Should-Read: For a long time, there have been Texas journalists claiming that former Texas Governor and Trump’s choice for Secretary of Energy Rick Perry is a competent, industrious, and good-intentioned man. Why, I have no idea:

Caitlin Macneal: Perry Didn’t Fully Understand Role Of Energy Secretary At First: “Former Texas Gov. Rick Perry did not realize exactly what the position of energy secretary entails…

…when he accepted Donald Trump’s offer to lead the department…. Perry was prepared to represent the American energy sector abroad and did not understand that he would be charged with overseeing the United States’ nuclear arsenal….

If you asked him on that first day he said yes, he would have said, ‘I want to be an advocate for energy,’” Michael McKenna, a Republican lobbyist who has advised Perry’s campaign and Trump’s transition team, told the New York Times. “If you asked him now, he’d say, ‘I’m serious about the challenges facing the nuclear complex.’ It’s been a learning curve…

During his 2012 presidential run, Perry called for the elimination of the Energy Department. The former Texas governor, if confirmed, will be charged with managing the agency’s $30 billion, two thirds of which is devoted to maintaining nuclear weapons and avoiding nuclear proliferation…

Must-Read: Note that in its rosy scenario Trump is not exceptional–for a Republican. Similar claims were made by Hassett, Hubbard, Mankiw, and Taylor on behalf of Mitt Romney back in 2012. Rosy scenario, and subsequently having to explain–in 1988, in 1992, in 2008, and 2020–why their projections back during the campaign and in the transition were such b.s.

And, yes, Hassett, Hubbard, Mankiw, and Taylor would have been making excuses last year had Romney won in 2012:

Nick Timiraos: Trump Team’s Growth Forecasts Far Rosier Than Those of CBO, Private Economists: “While there are often disparities between the White House and independent agencies on growth projections, they are rarely this large…

…The Trump administration has drafted preliminary economic growth forecasts in its federal budget planning that rely on assumptions that are far rosier than projections made by independent agencies and most private forecasters…. The forecasts, which were initiated before President Donald Trump took office, project gross domestic product—a broad measure of national output of goods and services—growing between 3% and 3.5% a year over the coming decade…. The economy has grown around 2% on average over the past decade…. The internal Trump projections are at odds with other assessments of the economy’s long-run growth prospects. The Congressional Budget Office… estimates… 1.9% annually between 2021 and 2027. The Federal Reserve forecasts growth of 1.8%….

“The president ran a campaign on proposals that would be incredibly pro-growth,” said Lindsay Walters, a White House spokeswoman. “There is a process in place where the administration develops an economic forecast based on its policies that are included in the president’s budget. That budget is still being finalized.”… The forecasts were prepared by Trump transition officials who met with officials at the Treasury Department and the CEA after the election, according to five people familiar with those discussions…

Compare:

R. Glenn Hubbard (Columbia University), N. Gregory Mankiw (Harvard University), John B. Taylor (Stanford University), and Kevin A. Hassett (AEI) (2012): The Romney Program for Economic Recovery, Growth, and Jobs “The Romney tax reform plan will increase GDP growth by between 0.5 percent and 1 percent per year over the next decade…

…We view these estimates as conservative as they fail to capture important, but hard-to-model, output gains from improved regulation, more certainty about the path of policy, and the aggressive agenda that Governor Romney has put forward with respect to energy, trade, education, human capital, and labor policy. Combined, and bolstered by sound monetary policy, we estimate that the Romney economic program will enable the private sector to create an additional 7 million net new jobs over the next decade beyond the improvement in employment from a more robust cyclical recovery in the short-term as a consequence of the Romney economic program….

From 2013 to 2022, under CBO’s current projection, potential GDP will grow about 2.5 percent per year on average…. Measuring from the first quarter of 2013 through the fourth quarter of 2022, the [Romney] average growth rate is expected to be approximately 4 percent per year with the upper long-term growth range, and about 3.5 percent with the lower long-term growth range…

Hassett, Hubbard, Mankiw, and Taylor were claiming 3.75%/year for Romney in 2012. At least the nameless transition forecasters are only claiming 3.25%/year for Trump today.

It’s what they do.

Must-Read: Colin Camerer: On “Rational Expectations” and John Muth: “Rational expectations pioneer John Muth in 1984…

…”really incredible” so little attention paid to cognitive limits #behavioraleconomics <https://t.co/xiy2iu069K>:

He had got hold of the data from five business firms, including expectations data, analyzed it, and found that the rational expectations model did not pass the empirical test. He went on to say:

It is a little surprising that serious alternatives to rational expectations have never been proposed. My original paper was largely a reaction against very naive expectations hypotheses juxtaposed with highly rational decision-making behavior and seems to have been rather widely misinterpreted.

Two directions seem to be worth exploring:

1. Explaining why smoothing rules work, and their limitations, and

2. Incorporation well-known cognitive biases into expectations theory (Kahneman and Tversky). It was really incredible that so little has been done along these lines. <http://public.econ.duke.edu/~kdh%Source%20Materials/Research/Rational%20Expectations%20Panel.pdf>

Should-Read: Wing Thye Woo: China’s Growth Odyssey: “Former World Bank Chief Economist Justin Yifu Lin is sanguine…

…Lin is confident that policies to boost domestic demand – including “improvements in infrastructure, urbanization efforts, environmental management, and high-tech industries” – will prove sufficient to meet the government’s official growth targets…. When Japan’s per capita income was that far behind the US, in 1951, it then “grew at an average annual rate of 9.2% for the next 20 years.” Lin attributes this growth to developing countries’ “latecomer advantage”…. Nobel laureate economist Michael Spence and Fred Hu of Primavera Capital Group seem to agree. While they acknowledge that “the Chinese trade engine has lost much of its steam,” they attribute this to “weak foreign demand,” and conclude that “China’s transition to a more innovative, consumer-driven economy is well underway.” In Spence and Hu’s view, China’s economy “is experiencing a bumpy deceleration, not a meltdown”….

[But] Cornell University’s Kaushik Basu… predicts that “Trump is about to make a policy mistake.” His “neo-protectionist” brand of tariffs, combined with financial deregulation, will not hurt only the US, Basu argues, but also any country that runs “large trade surpluses vis-à-vis the United States” – namely, China….

China must confront serious domestic challenges as well…. “China’s problem is not that it is ‘in transition,’” Jin says. “It is that the state sector is choking the private sector.”… Zhang Jun… also believes that the state sector poses a major threat to China’s economy, and calls for “a far-reaching restructuring of large SOEs.” He outlines the positive knock-on effects of shutting down state-backed “zombie” firms and limiting SOEs’ role to just a few relevant economic sectors – a process former Premier Zhu Rongji started but did not finish two decades ago….

Any discussion of China’s economy must address the political choices it faces. For the New School’s Nina Khrushcheva, Chinese President Xi Jinping has initiated an era in which “collective leadership has given way to one-man rule, and the unwritten rules of behavior have been junked.” Taken together, Xi’s re-centralization of power, prosecution of potential rivals, crackdown on the domestic media, and efforts to reinforce the “Great Firewall” to block foreign websites amount to a major setback for China’s sociopolitical progress – and possibly for its economic progress, too….

Taken together, the five largest Latin American economies’ per capita GDP, adjusted for purchasing power parity, was around 30% of the US level in 1955, and that ratio remains the same today. While these countries’ absolute standard of living has improved, the size of their development gap vis-à-vis the US has not changed in more than 60 years. This failure to catch up is generally known as the “middle-income trap.” And, as Ernesto Talvi of the Brookings Institution points out, it is no coincidence that the past 40 years of Latin American history has been marked by cycles of political disruption. Similarly, growth slowdowns in Malaysia and Thailand over the past two decades have led to large-scale protests and episodes of political violence.
Moreover, the middle-income trap is the norm. The only large Asian economies that have managed to narrow their development gaps relative to the US are Japan, Taiwan, and South Korea, and China’s problems are too large and complex simply to assume that it shares its neighbors’ economic exceptionalism….

Taming China’s SOEs is necessary for restoring strong growth, as Project Syndicate commentators agree. This does not reflect a shared ideological bias, but rather the reality that SOEs constitute a growing burden on the economy. The largest SOEs should not necessarily be privatized, but private firms must be allowed to compete freely with them (with exceptions for certain sectors such as armaments), and hard-budget constraints and open trade must be maintained. China should also explore policies to expand domestic innovation…. China can still achieve sociopolitical harmony and position itself to become a developed, high-income country. In an age of mounting global uncertainty, owing in no small part to the US, China stands to benefit enormously – particularly in geopolitical terms – if it can emerge as a source of sustained economic dynamism.

Should-Read: Robert Waldmann: Marking My Beliefs To Market: UK Violent Crime: “The lead causes crime hypothesis…

…I consider myself an early supporter…. In April 2008, I predicted that the UK violent crime rate would peak some time around 2008 <http://rjwaldmann.blogspot.it/2008/04/get-lead-out-in-freakiest-bit-of.html>. I just googled and found that it peaked in around 2006 or 2007. I’d say the prediction worked out pretty well.

Must-Read: The right moment for Republicans interested in health policy to intervene in the politics was back in 2010, when the “repeal and replace” meme was first decided on. They should have said: “Hell, no!–You really do not want to say that.”

My suspicion is that they thought the battle was not worth fighting because the dog would never catch the car. The least they could do is apologize to the rest of us now…

David Anderson: Governing Is Hard: “The Republican Party has an ACA problem.  The ACA is deficit reducing…

…raised taxes on upper income families…. But the Republican Party is ideologically committed to lower taxes on high income families. The Republican Party has a policy problem. It needs to offer something that is close enough to coverage to minimize blowback of sympathetic figures crying on camera that the Republican health policy bill will kill them. So that means some type of coverage.  And that means spending some money…. So here is what the Republican Party’s wonks are proposing:

Republicans are considering capping the U.S.’s tax break on job-provided health insurance, a major change to the tax system that could be used to finance their efforts to repeal and replace Obamacare.

This is a big pool of money… a quarter trillion dollars a year… a regressive tax benefit where the benefits mostly accrue to upper income individuals…. Most liberal wonks (myself included) will agree that building a system from scratch, ESI tax exclusion would never be part of an ideal package. BUT HERE IS THE PROBLEM.  It pisses off voters who receive coverage through work. And we already sort of tried this route before:

A similar idea was proposed by Senator Ron Wyden, a Democrat, during debate over the Affordable Care Act, and went nowhere. Obamacare already includes a levy on high-cost health insurance plans, known as the Cadillac tax, that begins in 2020. Republicans didn’t say where they would set the cap….

If the Republicans need to raise serious money from this exclusion being rolled back ($50 to $100 billion a year is serious), it means the tax hits most employer sponsored health plans to some degree.  If they don’t raise serious money because they fear blowback, it is a high income earner only tax and it still leaves their plan with a massive hole.

The easiest solution for Republicans looking for money…. Just borrow it…. But I can’t see how this proposal would get 150 votes in the House or 40 in the Senate.

Whenever before Republicans have found themselves in a serious box, the out has been: Just “dynamic score” it so you can claim you aren’t borrowing it, and then–“LOOK! IT’S HALLEY’S COMET!!”

Should-Read: Ben Thompson: DistroKid, The “Publisher’s Right”, Shopify’s Results: “As I’ve noted… the old value chain had three parts: supply — distribution — demand…

…The value in that value chain derived from supply owning distribution, which let said suppliers bundle the content that was in demand with ads. Per the previous item, though, the Internet has completely destroyed the value of distribution: it’s basically free, which is another way of saying it is worthless. The replacement for distribution in the value chain was instead discovery: now that everything was available everywhere, how were consumers demanding content to find what they wished to read?

What these European publishers continue not to grok is that while distribution inherently favored the supply side, discovery inherently favors the demand side. Specifically, publishers controlled distribution, while consumers control discovery. That is why the suggestion that Google owes publishers a dime is completely at odds with economic reality. The truth is that any publisher can, at any time, remove itself from Google News, or Facebook, and any of the other discovery mechanisms, and instead wait for consumers to go to them directly. That publishers (for very good reasons) don’t have faith that consumers will do that is the real cause of their economic troubles.

To return to the publishing curve, Google is closer to customers; the only way for publishers to extract the value they think is theirs it to get even closer. And, by extension, demanding the EU intervene will lead to a predictable outcome: Google will simply exit the market taking all of the customers who are quite happy with Google’s discovery functionality with them, leaving publishers with the emptiest of victories…

Should-Read: Charles Wyplosz: When the IMF Evaluates the IMF: “Two critical mistakes are not mentioned…

…Debt Sustainability Analysis…. As with all compounding exercises over long horizons, the results are extremely sensitive to small changes in the assumptions. The debt path, therefore, is no more than the unstable representation of assumptions, as are the benchmarks (Wyplosz 2011)…. Zettelmeyer et al. (2017) show that the confidence intervals are very wide, casting doubt on whether any policy conclusion can be drawn from DSA. Sadly, there is no hint in the report that the Fund is ready to question this procedure….

Preventing the crisis was therefore in the interest of a large number of important countries, which raises the issue of burden sharing…. Instead, as we know, Greece was instructed to borrow, which means that the burden has fallen entirely on its taxpayers. The burden is so heavy that the IMF now calls for a debt reduction, which would be ex post burden sharing. As the world’s benevolent referee, it should have refused ex ante to be complicit and part of such an imbalanced approach. The issue of burden sharing is not even mentioned in the report….

The IMF must be commended for imposing self-evaluation reports upon itself…. The fact that self-evaluation occurs and that the report is made public deserves to be commended. The procedure should be a model for the two other Troika institutions, the European Commission and the ECB. Most regrettably, self-evaluation is not part of their institutional culture. They seem to follow the prescription attributed to Napoleon: “In politics never retreat, never retract, never admit a mistake”.