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November 2016 posts

Mortgage Blowback?

By Jonathan B. Wight

The New York Times reports that consumers and housing industry experts are surprised by the sudden jump in mortgage rates – about 50 basis points (1/2%) since the election (see chart).  This could be random noise that means nothing, or a herald of something to come. 

If the latter, why should anyone be surprised? 

Mortgage ratesAs noted here and here, Donald Trump’s rhetoric and his stated policies would lead to huge increases in the budget deficit, which has to be financed by selling bonds.  Since foreigners have provided a huge part of the demand for U.S. financial assets, the shrinking of America’s role in the world (drawing away from TPP, NATO, etc.) could draw away financial assets as well. (The other side would be the liberalizing of financial regulations, which could make financial markets in the U.S. more attractive in the short run, but riskier in the long run.)

Becoming more protectionist will likely raise prices, even if the deficit were not exploding.  The combination of greater protectionism, rising deficits, a huge fiscal stimulus given current low unemployment, and perhaps less attractive financial markets for foreigners, leads to one conclusion … coming inflation ... and hence the noticeable spike in 30-year fixed mortgage rates.

You'd be a sap to lend money for that length without covering yourself for the potential increase in inflation. 

It is impossible to know what mortgage rates would be had Hillary won, but on one issue I think we can be fairly sure—budget deficit projections would be much lower, holding all else constant.

On the other hand, the Wall Street Journal discounts the worry about the uptick in inflation, and many indicators remain flat. Also, my own ability to predict inflation, growth, and other key indicators is as bad or worse than most others -- so for gosh-sake please discount my predictions. 

But elections have consequences, don’t they? And often the consequences are opposite of what is intended.  A populist who proclaims to help the lower-middle class might end up hurting that very group, through rising mortgage rates.  This would not be a surprise to anyone in Venezuela.  


By Jonathan B. Wight

Donald Trump gave a long sit-down interview with The New York Times.

It was big, really big, even great, great.

Of course, there are those who would rate it the same as usual, rambling and incoherent.

There are others who would say if we had students answering questions like this on ethics exams they would never pass the midterm, much less the course. 

And still others might say he has a learning condition that prevents him from focusing and actually addressing issues.

I would never say these things.  Others would.  Not me.

3226776737_72525bdb7f_mThe relevance to ethics and economics is that our president-elect has a strong sense of the importance of checks and balances, clear ethical standards for himself, the members of his family, and members of his administration, strong written and adhered-to rules against business conflicts of interest, and strong support for democracy abroad and freedom of the press here at home.  He exhibits exemplary Kantian duty to treat all others with respect. 

All is well – all is well, said the plump tom turkey on Wednesday, November 23. 

Insider Dealing?

By Jonathan B. Wight

TPM reports that “Trump's Philippines business partner Jose E. B. Antonio has been named the Philippines new trade envoy to the United States.”

Do you see a conflict of interest? 

What about the secret meeting with Trump’s Indian business partner with Trump's kids?

Seems impossible to eliminate the conflicts as long as Trump or his children are so wrapped up in policy as well as profit. 

Divestment would silence all the critics. 

Sense on Trade

By Jonathan B. Wight

I’ve often thought that market enthusiasts paper-over the problems that get in the way of global efficiency—problems that often exacerbate distributional concerns.

The reason for ignoring distribution, one often hears, is that going there opens a Pandora’s box that can only end badly, since trade opponents will use any excuse to achieve their protectionist ends.  Better for economists to shade their views, and err on the side of the market.

Dani Rodrik nails this one:

In truth, many trade enthusiasts are no less motivated by their own narrow, selfish agendas. The pharmaceutical firms pursuing tougher patent rules, the banks pushing for unfettered access to foreign markets, or the multinationals seeking special arbitration tribunals have no greater regard for the public interest than the protectionists do. So when economists shade their arguments, they effectively favor one set of barbarians over another.

Better, I think to do critical thinking about trade that includes its warts.  Better not to over-sell, because that will come back to bite you, as it may have done in this election.

Here is more of Rodrik’s straight talk on trade: https://www.project-syndicate.org/commentary/trump-win-economists-responsible-by-dani-rodrik-2016-11?utm_source=Project+Syndicate+Newsletter&utm_campaign=1cc802d5de-rodrik_straight_talk_on_trade_20_11_2016&utm_medium=email&utm_term=0_73bad5b7d8-1cc802d5de-104939277

Trump and the Enlightenment

By Jonathan B. Wight

I think it is a mistake to see the election of Trump in isolation. The same upheavals of discontent can be found in Germany, Sweden, England (Brexit!), Italy and many other countries. It is the voice of a beleaguered former majority voice (white blue collar workers) who have felt adrift in their own countries—neglected and sacrificed at the altar of liberal ideals.

The fault lies with us pointy-headed Enlightenment propagandists—those who over the last century were proposing to open borders to trade and people, as a way to raise the general level of wealth, promote world peace, and achieve greater fairness.

The Kantian ideal to treat all persons with respect, or the Benthamite ideal to count equally the pain of all persons and animals, whether rich or poor, has given way to instinctive nativism and crude insults towards those with differences.

The 2016 U.S. election was certainly about the distribution of gains (and losses) from the Enlightenment project.  And there’s a curious paradox: in electing Trump, voters are rejecting the Democratic approach of redistribution through entitlement spending, and supporting a more neoclassical approach of tax cuts for the rich and trickle down.  One could say this is something like communitarian or process justice in opposition to distributive justice.

But the twist is this: Adam Smith, in The Wealth of Nations, also supported a communitarian justice approach.  Fair rules of exchange would lift the working poor out of poverty!  To achieve fair rules would require opening markets to globalization and trade. 

In Trump’s world, to achieve fair rules means to reduce openness to globalization and trade.


Part of the blame for this backlash against globalization goes to those who...

Continue reading "Trump and the Enlightenment" »

Caudillos and Economic Development

By Jonathan B. Wight

My PhD was in economics, but I picked up a fascinating graduate minor in Latin American Studies along the way.  

Latin American economic development is hard to separate from its politics, because the two tend to be intertwined.  In fact, there is a specific word for the big man politician who also guides the economy:  a caudillo.

A caudillo is a Latin American strongman, who rules by cult of personality and uses this personal power (enhanced by military support) to change institutions and policies.  The caudillo defies checks and balances and the separation of powers.

Caudillos also exist in other parts of the world.  Examples of strongmen populist caudillos include: Juan Peron (Argentina, 1946-55 and 1973-74); Francisco Franco (Spain, 1936-75); Hugo Chavez (Venezuela, 1999-2013), Fidel Castro (Cuba, 1959-2008); Robert Mugabe (Zimbabwe, 1987 – present); and Vladimir Putin (Russia, 2000-08 and 2012 – present).  There are many others.

Another certain country has just elected a caudillo-type personality who shows little regard for rule of law and checks and balances.  He pledges to upend the institutional rules, including breaking trade treaties, politicizing the Federal Reserve System, engaging in massive spending on military and infrastructure, all the while giving large tax cuts to the rich.

It doesn’t take a degree in Latin American studies to predict the results: The typical outcomes of caudillo rule are what you would expect when there are no checks on excessive power:  massive government spending, monetizing the rapidly rising debt, and inflation (where prices are allowed to rise, and shortages where government sets prices as in Cuba).  Human rights violations are routine. 

Foreigners may be less willing to lend, interest rates will rise, and consumer and business expectations may be negatively affected.  A recession would not be a surprise despite the large fiscal stimulus. 

It’s going to be a wild ride.