Wednesday , April 25 2018
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Menzie Chinn

Menzie Chinn

He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

Articles by Menzie Chinn

Liberal Biased Uncertainty Index Elevated

11 hours ago

Reader CoRev argues that economic uncertainty indicators such as the Baker, Bloom and Davis based on content analysis of newspaper articles are instances of GIGO (garbage in, garbage out). Here is a plot of another indicator suggesting current elevated uncertainty.
Figure 0: Measure of risk/uncertainty (red). Date for April is data through 4/23.
This indicator is the VIX, which is “a measure of the stock market’s expectation of volatility implied by S&P 500 index options”. Compare against the criticized economic policy uncertainty (EPU) news index.
Figure 1: Economic Policy Uncertainty, news based (blue, left scale), and VIX (red, right scale). Data for April is average of daily data through 4/23. Source: policyuncertainty.com and FRED.
The EPU and the VIX covary (a regression of one on

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A Dummies Approach to Trumpian Uncertainty

3 days ago

Once again, is economic policy uncertainty (EPU) as measured by the Baker, Bloom and Davis news index, elevated during the Trump era?
There are many ways to answer this. First, is to look at whether the index (or average of index) is above the full sample average (the unconditional mean), second, relative to other presidential terms (conditional), third, relative to presidential terms and exogenous events, or fourth relative to a more recent period, controlling for exogenous events.
The simplest is to compare the observation for March 2018 to the sample average. A time series of EPU is useful.
Figure 1: Monthly Economic Policy Uncertainty 1985M01-2018M03, news based (blue), unconditional mean (red), and unconditional median (teal). Orange shading denotes Trump administration. Source:

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Yield Curves Flattening in High Income Countries

4 days ago

A recent article on the predictive abilities of yield curves (Shrager/Quartz) includes a nifty interactive which allows you to look at yield curves over time. Below, I do a snapshot comparison, across the world.
Figure 1: Ten year-three month term spread (blue bars), as of 9 July 2016. China observation is Five year-three month term spread. Euro ten year rate is for Germany. Source: Economist, data as of April 18.
It’s hard to compare across countries, particularly without knowledge of what is the average term premium in each country. (See Chinn and Kucko (2015) for a cross country assessment of the predictive power of yield curves for eocnomic activity and recessions.) However, one can easily compare what the spreads have done since a last check (in this case July of 2017). This is shown

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Mass Shooting Casualties since November 2016

4 days ago

Figure 1: Cumulative sum of mass shooting casualties, beginning 2016M11; deaths inflicted by non-Muslims (dark red), wounded inflicted by non-Muslims (pink), deaths inflicted by Muslims (dark blue), wounded inflicted by Muslims (light blue). Source: Mother Jones. Tabulations of religion of perpetrator by author.
Longer perspective displayed in this post.

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Is Trump Really Special? Economic Policy Uncertainty Edition

5 days ago

Despite reader Ed Hanson‘s comment:
[T]he current Monthly EPU is at an elevated level, but it has been at this elevated level 7 out of the past 9 years. The elevated value is better described as normal for about the last decade.
And his concluding admonishment:
Perspective, Menzie
I still believe that economic policy uncertainty as measured by the news based index (which Ed Hanson was discussing) is elevated.
Figure 1: Monthly Economic Policy Uncertainty, news based (blue), baseline (red), as reported. Source: http://www.policyuncertainty.com.

The March reading for the news based series (baseline series) of 155.4 (117.7) exceeds the sample mean of 110.5 (107.9). The news based series exceeds the 2008M04 2018M03 sample mean of 135.9, while the baseline series falls below the 130.2 mean.

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Guest Contribution: “Why China won’t yield in Trump’s trade war”

5 days ago

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. This is an extended version of a column that appeared at Project Syndicate on April 17th.

April 20, 2018 — President Trump enacted steel and aluminum tariffs in March, citing national security. China is the intended target, as most other major suppliers were eventually exempted. On April 2, China retaliated by imposing tariffs on 128 American products (representing about $3 billion of trade), ranging from 15% on fruits to 25% on pork. Trump April 3 announced 25% tariffs on another 1300 Chinese products [representing some $50 billion of trade], citing forced transfer of US technology and IPR. China on

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Annual, Annualized, q4/q4 Growth Rates: A Graphical Depiction

6 days ago

Why do reported growth rates differ for the same variable? Refer to the last three years of GDP data to see…
Figure 1: Quarterly GDP, SAAR, FRED series GDPC1 (dark red line), annual, FRED series GDPCA (green bars), in billions of Chained 2009$. 2017 q4/q4 growth rate (red arrow); annual 2017 y/y growth rate (green arrow); 2017Q4 q/q SAAR growth rate (blue arrow); 2016Q1 y/y SAAR growth rate (black arrow). Source: BEA, 2017Q4 3rd release via FRED, and author’s calculations.
So, there are several ways to calculate the growth rate over the course of the year. They will almost invariably differ, perhaps substantially, when GDP is either growing very rapidly or shrinking very rapidly. And there is no “right” way. If one wants to calculate the most recent growth experience, one might stress

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Net vs. Gross Investment

7 days ago

Deregulatory moves, both actual and anticipated, have been hailed as spurring business fixed investment [1] Is there content to this assertion? A glance at nonresidential fixed investment seems to be supportive.
Figure 1: Private nonresidential fixed investment, in billions of Ch.2009$, SAAR (blue). NBER defined recession dates shaded gray. Source: BEA, 2017Q4 3rd release.

However, the standard investment series reported in the NIPA tables pertain to gross investment spending, i.e., not taking into account depreciation. As capital expenditures have skewed more toward information and communication technology (ICT) equipment and software, the pace of capital depreciation has accelerated. As a consequence, the net and gross series have deviated more profoundly over time. Plotting net

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Twin Deficits Redux? CBO Predicts

8 days ago

From the recent CBO Budget and Economic Outlook, the projected current account and implied cyclically adjusted budget balance.
Figure 1: Structural/cyclically adjusted Federal budget balance (dark blue), and current account balance (dark red), both as a share of GDP. NBER defined recession dates shaded gray. CBO projection period shaded gray. Projection of structural budget balance estimated by author using June 2017 estimate, adding in legislative changes reported in CBO (2018). Source: BEA 2017Q4 3rd release, CBO (2018), and author’s calculations.

So, the twin deficits re-appear, as many of us had predicted. Interest rates rise as fiscal policy collides with tighter monetary policy. Today, the IMF released its forecasts in the semi-annual World Economic Outlook, the CBO forecast for

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Trump v. Treasury

8 days ago

Mr. Trump tweeted today:

Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!
— Donald J. Trump (@realDonaldTrump) April 16, 2018

U.S. Treasury reported on Friday:
Pursuant to the 2015 Act, Treasury finds that no major trading partner of the United States met all three criteria in the current reporting period. Five major trading partners of the United States, however, met two of the three criteria for enhanced analysis in this Report. Additionally, one major trading partner, China, constitutes a disproportionate share of the overall U.S. trade deficit. These six economies – China, Japan, Korea, India, Germany, and Switzerland – constitute Treasury’s Monitoring List. Japan, Germany, and Korea have met two of the three

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Anti-ρ-ism in American Policy Discourse

9 days ago

A sequel to my rebuttal to an anti-log manifesto:
Reader Ed Hanson:, commenting on my use of correlation coefficients in analyzing economic policy uncertainty comovements.
My lessen 1 is the danger to statisticians who try to create more precision from the dat than actually exist. Just because you can calculate a number does not mean that number has precision. In other words, Menzie, you are attempting to get more precision out of the Index than actually exist. My visual and general note of spikes of uncertainty has more meaning and correlation than your over mathematical treatment which feigns accuracy.
It is an easy refuge for people to criticize statistical analysis as “lies, damn lies, and statistics”. However, in doing statistical analysis on economic policy uncertainty indices, I

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Guest Contribution: “Can Media and Text Analytics Provide Insights into Labour Market Conditions in China?”

9 days ago

Today we are pleased to present a guest contribution written by Jeannine Bailliu, Xinfen Han, Mark Kruger, Yu-Hsien Liu and Sri Thanabalasingam (all Bank of Canada). This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.

Although issues have been raised with respect to many of China’s official statistics, those pertaining to the labour market have been seen as particularly problematic. The main problem with the official statistics is that while they capture formal employment, they do not appear to include migrant workers, who are typically engaged on an informal basis. The omission of

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Comovement in Economic Policy Uncertainty

11 days ago

Reader Ed Hanson makes a puzzling assertion regarding trade policy measures announced by Mr. Trump, and the evolution of policy uncertainty as measured by Baker, Bloom and Davis:
As for the uncertainty, I can not make your author’s calculation but I can look at the front page of the policyuncertainty.com site and look at the headline monthly index they present. All the countries, except India, show a similar chart. So I doubt if such uncertainty across the spectrum is caused by a minor thing such as TPP. But I would not be surprised if some of the spike is coming down from the Chinese US trade spiff. Both these countries show very similar recent chart.

In response to my expressed dubiousness, he writes:
I believe you when you say, “I honestly don’t see what he’s claiming.”
But if you had

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TPP: Maybe Not So Horrible

13 days ago

From The Hill:
President Trump on Thursday instructed top administration officials to explore re-entering the Trans-Pacific Partnership (TPP) — a trade pact he pulled the U.S. out of last year while calling it a “disaster.”
With this whipsaw of trade policy announcements, is it any wonder that economic policy uncertainty is rising? As measured by the Baker, Bloom and Davis index:
Figure 1: Daily EPU index as of April 12 (blue), and 7 day centered moving average (bold red). Source: policyuncertainty.com, and author’s calculations.
A longer term perspective on economic policy uncertainty is shown in this post.
And of course, most of us knew it wasn’t so horrible at all, back when we had a chance to influence the nature of TPP.
Update, 8:15PM Pacific 4/13: Reader Ed Hanson asserts that EPU

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Data vs. Tax Cut and Budget Balance Mythologies

13 days ago

In the current discourse, there seems to be some amnesia with respect to when tax cuts occurred, why they occurred, and how they affected Federal budget deficits. Here is some data (read comments to this post).

Figure 1: Federal budget balance as share of GDP (blue), cyclically adjusted budget balance as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations.

EGTRRA is the Economic Growth and Tax Relief Reconciliation Act, JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act. Some people have argued that these tax cut acts actually improved the budget balance (or increased tax revenues). The data shown above argues against this point (as does a large empirical literature).

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Are Soybean Tariffs Irrelevant?

15 days ago

I’ve seen the argument that China’s tariffs on soybeans will have no effect because the soybeans will be relabeled so that US soybeans go to Europe, and soybeans that previously went to Europe go to China, evading Chinese tariffs on US soybeans. John Cochrane makes this point. This seems to have surface appeal in a world where transport costs are zero, and there are no set-up costs to establishing new trading links. Still, I sensed that this conclusion must rest on some assumptions, including for instance infinitely elastic supply. I decided to investigate further.

For the sake of argument, let’s assume zero transport costs. What does formal modeling say? This was beyond me, fortunately I didn’t have to re-invent the wheel. From Gardner and Kimbrough, “The economics of country specific

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What’s the End Game?

18 days ago

From Toles:

The question we should be asking (prompted by my thinking about the relevance of game theory) is which payoff matrix is of relevance. Here, it makes sense to differentiate between the objectives of Mr. Trump and the United States as a whole.
To degrade China’s ability to ascend the quality ladder, and maintain US technical leadership in advanced production technologies. To reduce the bilateral trade deficit with China. To reduce the overall US trade deficit. To increase the Republican party’s ability to retain control of the legislative branch. To activate nativist and xenophobic groups within the Trump electoral coalition. To satisfy atavistic desires to impose pain on foreign parties.Surely, this is not an exhaustive list, but I think it covers a lot of possibilities.

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Is There a Pattern? Trade Sanctions on China

20 days ago

From Bloomberg:
In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products upon which to impose such tariffs.

I’ve borrowed a graph from Alec Phillips and Andrew Tilton, and added the $100 billion figure to place in perspective what this would mean.
Source: Alec Phillips and Andrew Tilton, “Assessing US-China trade tensions,” Top of Mind: Trade War 2.0, Goldman Sachs, March 28, 2018.
One has to wonder if this directive will add to the dustbin of other unfulfilled directives, but if it were to actually be implemented, this graph is useful to place in perspective the impact.
Figure 1: US exports of goods and services to China (blue), and US imports of

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Some Thoughts on Chinese Tariffs on US Exports: Tariff Incidence, Value Added, Exchange Rates

21 days ago

Reader Bruce Hall, opining on the impact of mooted Chinese tariffs on US hog and soybean exports.
As with pork, it looks as if the cost of food is going down for Americans as the Chinese bury their citizens in food price increases.

I’m teaching international trade this semester, so this is a good time to remind my students: a tariff’s incidence when the home country is large depends on the relative size (and elasticities) of the import demand and export supply curves.
For instance, a 25% tariff on US soybeans, could result in a 25% increase in prices of imported soybeans in China. Or it could result in 0% if the US is a very small supplier in global markets. Well, the US is pretty large (largest single exporter), so let’s say 15% of the tariff is reflected in Chinese prices. The other

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“Parts of floor polishers of subheading 8479.89.20; parts of carpet sweepers”

22 days ago

That’s HTS code 84799041, on the Section 301 hit list released today. Mr. Trump has the thanks of a grateful Nation for stopping intellectual property theft in this important category.
The entire list is here.
There’s a 30 60 day consultation period. Since around $50 billion of goods is targeted, China will likely impose proportional measures if and when retaliation occurs.

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As you sow…

22 days ago

[Galations, 6:7]
As 25% tariffs were imposed on US pork exports to China, hog futures continued the downward decline.
Source: ino.com.
In longer term perspective, prices have been trending down, with futures for June 2018 now lower than spot prices at the end of 2016:
Figure 1: Pork prices (net farm value, cents per pound) (blue), 2 April futures for June (blue square) (2017M01 cents per pound) (red). Real is CPI-all deflated. Source: USDA, BLS, INO, and author’s calculations.
Pork exports are about a $6.5 billion a year; about $1.08 billion went to China/HK in 2017. Repercussions will be geographically concentrated.Source: USDA.
Tyson’s a large processer of pork, experienced pressure today.
Source: Google finance.
The measures imposed on pork were in response to Section 232 sanctions.

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Another Event Study: Hogs

25 days ago

Source: ino.com.

Section 232 measures were announced to be announced on 7 March, Section 301 measures on 22 March. China’s retaliation was announced on 23 March. Figure 2 depicts the evolution of hog prices:
Figure 1: Pork prices (net farm value, cents per pound) (blue), 29 March futures for June (blue square) (2017M01 cents per pound) (red). Real is CPI-all deflated. Source: USDA, BLS, INO, and author’s calculations.
Hogs were a warning shot. Fuller retaliation would likely include soybeans. Would the Chinese follow through? Markets seem to ascribe some likelihood of a more serious strike.
My view: Ag country has reason to worry.

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When Did Minnesota and Wisconsin Fortunes Diverge?

26 days ago

Reader PeakTrader says the fortunes of Minnesota and Wisconsin “began to diverge decade before Walker”. I don’t buy it.

Figure 1: Log nonfarm payroll employment in Minnesota (blue), in Wisconsin (red). NBER defined recession dates shaded gray. Orange denotes Walker administration. Source: BLS, and author’s calculations.
The graph shows that in the years before the great recession, the two economies tracked fairly well, and the divergence was widened significantly during the Walker years. One might reasonably ask does a analogous graph using GDP present a different picture. My answer is no.
Figure 2: Log GDP in Minnesota (blue), in Wisconsin (red), in mn Ch.2009$ SAAR. NBER defined recession dates shaded gray. Orange denotes Walker administration. Source: BEA, and author’s calculations.
I

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A Deceleration in Economic Activity?

27 days ago

Third release numbers on GDP are out. Growth of Gross Domestic Output — the average of GDP and GDI — is down much more than that of GDP: nearly a percentage point.

Figure 1: Quarter-on-quarter output growth as measured by GDP (red), and by GDO (blue), SAAR. 2018Q1 figures are forecasts as for March 29, from Macroeconomic Advisers (red solid square) and from Atlanta Fed (red triangle). Source: BEA, Macroeconomic Advisers and Atlanta Fed.
The downshift in Atlanta Fed nowcasts from 5.5% to 2.4% is pretty interesting.

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Wisconsin and Its Neighbors

28 days ago

Still not the leader of the pack.

Reader Bruce Hall asks for comparisons of Wisconsin against regional comparators.
Figure 1: Log nonfarm payroll employment for Minnesota (bold blue), Wisconsin (bold red), Illinois (green), Iowa (gray), Indiana (chartreuse), Michigan (teal), and Ohio (purple), all normalized 2011M01=0. Source: BLS January 2018 release via FRED, and author’s calculations.
Oftentimes, Illinois is pointed out as the “sick man” of the Midwest particularly by conservative commentators. However, Wisconsin barely keeps pace with Illinois.
Somehow, I am doubtful this will convince true believers that Wisconsin is lagging, given the a priori beliefs of some that union busting, spending cuts, and tax cuts must result in rapid growth.

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Wisconsin CPI-deflated Wages back to January 2011 Levels

28 days ago

Regarding the slowdown in employment growth in February, reader Neil asks:
To what extent could the weakness in February be a payback for the outsized growth in December and January. The three month average for nonfarm growth in Wisconsin looks solid. Also, do you have any thoughts on the average hourly earnings data? Looks like Wisconsin is seeing strong growth over the last year.

Well, I’m not impressed with the evolution of hourly earnings (I don’t have much to say on the idea of payback). Figure 1 shows CPI deflated average hourly earnings for production and nonsupervisory workers in Wisconsin as compared to the Nation.
Figure 1: Log average hourly earnings for production and nonsupervisory workers for US (blue), and for Wisconsin (red), both deflated by CPI-all, 2011M01=0. Source:

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