Here’s the state of Britain’s right wing party, supposedly being torn apart by Brexit:

Alan Duncan, a junior minister in the Foreign Office, said of the Tory MPs who had triggered the confidence vote: “This is an act of irresponsibility, foolishness and national vandalism.”

“Any attempt to replace the prime minister in the middle of all this is utterly reckless and brainless. Anyone who has done this should be ashamed of themselves. They are not acting in the national interest.”

If Mrs May lost a vote of confidence or decided to resign, it would plunge the party into a formal leadership contest; there is no clear frontrunner to replace her and any contest would be highly divisive and could take weeks to play out.

Now let’s look at the condition of the right wing party in an English-speaking nation facing no Brexit crisis, which has a healthy economy that has been growing for 27 straight years, and no immigration crisis:

Mr Morrison owes his current eminence (if, again, that is the right word) to a cabal of what a senior Liberal calls a bunch of “crazy, right-wing nutjobs”. In August they defenestrated the man, Malcolm Turnbull, who had called and won the previous election, and had attempted to govern as a pro-business and socially liberal centrist. One of the cabal, Peter Dutton, a vituperative populist, failed to secure Mr Turnbull’s crown. In the ensuing scrimmage, which did few of its participants credit, Mr Morrison won it almost by accident. The most competent moderate, Julie Bishop, was swiftly trampled. . . .

In politics, says one senior party member, you used to make progress through compromise. “Now, it’s, ‘If you don’t give me something I want, I’ll blow the place up.’” Perhaps Mr Abbott and his like really do have a death wish. Perhaps they fancy that defeat by the Labor Party will have a wonderfully purgative effect, clearing the wets out of the Liberal Party and allowing their faction to enjoy unadulterated rule. What is nearly certain is that a grand old party faces a whipping next year. The question is whether it can survive at all.

As I keep telling you, there’s something in the water. (Or the internet?) I’m sure that some commenters will say that politics is always like this.  Actually, this is much worse than usual.  I predict that the US Republican party will be torn apart by a similar crisis, at some point in the next few years.

PS.  This also caught my eye in the Australia article:

As if in support, the women’s minister, Kelly O’Dwyer, said in a leaked discussion with colleagues that the party’s leaders were seen as “homophobic, anti-women, climate-change deniers”.

Anti-women? So it’s not just Brazil, the Philippines, the US, Italy, and Russia.  Add Australia to the list of countries featuring increasingly misogynistic leadership.  Is that enough to count as a trend?  Maybe Time’s “Man of the Year” should have been, “The angry, homophobic, misogynist, authoritarian, gas guzzling, macho male.”

PPS.  This made me smile:

“Now, it’s, ‘If you don’t give me something I want, I’ll blow the place up.’”

Trump has said that if Congress doesn’t give him the new Nafta, which is quite similar to the old one, he destroy Nafta entirely.

What should the Dems do?  Feed the beast, or see if Trump is bluffing?

India’s Modi shares some similarities with other populists in places like Turkey, Italy and the US.  Here’s a recent FT story:

Tensions between the RBI and Mr Modi have been mounting for months over the central bank’s hawkish monetary policy, use of its mounting reserves and the tough measures taken to clean up bad loans at India’s state-run banks.

Mr Modi has been accused of demanding that the RBI ease back on its crackdown out of fear it will hit economic growth during his drive for re-election, particularly as liquidity in non-bank lenders has dried up after a series of defaults at IL&FS, a high-profile finance and infrastructure group.

At a 10-hour board meeting last month, Mr Patel made a number of concessions under heavy pressure from government nominees, including promising to review restrictions on fresh lending by banks that already have high levels of bad debt. Pressure on the RBI was expected to continue at Friday’s meeting.

Fresh lending from banks that already have high levels of bad debt?  What could go wrong?

As a result of the pressure, Patel announced his resignation today.  (Recall that Raghuram Rajan was let go two years ago, for similar reasons):

“By forcing Mr Patel’s hand, the government has now made it clear who runs the show,” said Eswar Prasad, a professor at Cornell University, adding that the move marks “the culmination of the government’s taking the hammer to a cherished and widely respected institution”.

The Indian rupee fell more than 1.8 per cent against the dollar in the immediate aftermath of Mr Patel’s resignation.

If you look around the world, there is more and more evidence that the left and right are switching position on a wide range of issues:

1.  The populist right is increasingly supportive of monetary stimulus and opposed to central bank independence. (Easy money)

2.  The right is increasingly supportive of protectionist trade policies. (Mercantilism)

3.  The right is increasingly supportive of ramping up “moral hazard” in the financial system. (Easy credit)

4.  The right is increasingly supportive of deficit spending, including entitlements.

Those used to be left-wing positions.  Of course there are plenty of Republican politicians and pundits in the US that still oppose this populism, but this is the way that politics are evolving, all over the world.

I predict this process will continue, with local variations. Many other left wing ideas will flip to the right. The right will advocate a higher minimum wage and more government spending on infrastructure.  Right wing populists will increasingly oppose Silicon Valley type companies.    But this switch on tech firms will be less noticeable in the US, as it conflicts with the desire of nationalists to extract rents from the rest of the world.  In contrast, populists in the other English speaking nations will be less protectionist than in the US, as the costs of protection are more obvious in those smaller trading nations (Canada, the UK, Australia, New Zealand, Ireland, etc.)

Nonetheless, at a deep psychological level, the forces reshaping politics are obviously global.  The Economist has a fascinating article on the recent dramatic changes in Australia’s (conservative) Liberal Party, in which a Trumpian wing is suddenly becoming far more powerful.  Interestingly, the factors that supposedly led to the rise of Trump in America (opposition to imports, the Great Recession, low-skilled immigration, etc.) are largely absent in Australia.  This suggests that the psychological cause of this phenomenon is far deeper that the shallow explanations offered by media pundits.  I have no idea what those causes are, but imagine they will become clearer over time.  Why is misogyny usually a part of the package, for instance?

The Conservative Party in the UK is going through turmoil very similar to what’s reshaping Australia’s Liberal Party.  Unlike in Australia, however, it stays afloat because its opposition is even more loony.  The Australian Liberal Party doesn’t benefit from such a weak opposition, and thus faces a disaster at the next election.

The good news is that all of this turmoil may eventually lead to a US political party that is socially liberal and economically liberal.  I fear, however, that in the short run we’ll have two economically illiberal parties.

Imagine a leader with an enormous ego and a devoted fan club, who frequently behaves in a reckless and irresponsible fashion.  He sends out tweets full of bizarre and irresponsible attacks on other people, and also misrepresents important financial information, which misleads various stakeholders.

What should we do with a leader like this?

I guess the answer depends on where they work.  If they work in the private sector, then they need to be punished for their bad behavior, perhaps by the SEC.  If they work in the executive branch . . . well, you can guess.

PS.  Make that three big egos—look who The Economist thinks has a good chance to become the next British Prime Minister:

Mrs May might well win such a vote, if only because Mr Johnson is so unpopular among Tory MPs. His problem is not just that the majority of Tory MPs voted “remain” in the referendum, and hate him as leader of the Brexiteers. MPs of all political persuasions regard him as a cad. One senior Tory says that “it’s 100% inconceivable that he’ll become leader of the Conservative Party…He’s a media clown, not a serious politician.” “He’s a shit who doesn’t give a shit about anything but himself,” says another. The list of charges against him is long: he doesn’t believe in anything but his own advancement; he doesn’t lift a finger to help his colleagues; he was a disaster as foreign secretary.

He has one big thing going for him, in the eyes of most Tory MPs: his performance at the polls. When he won two terms as mayor of Labour-leaning London he was praised for possessing the “Heineken factor”—the ability to reach parts of the country that other Tories couldn’t reach. . . .

But should Mrs May lose a confidence vote, Mr Johnson has a good chance. The two further hurdles are probably superable. He has to get onto a shortlist of two MPs that the parliamentary party sends to the party’s 124,000 members, and then he has to win the membership’s support.

On the first, the Brexiteers, who include not just the ERG but other eurosceptics, have enough votes to get one of their own onto the final shortlist, and are likely to coalesce behind Mr Johnson. Jacob Rees-Mogg, their leader, has already said that he thinks that Mr Johnson would make an excellent prime minister.

On the second, Tory party members like Mr Johnson more than Tory MPs do—and are getting keener with every suicide-vest jibe.

Could a conservative politicians who is hated by his elite of own party (but not the voters), who acts like a buffoon, and who likes to make outrageous attacks on a top female politician, actually become the leader of the UK?  Stranger things have happened.  Eventually every country in the world will elect a buffoonish nationalistic leader.  And then the world can pick up where it left off in the 1930s, before that unfortunate detour into the UN, EU, IMF, WTO, World Bank, NATO, NAFTA and all those other institutions that ruined everything accomplished during 1914-45, the golden age of nationalism.

PPS.  Speaking of big egos, a victim of the MeToo movement has just died:

• Dennis Hof, the notorious pimp and Republican candidate for Nevada’s state assembly, died hours after a combination 72nd birthday party/campaign rally attended by GOP tax fighter Grover Norquist, recent Trump pardon recipient Sheriff Joe Arpaio and porn movie legend Ron Jeremy.
• Hof died at the Love Ranch, one of his legal Nevada brothels, according to the Reno Gazette Journal. Another brothel of his, the Moonlite Bunny Ranch, was made famous by the HBO show “Cathouse.”
• Multiple former prostitutes had accused him of sexual assault, but prosecutors did not file charges against Hof, who denied the claims.

As you’d expect, he was highly popular with evangelical voters.

You’ve probably noticed that I no longer do as many posts on monetary policy.  That’s partly because I put my better posts over at Econlog and partly because there’s currently not much to talk about.  NGDP growth has been in the 3% to 5% range for 9 years, and I see no sign of anything changing in the near future (except perhaps a bit slower NGDP growth after this year, which is currently featuring above 4% growth.)  While boring is bad for me, it’s good for the economy.

Today, interest has turned to the question of when the next recession will occur.  The short answer is the same as always—no one can predict recessions.  But I’d like to talk about the issue anyway, since everyone seems interested in the question.

I’ve recently been catching up on David Beckworth’s podcasts, and listened to a very interesting discussion he had with Michael Darda.  Michael is a market monetarist who works in the investment area, and is known for having an excellent grasp of macroeconomics.  He knows the data quite well and he has a rare ability to interpret macro data correctly.  Lots of people are good at one, but he’s extremely good at both—no doubt partly due to his upbringing in Madison, Wisconsin.
At one point they began discussing the yield spread, which has been one of the better recession forecasting tools.  I’d like to put in my two cents worth.

As you can see from the following graph, the yield curve often inverts before a recession.  Here it’s important not to over interpret the correlation, as US expansions never last more than 10 years, and yield curves typically don’t invert until well into an expansion, and the lag between inversion and recession varies somewhat over time.  Furthermore, yield curves did not invert before recessions in the 1933-58 period.  Still it’s one of our most reliable forecasting tools.

Here are a few observations:

1.  Over at Econlog, I argued that while the yield spread is pretty good at predicting recessions, it’s much less good at indicating when money is too tight.

2.  It’s possible that the yield spread is reacting to changes in the unemployment rate.  Consider the following hypothesis.  The yield spread gets relatively flat whenever the unemployment rate falls to a level close to the natural rate of unemployment.  Let’s also assume that the unemployment rate falling close to the natural rate is a good predictor of recessions:

In that case we should be worried, as the unemployment rate has recently fallen to a level that is probably close to the natural rate.

Interestingly, there is one notable case when unemployment falling close to the natural rate did not lead to a recession.  In 1966, unemployment fell to 3.8% and there was no recession until 1970.  But that false signal is equally true of the yield spread, which also inverted in 1966.  Coincidence?

[On the other hand, the natural rate of unemployment is time varying (higher during 1975-95) and hard to measure, which makes the yield spread a better forecasting tool.]

When the unemployment rate is trending lower, it’s rational to expect the expansion to continue.  It may not always continue (consider 1981) but it’s a rational forecast.  And when unemployment is trending lower, the yield spread tends to be positive.  That’s because investors expect the future economy to be stronger than the current economy, and interest rates are highly correlated with the strength of the economy.

Conversely, when unemployment has fallen close to the natural rate, it’s no longer rational to expect lower unemployment in the future.  Indeed it’s quite likely that we’ll soon enter a recession.  That’s why the yield curve gets flat, and sometimes inverts.  In plain English, we never seem to achieve soft landings.  But Australia frequently does, and thus it’s not impossible.  The UK achieved a soft landing in 2001, and hence their 1990s expansion lasted until 2008.  If they can do it, so can we.

Memo to Jerome Powell:  Your mission, should you decide to accept it, is to avoid the hard landings that so often occur, but also avoid the 1966 scenario, where the Fed pulled up too soon, never landed at all, and instead soared off into the Great Inflation.  To do this, you need to avoid an excessively expansionary policy, which sometime triggers the inflation that later causes overly tight policy, and also avoid overly tight policy, which can directly cause a recession.  Let’s see . . . how about 4% expected NGDP growth?

Given that we’ve never had an expansion last for more that 10 years, you might wonder why I expect this one to go beyond a decade.  Well, until 2006-12 we’d never had a housing crash.  Until 2016, we’d never elected a lunatic as President.  Until 2018, we’d never adopted a wildly expansionary fiscal policy during a period of peace and prosperity.  None of those examples have any bearing on how long this expansion will last, rather they show that it’s really common for things to happen that have never happened before in the US.  And notice that other countries have had housing crashes before 2006, and lunatic presidents, and reckless fiscal policies during peace and prosperity.  That’s why I mentioned Australia and the UK (and there are many other such examples.) They provide an important clue that there is no inherent age limit on expansions.

Inductive reasoning can be useful, but must be handled with care.

PS.  The Hypermind NGDP prediction market is currently forecasting 4.8% NGDP growth from 2018:Q1 to 2019:Q1.  However, since the 2nd quarter is already in and growth was quite strong, this implies (annualized) 3.9% NGDP growth from 2018:Q2 to 2019:Q1.  Monetary policy is right on course.

PPS.  Because money is now boring, and my Trump posts are always stupid, please feel free to recommend other topics.  On the other hand, money is the only topic on which I have anything interesting to say.

Natural experiments are being conducted all the time.  And yet I often feel like people really don’t care about the outcome of these experiments.

Let’s consider 5 popular hypotheses:

1.  The mortgage interest deduction has a major impact on the housing market.

2.  The NASDAQ was obviously wildly overvalued in 2000.

3.  Switzerland was forced to revalue its currency in January 2015.

4.  The US housing market was obviously wildly overvalued in 2006.

5.  Brexit would cause a recession in the UK economy.

In my view, natural experiments have strongly suggested that all 5 of these hypotheses are false.  And these are not trivial unimportant hypotheses, they were widely held views about some really important issues.

1. The tax bill that passed last year sharply cut back on the mortgage interest deduction.  Before that happened I read about 1000 articles warning that if we took away this deduction it would severely hurt the housing market.  We didn’t completely eliminate the deduction, but it’s more than half gone.  And yet housing continues to boom.  I have yet to see a single news article discussing this important natural experiment.

2.  The Nasdaq is now far higher than in 2000.  Of course it could be wildly overvalued today.  Unlike in 2000, however, there is no widely held view that it is wildly overvalued today.  That’s a problem for the hypothesis that it was wildly overvalued in 2000.  If true, why don’t people feel that way about the current stock market?  And you can’t point to changing economic circumstances, such as lower nominal interest rates, as those factors are linked to other changing economic circumstances, such as an unexpected slowdown in trend NGDP growth.  I.e. where would Nasdaq be today if NGDP had grown during 2000-18 as rapidly as people expected back in 2000?  Maybe 10,000?

3.  Tyler Cowen correctly noted that Denmark would provide a good test of whether Switzerland was forced to revalue in January 2015.  We now know that Denmark was not forced to revalue.  Even worse, evidence suggests that the Swiss revaluation did not have the intended impact on the SNB balance sheet, which kept growing. That was claimed as the reason the Swiss needed to revalue.  And yet despite this natural experiment, experts continue to claim that the Swiss were forced to devalue, as in this recent podcast. It seems obvious to me that the Swiss simply made a mistake—are there any good counterarguments?

4.  There are two powerful pieces of evidence against the claim that the US housing market was overvalued.  First, many who made that claim also said the same thing about housing markets in Canada, Australia, the UK, and other countries.  And yet many of those other countries did not crash.  Even worse, America’s housing market has mostly recovered, and yet I see almost no one currently saying “America’s in a huge housing bubble, and when it crashes we’ll have another Great Recession”.  So why continue to claim the 2008 recession was caused by a housing bubble that no longer even looks like a bubble at all?  (And don’t point to housing construction; that’s shifting the goalposts.  In 2008, everyone pointed to the historically high level of house prices in 2006; housing construction never reached unusual levels during the boom.)

5.  This one hasn’t been entirely ignored, as the Brexit supporters pointed to a strong economy after the June 2016 vote.  The Financial Times claims that Brexit is now slowing British growth:

In my view it’s too soon to claim that Brexit is slowing growth.  I expect it will, but the graph the FT presents does not look statistically significant to me.

Ditto on the recent corporate tax cut—it’s too soon.  Both supply-siders and Keynesians expected a short term boost to growth, for different reasons.  Only the supply-siders predicted a longer term boost.  My own view was somewhere in between.  I expect some sort of long run supply-side boost, but much less that the Larry Kudlows of the world expect.  I see perhaps an extra 2% in RGDP growth spread out many years, with most of the boost coming soon after the tax cut.  Supply-siders see the growth rate rising to a new trend of roughly 3%/year, which seems unlikely to me.  If growth is still running at 3% in late 2019, then I clearly will have underestimated its impact.  I hope I did.

I’ve done a number of previous posts on this general topic, discussing earlier experiments such as the 2013 fiscal austerity, and the 2014 elimination of extended unemployment benefits.  Those who suggested that these would be good natural experiments often ignored the results when they didn’t go as expected.  (GDP growth accelerated in 2013, and job growth accelerated in 2014.)

Many pundits can’t handle the truth, unless it confirms their prior beliefs.