Archive for the Category Trade


How would consumers feel about the Federal government tripling the gas tax?

Even the previous 4-cent increase in the gas tax was controversial.  Now suppose the federal gasoline tax (currently 18.4 cents) was tripled.  I’d expect consumers to freak out over the news.  And yet even a 37-cent increase is relatively small compared to some of the wild gyrations in gas prices that we’ve seen in recent years.  So why would the reaction be so strong (assuming that I’m correct?)

I think the answer is that consumers know that gas prices gyrate up and down, but also that a gas tax is permanent.  Thus future gyrations would be around a trend line that is 37 cents higher than before.

Commenter Plucky directed me to a very good Tax Foundation article on the proposed border tax.  This caught me eye:

Another consequence of dollar appreciation is that debts denominated in U.S. dollars will become more expensive in foreign countries. This is because a foreign country or business would need to raise money in the local currency and convert it into more expensive dollars to pay the debt. Emerging markets may be hit hardest by this.[33] However, many policy changes in the United States and natural movements in the market have impacts on the value of the U.S. dollar that could impact dollar-denominated debts.[34] It isn’t clear why a border adjustment would be a special case.

I’d make two points here:

1.  A border tax would be relatively permanent.  The dollar would continue to fluctuate over the business cycle, but (so it is claimed) around a 25% higher trend line.  That’s a lot.  For instance it would give Canadian tourism a big advantage over American tourism.  Hawaii would find it harder to attract Asian tourists.  Ditto for Florida vs. the Bahamas.  It certainly won’t destroy our tourism industry, but don’t assume that 25% is not a big deal—it is.  How about our airlines?

2.  In the past, a strong dollar has often been associated with a relatively strong US economy.  Thus the pain of emerging markets having to repay dollar debts at a higher rate is partly offset by strength in EM exports.  This would be different, a sudden 25% jump in the cost of repaying debt, without the associated macro benefits.  Again, I’m not saying it would necessarily cause a debt crisis, but don’t assume that adding 25% to trillions in dollar debts is not a big issue.

PS.  I actually think the tax reform proposal has a lot of merit. Debt and equity would finally be on a level playing field.  But I still have a few lingering doubts about suddenly imposing an exchange rate shock of that size.  (Perhaps because I own some overseas mutual funds.  But then even US multinationals will see foreign profits translated back into US dollars at a considerably lower value, and yet the US stock market seems to be doing fine.  So who knows?)

Don’t confuse free trade and trade deficits

Here’s Benjamin Cole:

As David Glasner recently noted, no plank of orthodox macroeconomics is more sacred today than that international free trade is good, and that even large and chronic trade deficits don´t matter.

But an overlooked 2012 paper from the New York Federal Reserve, entitled House Price Booms, Current Account Deficits, and Low Interest Rates, raises serious concerns about chronic trade deficits, particular given the deeply entrenched ubiquity of property zoning.

This is not true.  The claim that large trade deficits do not matter is certainly not “sacred”, indeed many economists disagree.  But even if it were true, this makes no sense.  Trade deficits are one thing, and free trade is another.  Both the US and Germany have relatively free trade, but we have a large deficit (although much of that is measurement error) and Germany has a large surplus.  The cause of our current account deficit is saving/investment imbalances.  If you want a smaller deficit you do not install tariffs, you install pro-saving (or anti-investment) fiscal policies.  You encourage saving by lowering the tax rate on capital income, and you reduce government dissaving by making the budget deficit smaller.  Yes, tariffs could reduce the budget deficit by a tiny amount, but it’s an extremely inefficient way of doing so.

If you are worried about trade deficits, the last thing you should be doing is protectionist trade policies.

The paper posits, “One of the most striking features of the period before the Great Recession is the strong positive correlation between house price appreciation and current account deficits, not only in the United States but also in other countries that have subsequently experienced the highest degree of financial turmoil.”

The short story is this: When a nation consumes more than it produces, and imports the difference, it must sell assets to finance the shortfall. Foreigners are especially keen on the perceived security of real estate, and, of course, can leverage up with the ready assistance of domestic banks.  The term “commercial bank” has become a misnomer, as more than 75% of U.S. bank lending in is on property. Thus, huge trade deficits equal huge capital inflows into domestic real estate.

Property Zoning

The universal culprit in this trade-deficits-results-in-house-price-booms scenario is property zoning, a feature of modern economies deeply embraced by both the propertied and financial classes, but (consequently?) rarely a topic in macroeconomic discussions.

To mix metaphors, property zoning is the Achilles Heel of macroeconomic blind spots.

Without property zoning, nations such as Australia, Canada and the United States could produce more housing to soak up the foreign capital inflows, even after those flows are leveraged five-to-one by domestic banks. The U.S. runs about $500 billion a year in trade deficits.

But with ubiquitous zoning, house prices soar to equate supply and  demand, generating inflation and reducing living standards of the domestic population.

Ben is right that lots of people complain about foreigners snapping up real estate (more so in places like Sydney, Vancouver and London, than in the US.)  But he’s wrong about the economics.  Housing construction during periods of house price booms like 2005 is far higher than during house prices busts like 2009-12.  The irony here is that the very same protectionists who complain that foreigners don’t buy enough of our cars, thus depriving Detroit auto workers of jobs, also complain that foreigners buy too many of our houses, thus providing jobs to our construction workers.

Den ganzen Beitrag lesen…

Don’t tell Trump that border taxes are not protectionist

Here’s the Washington Post:

The leaks coming out of the Trump White House cast the president as a clueless child

All White Houses leak. Sometimes the leaks are big, sometimes small. But there are always people willing to talk to reporters about the “real” story or about why the chief executive made a mistake in regards to some decision he made.

That said, I’ve never seen so much leaking so quickly — and with such disdain for the president — as I have in the first six days of Donald Trump’s presidency. . . .

Time and again, the image of Trump pushed by his “aides” is one of a clueless child — someone who acts on impulse, disregarding the better advice of people who know better. We know he needs to be managed or else he will say and do stupid things, the message seems to be. We’re working on it.  .  .  .

Trump has shown that his tendency to obsessively consume media — especially cable television — is unchanged in the six days since he has become president. He appears to be making policy decisions via things he watches or reads. (Remember Trump’s famous/infamous statement that he got his military information and advice “mostly from the shows.”)

At odds with all of this, however, is the fact that Trump is both deeply proud and hugely image-conscious. Having to read and watch allegedly loyal “aides” casting him as a sort of feckless child constantly in need of guidance wouldn’t seem to be the sort of thing that would sit well with him. . . .

The frequency — and nature — of these leaks are yet another reminder that the Trump presidency is nothing like anything that’s come before it. There is no blueprint. We’re through the looking glass.

But my educated guess is that these leaks must be driving Trump absolutely crazy. And when he gets mad, history suggests he will try to get even. And quickly.

Of course I warned people of this a year ago, but was told I was “deranged” and that Trump is perfectly fine.  I look forward to the scene where our Furher discovers that his aides have sold him a bill of goods on how the border tax/subsidy would “protect” America.

Dear God!  I never realized that life could be so much fun.

Do current account deficits costs jobs?

Over at Econlog I have a post that suggests the answer is no, CA deficits do not cost jobs.

But suppose I’m wrong, and suppose they do cost jobs.  In that case, trade has been a major net contributor to American jobs during the 21st century, as our deficit was about 4% of GDP during the 2000 tech boom, and as large as 6% of GDP during the 2006 housing boom.  Today it is only 2.6% of GDP.  So if you really believe that rising trade deficits cost jobs, you’d be forced to believe that the shrinking deficits since 2000 have created jobs.

screen-shot-2016-12-22-at-11-53-25-amSo why have manufacturing jobs plummeted since 2000?  One answer is that the current account deficit is the wrong figure, since it also includes our surplus in trade in services.  If you just look at goods, the deficit is closer to 4.2% of GDP.

But even that doesn’t really explain very much, because it’s slightly lower than the 4.35% of GDP trade deficit in goods back in 2000.  So again, the big loss of manufacturing jobs is something of a mystery.  Yes, we import more goods than we used to, but exports of goods have risen at about the same rate since 2000.  So why does it seem like trade has devastated our manufacturing sector?

Perhaps because trade interacts with automation.  Not only do we lose jobs in manufacturing to automation, but trade leads us to re-orient our production toward goods that use relatively less labor (tech, aircraft, chemicals, farm produces, etc.), while we import goods like clothing, furniture and autos.

So trade and automation are both parts of a bigger trend, Schumpeterian creative destruction, which is transforming big areas of our economy.  It’s especially painful as during the earlier period of automation (say 1950-2000) the physical output of goods was still rising fast.  So the blow of automation was partly cushioned by a rise in output.  (Although not in the coal and steel industries!)  Since 2000, however, we’ve seen slower growth in physical output for a number of reasons, including slower workforce growth, a shift to a service economy, and a home building recession (which normally absorbs manufactured goods like home appliances, carpet, etc.)  We are producing more goods than ever, but with dramatically fewer workers.

screen-shot-2016-12-22-at-12-08-01-pmUpdate:  Steve Cicala sent me a very interesting piece on coal that he had published in Forbes.  Ironically, environmental regulations actually helped West Virginia miners, by forcing utilities to install scrubbers that cleaned up emissions from the dirtier West Virginia coal.  (Wyoming coal has less sulfur.)  He also discusses the issue of competition from natural gas.

Innumeracy drives me nuts

One thing that frustrates me is that I have to go through life listening to tiresome arguments from the 99.9% of people who are innumerate.  Here are a few recent examples:

1.  “The polls were wrong about the election.”  That’s true of some of the state polls, but the national polls were roughly correct.  They predicted that Hillary would gain about 4.5 million more votes than Trump.  We still don’t know where it will end up (her margin widens daily), but it looks like she’ll end up nearly 3 million ahead. If you had told most pundits that Hillary would have won 3 million more votes than Trump, most would have assumed that she would win the election.  The mistake was not so much the polls, but rather the assumption that a comfortable margin in the popular vote would be enough.  That’s not an unreasonable mistake; in the past 120 years there was only one other split decision (in 2000), and in that case the popular vote was exceedingly close.  It’s like the housing price collapse of 2006-09; we all knew it was theoretically possible for someone with a multi-million popular vote margin to lose the electoral college, but didn’t expect it because we had not seen it in modern times.

2.  “If elections were determined by popular vote, Trump would have campaigned differently and most likely would have won the popular vote.” Of course that’s theoretically possible, but the odds are overwhelmingly against.  First, because the new strategy for both candidates would have involved more emphasis on getting out the vote in the non-swing states.  But the non-swing states went for Hillary by nearly 4%.  So if increased campaigning had boosted the turnout in places like California, then Hillary would have very likely won by even more.  Thus the big popular vote margin actually understates what that margin would have been in a direct election of the President.  And second, people don’t seem to understand how massive a popular vote margin of nearly 3 million actually is.  It would be extremely hard to generate another 3 million votes for Trump, or more precisely an amount of additional votes that’s 3 million more than the other campaign generated.  Face facts: Hillary didn’t lose because people didn’t like her; she was more popular than Trump on Election Day.  Trump won because the election was rigged by the Founding Fathers.

3.  “Neoliberal economists who promoted free trade are to blame for Trump.”  This is wrong for all sorts of reasons.  First of all, the direct loss of jobs due to imports is largely offset by jobs created in other sectors like exports and construction. Furthermore, automation costs far more jobs than trade.  And finally, the actual loss of jobs due to neoliberal policies like Nafta and GATT are only a tiny fraction of jobs lost to imports in general. Even if we had not liberalized trade in recent decades, we’d still be importing lots of cheap manufactured goods from East Asia and Mexico, and have a huge CA deficit.  If you take 10% of 10% of 10%, you end up with a really tiny number, and yet a commenter recently sent me an article by Notre Dame economist David Ruccio claiming that neoliberal economists were to blame for Trump:

Are mainstream economists responsible for electing Donald Trump?

I think they deserve at least part of the blame. So, as it turns out, does Dani Rodrick

My argument is that, when mainstream economists in the United States embraced and celebrated neoliberalism—both the conservative and “left” versions—they created the conditions for Trump’s victory in the U.S. presidential election.

We are 0.001% to blame, at most.  If economists don’t have a sense about what sort of numerical claims are plausible, who will?

4.  I could cite many other examples.  The claim that greater infrastructure spending would significantly boost US economic growth is absurd.  It might boost it, but the US economy is far too large and diverse for a $550 billion infrastructure package to make much difference, especially during a period of 4.6% unemployment and monetary offset.  Tax reform and deregulation are more promising, but even here the claims of 4% to 6% RGDP growth are ridiculous, at least over an extended period of time (I suppose one or two quarters are possible.) Trend RGDP growth during the 20th century averaged about 3%, under wildly different policy environments.  I’m not saying policy had no impact (I’m a moderate supply-sider), but people tend to overrate the impact.

To give a sense of how hard it is to dramatically impact the macro economy, consider that the Trump people (wrongly) claim their Carrier victory will directly save 1000 jobs.  Obama “created” about 6000 or 7000 jobs every single day over the past 7 years.  A thousand jobs is not a drop in a bucket, it’s a particle of water vapor in a bucket.  If Trump had that sort of “victory” every single day of his 8-year presidency, he’d still probably create far fewer jobs than Obama.  James Pethokoukis had this to say about the banana republic-like Carrier deal:

American Enterprise Institute scholar Jimmy Pethokoukis told CNBC on Thursday that President-elect Donald Trump’s speech about his deal to keep Carrier jobs in the United States was “absolutely the worst speech by an American politician since 1984 when Walter Mondale promised to reverse Reaganomics.”

“The idea that American corporations are going to have to make business decisions, not based on the fact that we’ve created an ideal environment for economic growth in the United States, but out of fear of punitive actions based on who knows what criteria exactly from a presidential administration. I think that’s absolutely chilling,” he said.

He continued: “[Companies should not make decisions] based on fear that there are going to be tariffs, that they are going to have contracts taken away from them, or the president will attack an American corporation for trying to create a valuable product.”

He also suggested that if the Democrats had done something similar, the GOP would have freaked out.  I can imagine Republicans complaining about this being a left-wing anti-business abuse of power, if Obama had done it.

Commenters often wrongly claim that I equated Trump and Hitler.  Now “analysts” are indirectly comparing Trump and Hitler:

A source who has advised Trump’s transition team on security policy told Reuters last week the president-elect would start a “clean slate” with Duterte, and analysts see some similarities in their blunt style. . . .

Sometimes called the “Trump of the East” because of his mercurial ways, Duterte has threatened repeatedly to sever U.S. defense ties, saying he “hates” having foreign soldiers in his country.

Here’s an example of Duterte’s blunt style:

Philippines President Rodrigo Duterte on Friday compared his campaign to kill criminals to the Holocaust, saying he would like to “slaughter” millions of addicts just like Adolf Hitler “massacred” millions of Jewish people.

“Hitler massacred three million Jews. Now, there are 3 million drug addicts. … I’d be happy to slaughter them,” he told reporters early Friday, according to GMA News.

“You know my victims, I would like to be, all criminals, to finish the problem of my country and save the next generation from perdition,” he said.

No wonder Trump is anxious for Duterte to be one of the first heads of state to visit the White House:

U.S. President-elect Donald Trump invited Philippines leader Rodrigo Duterte to the White House next year during a “very engaging, animated” phone conversation, a Duterte aide said on Friday, amid rocky relations between their two countries.

They have so much in common.  Trump likes reading books of Hitler’s speeches and says:

You know I’m proud to have that German blood, there’s no question about it. Great stuff.

And Duterte sees mass murder as the “final solution” to the drug problem.

PS.  But I’m not equating Trump and Hitler-loving dictators; I leave that to the “analysts”.

PPS.  Last time I mentioned the Duterte quotation, a commenter defended him by pointing to his high approval rating in polls.  And he didn’t seem to be kidding.