helped usher in the longest period of one-party rule in the 20th century.”

But is that what really happened? The Immigration Act of 1924 passed by large majorities in the House of Representatives and the Senate. Kazin seems to gloss over the reality of how decisive Democrats were in these votes.  The tally in the House was 323 to 71. The tally in the Senate was 69-9. Only nine Senators opposed the act, and only 3 of those voting Nay were Democrats.

This legislation sets the (low) standard for racist nativism in the history of U.S. laws. It was inspired by racist theories of Nordic superiority over southern Europeans, Jews, Asians, etc. The law instituted a strict immigrant quota on each country. Immigrants from Germany, England, and Sweden were limited to 51,227, 34,007, and 9,561 respectively per year. No more than 100 immigrants were allowed from most other countries, including China, India, Japan, Greece, Persia, and Turkey. Jewish immigration in particular was curtailed.  The theory on the hard Left then, as now, was that low-skilled immigrants stole jobs.

The most forceful proponent in favor of the Immigration Act of 1924 was U.S. Senator Ellison “Cotton Ed” Smith, a Democratic Party politician from South Carolina. “The time has come when we should shut the door and keep what we have for what we hope our own people to be,” Smith proclaimed in an infamous speech. Zero-sum economic thinking on the Left has not changed since, even if the racial tones have been excised.

Kazin is wrong. The xenophobia of 1924 was not a Republican project. Indeed, President Calvin Coolidge spoke against the Japanese quota in particular in his signing statement. An even clearer indication of the partisan difference came five years later in 1929 when an effort in the Senate to repeal the quotas was defeated. Look at the tallies of the 1929 vote here if you don’t believe me. A majority of Republicans voted for repeal (26-19), while three-quarters of the Democrats voted against (10-24).

The conclusion we should make is not that one party is better than the other, more or less racist than other, or any such simple claim. There are heroes and villains in both parties. A particular hero is President Harry Truman, a Democrat who spoke so dangerously of his Christian faith in the brotherhood of man. Truman merits the last word:

What we do in the field of immigration and naturalization is vital to the continued growth and internal development of the U.S. – to the economic and social strength of our country – which is the core of the defense of the free world. Our immigration policy is equally, if not more important to the conduct of our foreign relationships and to our responsibilities of moral leadership in the struggle for world peace.

I have long urged that racial or national barriers to naturalization be abolished. … I want all our residents of Japanese ancestry, and all our friends throughout the far East, to understand this point clearly. I cannot take the step I would like to take, and strike down the bars that prejudice has erected against them, without, at the same time, establishing new discriminations against the peoples of Asia and approving harsh and repressive measures directed at all who seek a new life within our boundaries. I am sure that with a little more time and a little more discussion in this country the public conscience and the good sense of the American people will assert themselves, and we shall be in a position to enact an immigration and naturalization policy that will be fair to all.

What’s Happening to the World Economy?

A recession is coming. With the sudden 1000+ point drop in the Dow Jones Industrial Average today, following another major devaluation of China’s currency (8 percent?  My God, 8 percent?), and the incessant weaknesses in the U.S. labor force during this weakest of all recoveries, the signs of a new recession are all here. But remember, a recession is always coming.

The first instinct is to wonder if the Federal Reserve should press ahead with raising the core interest rate during its September meeting. To do so in the face of so much volatility — and what feels like an imminent recession — seems to be completely counter to the basic folk wisdom of monetary policy. A central bank should lower, not raise, interest rates during the down cycle, right? I suppose that folk wisdom is correct, but beware panic thinking. Some thoughts, very briefly:

  1.  Just because the stock valuations are volatile does not mean the US economy is recessing. That’s a huge leap. Indeed, the quick bounce back in stock prices today shows that there are plenty of buyers ready to scoop up equity from panic sellers. Don’t lose sight of low unemployment, steady GDP growth, and other fundamentals.
  2. China’s devaluation (and the weakness in oil and other commodity prices) confirms global weaknesses. At a minimum, these signs indicate that other leading economies are weaker than the U.S. economy.
  3. Both previous points beg the question why U.S. interest rates are set to zero. I would argue that the zero rate has many large, second order costs. It is a major burden on other currencies, for one. By keeping US rates low, the Fed is effectively weakening the dollar relative to other currencies. There is no escaping the fact that the Fed is a central player in the currency trials — putting pressure on China, Japan, and Europe to keep their rates (and pegs) lower still. That seems destabilizing to me, and the blowback is finally here.

I think the Fed missed its optimal moment to raise rates. Zero was and still is too stimulative. A healthier U.S. economy demands a return to normalcy with interest rates, and I’m frustrated that the insistence on high asset prices may cause a crash. Today was a warning. Let’s hope it is not too late for the Fed to get rates normal.

Banking Freedom, Yes. Fiscal Union, No.

Is there a way to save the Greek people without saving the socialist government structure of Greece? Yes, according to an op-ed in today’s WSJ by UCLA economist Andrew Atkeson and my Hoover colleague John Cochrane.

When Europeans can put their money into well-diversified pan-European banks, protected from interference from national governments, inevitable sovereign defaults will not spark runs, or destroy local banks and economies.

It’s painful to imagine the innocent Greek worker who has only one option for saving her money — the local bank — which then tells that person she is no longer allowed access to her own money! The personal capital of the Greek people is being held hostage by their socialist government. Wow.

So is the right solution to give that government bailout money from the German people?  The American people? The smart alternative is to allow the Greek people to save in any bank in the world, meaning that any bank in the world should be free to open branches in Athens and other Greek cities. As John has written before, this freedom is what makes government debt in Illinois and Puerto Rico different from Greece.

In Balance, we make a similar observation in Chapter 10 “Europa: Unity and Diversity.” Recognizing that too many issues are oversimplified as less-v-more and good-v-evil, the nature of freedom and the state is ambiguous on centralized authority. Parsing the degree of centralization that optimizes prosperity differs across different institutions: speech, banking, immigration, taxation, and so on. While we generally should err toward decentralization, John makes a case that monetary union (or rather, currency union) is a good thing. In Balance, we wrote,

One difference between European and American integration is much more fundamental, yet it has received little attention. …The bank account of a citizen in Lansing, Michigan, is not threatened by confiscation or default of the Michigan statehouse. That same security does not comfort the bank accounts of the people of Athens.

Critics have warned that a currency union without a fiscal union is inherently flawed. That is hogwash. Glenn and I described (on page 209) six distinct policy layers of economic integration.

  1. Trade
  2. Monetary (aka Currency)
  3. Labor
  4. Regulation
  5. Banking
  6. Fiscal

Too many experts think of integration as an all-or-nothing choice. They may favor incremental steps toward integration with trade agreements (as we do), but ultimately their bias is for ultimate integration of all layers (as we do not), especially fiscal union. Fiscal union can be benignly described as strong states subsidizing weaker/poorer states, but I hear that as glossy language for a full transfer of control over the authority to tax and spend.

There’s no need for any state to surrender fiscal authority to the central government. The fifth layer is far enough for optimal efficiency. That’s banking union, which is more properly understood as banking freedom from the perspective of individual citizens. Local cities and states do their people no favors by holding sovereign power to control and confiscate the private assets held in local banks.  It’s nice to see Atkeson and Cochrne putting more attention and historical background on this issue. The final word is theirs:

The United States offers a precedent. … In the 1980s, the U.S. deregulated banks to allow extensive branch and interstate banking, further isolating local banks from local troubles.

… Europe needs well-diversified, pan-European banks, which must treat low-grade government debt just as gingerly as they treat low-grade corporate debt. Call it a banking union, or, better, open banking. The Greek tragedy can serve to revive the long-dormant but necessary completion of Europe’s admirable common-currency project.

Are jobless claims overheating?

Watching the U.S. labor markets, I have long been impressed that initial jobless claims are one of the best real-time indicators of the health of the overall economy. And right now, they are white hot.

uiclaims

When the economy is normal, there are 300k to 350k claims for unemployment insurance filed across the nation.  When claims rise above 400k, it is a sure sign of recession. Often, it takes months or years into a recovery for claims to drop down below that red line again. However, it is rare for claims to drop below 300k. Very rare for that level to be sustained.

In the past 4 decades, it has happened 4 times:

  • 1987 (briefly) and 1988
  • 1998 – 2000
  • 2005 for a few weeks
  • The past nine months (Sep 2014 – June 2015)

What’s really extraordinary is when jobless claims fall below 275.  That’s where they have been for the past 14 weeks. The only other time claims went below that line was in the second quarter of 2000, right before the dot-com bubble burst.

I have no idea if white-hot jobless claims trend is alarming, but I have every confidence that it means the labor market is strengthening faster than most realize. The wage inflation data may not show it yet, but I fully expect higher wages and labor force participation in the months ahead.

UPDATE: I posted in a new version of the chart, saved on the WordPress site instead of just pasted in from excel.  Hope you all can see it.

Contextualizing GDP growth in the U.S.

Today the Bureau of Labor Statistics published the first look at Q1 Gross Domestic Product and its components. The headline number was revealed to be a surprisingly low 0.2 percent. This is alarming, but not just because it defied the consensus prediction. Any single estimate, especially a preliminary one, is not in itself alarming. What’s alarming is the trend.

Take a look at the following image of the past six quarters’ GDP growth rate and its main components (expressed in terms of how each component adds up to the aggregate GDP number):

image (2)

We see weak Consumption growth, above all.  The net exports number is negative, but that won’t last (more on that below) and besides it was negative last quarter, too. What surprises me is the disappearance of Investment. Realize that a year ago the economy wasn’t just stalling, it was contracting. Rather than get worked up about one quarter, let’s look at the whole recovery to date.

In the next chart, consider how the current recovery’s average growth rate (and average component growth rates) compares to previous expansions.  I calculated each of the expansions based on NBER business cycle dates, trough to peak.

image (1)

What do we see?

1.  The new normal (this expansion) does not look very healthy. Overall, the GDP growth rate is half of the rate in the 80s expansion.  Even more interesting is what looks like a clear linear trend of slower overall GDP growth from 4.4 to 3.8 to 2.9 to the current 2.2.  But why?  Keep in mind that the lengths of the periods being averaged are not equal. The 80s expansion is the 3rd longest in US history at 108 months, while the 90s expansion is the 1st longest at 128 months.  In contrast, the 2000s expansion is “merely” 81 months which, oddly, is also the length of the current expansion.

2. Net exports are a non-story. Currently, the impact of net exports is a mild reduction to topline GDP growth in recent years, maybe 0.1 percentage points, the same as every previous expansion.  Moreover, you don’t find the gains of trade in these topline figures, rather they come from cost efficiency in intermediate goods. Regardless, people spinning blame for weak growth this quarter or this year on Greece or China are not checking their history.  We’re lucky there IS a China (there essentially wasn’t one in the 1980s). Scapegoating foreigners is always lame, but especially here.

3.  The components do not show weakness in Investment during our era.To be honest, I thought “I” would be revealed as weaker today relative to recoveries past. To the contrary, what’s most different in the expansion since 2009 is the weaker Consumption and Government.

I wasn’t satisfied with the second chart because it doesn’t put each recovery in context of the depth of the recession the economy “bounces back” from.  This is important because in 2009, the White House and CEA were claiming that the recovery was likely to be very strong because the recession had been very deep. Greg Mankiw posted an astute comment on his blog at the time which has been on my mind ever since: “The purpose of this picture is to show that deeper-than-average recessions are followed by faster-than-average recoveries. ” (read it here). Naturally, he was attacked by Paul Krugman for daring to question what was unquestionable: the certainty of a strong recovery (stronger still thanks to the Stimulus).

It is striking that the debate raged for a year or two – there’s always tomorrow, right? — but nobody believes today what apparently everybody believed in 2009.  This really begs the question, why is the economy NOT rebounding back to trend?  My Hoover colleague, John “Grumpy” Cochrane, has some interesting things to say about unit roots and trends, but the bottom line is that the very idea of Potential GDP has become slightly metaphysical. I have mixed feelings about it.

The third chart provides some useful context, and in this one you should know the recessions are of roughly equal duration (4-6 quarters).  Now THIS is a picture worth a thousand words:

image (3)

The ’01 recession is an odd duck — average GDP growth was bizarrely positive, albeit tiny. Consumption growth was not derailed at all.  If you believe that boom is proportional to bust, then the mildness of the 00s expansion makes sense. But that means the current expansion does not. And the very sharp drop in Consumption in the 08 recession and current recovery signal that something permanent shifted negatively during the financial crisis.

A final, vital piece of context is that all growth is good growth. What I mean is that our collective focus on “weak growth” is an oxymoron. Even the weakest growth means that the economy is richer than it was the quarter before. By comparing 2015 to 1985, the actual underlying economies are radically different in ways from the composition of the labor force to the nature of money itself. But still, I’m left with a sense that the engine of US growth — our institutions — have changed for the worse. That’s alarming.

Thoughts on Jobs Day

Today’s jobs report is a lot like the last one and the one before: mixed signals.  The unemployment rate is unchanged at 5.5 percent. Payroll growth is positive but timid at 126,000 when economists had apparently expected twice that.  Seven cents were added to the average hourly wage, which is faster than normal. And finally, worst of all, continuing the trend of the past 5 years, the labor force declined by nearly 100,000 people.

Those are mixed signals, but it is exactly what I expected. The most alarming central fact of the economy’s new normal is that it is bleeding people. Here’s a quick and dirty facts from BLS data on the labor force participation rate overall (LFPR) and the rate for people between the ages of 25-54.  This disproves the contention that the change is just about demographics.

-3.5  = Change in LFPR since 2007
-2.2  = Change in LFPR 25-54 since 2007
+1.1  = Change in Unemployment rate since 2007

When the Federal Reserve looks at today’s report, it has to conclude that this may be as good as it gets. Frankly, you do not want to see the unemployment rate get much lower than 5.5 or else it will signal an overheating economy.  The last time the unemployment rate went below 5 percent, it was 2005. But they were being pushed down by ultra low (at the time) interest rates set by the Fed in 2003. Real estate markets were inflated. Starting in mid 2004 – when the unemployment rate was exactly what it is today (5.5%) – the Fed began raising interest rates, which it did multiple times to cool the engine. We all know how that ended. Consider:

-3.4  = Change in LFPR since 2004
-1.8  = Change in LFPR 25-54 since 2004
+0.0  = Change in Unemployment rate since 2004

This is the new normal. So why is LFPR down three and a half percent?  That’s the magic question.

Gerrymandering Misunderstood

The Washington Post has a short article about gerrymandering with a deeply flawed graphic. By that, I mean the graphic implies that the most partisan district lines are the ideal.  How crazy is that? One hand at the Post is writing (for decades) that partisanship has gotten out of control, but the other hand says that partisanship in extreme districts is the answer.

This chart’s “1. Perfect representation” system is deeply flawed — it has 5 extreme incumbents who will never face a challenger. Not perfect at all. It looks a lot like the incumbency-protection gerrymander in California from 2002-2012. It is the kind of system the monopoly parties love, candidates hate, and where people are irrelevant.