Archive for December 2019


Countries cannot leave planet Earth

The EU is a bit of a busybody, with some unnecessary regulations. It also does lots of good things, and overall I view it as a force for progress. Still, I’m glad that countries are free to leave if they find the EU to be too oppressive.

Unfortunately, there is no way for countries to leave planet Earth, no matter how oppressive its Global Master becomes. And in recent years the world’s master is becoming extremely oppressive, bullying both friends and enemies:

The company laying the controversial Nord Stream 2 pipeline said it had suspended work, as US sanctions against a project Washington says will increase Europe’s dependence on Russian energy imports came into force.

Germany condemned the sanctions, which threaten to plunge relations between Berlin and Washington, already badly damaged by President Trump’s constant attacks on Germany’s trade surplus and relatively low defence spending, to a new low.

German finance minister Olaf Scholz described the punitive measures as “serious interference in Germany and Europe’s internal affairs and our own sovereignty”. “We object to them in the strongest terms,” he told the German TV channel ARD.

Such measures were “incomprehensible and improper for friends that are also linked by our common membership of Nato,” he added.

I actually have no problem with the US putting economic sanctions on Russia. That’s our decision. But when we bully other countries into following our lead (including allies like Germany), then we show that we are no better than the countries we criticize. A truly shameful moment in American history, in a decade full of such disgraces.

History suggests that eventually someone, or a group of countries, will cut the US down to size.  Let’s hope it’s soon.

The real problem is automation

While politicians search in vain for trade deals that will help blue-collar workers, the real problem is being ignored.

U.S. Steel Corp. plunged after delivering a barrage of harsh news, warning of a loss and announcing it will shut down most of its Great Lakes Works facility near Detroit, lay off workers and slash its dividend.

. . . The industrial icon plans to lay off as many as 1,545 workers from the Michigan plant, reduce its quarterly dividend to 1 cent from 5 cents, and prune capital expenditures.

U.S. steelmakers are facing slowing demand in the manufacturing sector, even though mills have enjoyed protection because of Trump administration tariffs. U.S. Steel has been a laggard in the domestic industry, with aging plants that are less efficient than rivals with newer technology.

Tariffs can’t save steel jobs, which are going the way of the dodo bird. And the effects of automation are not gradual; they come in big chunks as obsolete mills close down.

Mark Perry directed me to a couple of stories that illustrate the problem:

In the 1980s, American steelmakers needed 10.1 man-hours to produce a ton of steel; now they need 1.5 man-hours, says Joe Innace of S&P Global Platts.

Most American steel is now made at super-efficient mini mills, which use electric arc furnaces to turn scrap metal into steel. (Traditional integrated steel mills make steel from scratch, feeding iron ore and coking coal into blast furnaces.) Some mini-mills need just 0.5 man-hours to produce a ton of steel, Innace says.

Increased productivity means today’s steel mills don’t need as many workers. Steel industry employment peaked at 650,000 in 1953. By the start of this year, U.S. steelmakers employed just 143,000.

We still produce as much steel as in the 1950s, but with far fewer workers. And the problem is about to get much worse:

“So steel and aluminum will see a lot of good things happen. We’re going to have new jobs popping up,” Mr. Trump told steel and aluminum executives last Thursday at the White House as he announced his 25% and 10% tax on imports.

Someone should tell him about Voestalpine AG ’s steel plant in Austria, which reveals the reality of steel production and jobs. A Bloomberg News story from June 20, 2017 offered a fascinating look at how a modern plant can now produce high-quality steel with few workers.

The plant in Donawitz, a two-hour drive from Vienna, needs all of 14 employees to make 500,000 tons of steel wire a year. The same mill in the 1960s would have needed as many as 1,000 workers to produce a similar amount albeit of lesser quality.

Free traders like Paul Krugman claim that mercantilists don’t understand basic Ricardian trade theory. Mercantilists claim that neoliberals put too much weight on efficiency and don’t understand the pain inflicted on blue-collar workers by import competition. The fact that mercantilists are almost totally silent on automation is the “tell” that Krugman is right—they really are ignorant of the basic ideas of comparative advantage. If they weren’t they’d focus on automation, not trade.

There’s almost never a secret plan

The recent trade deals (Nafta 2.0, China, etc.) certainly look like failures. That’s my view and also the view of Paul Krugman.  More generally, I see governments as being big and clumsy organizations, and assume that the most straightforward interpretation of their motives is usually the correct one.  Tyler Cowen offers an alternative perspective:

Elsewhere you will see Paul Krugman suggesting Trump has lost the trade war, but I don’t think he comes close to even seeing what the trade war with China is about. No matter what Trump says, the trade war is not about lowering the trade deficit. It is about (for a start) two major considerations: a) ensuring that national security-motivated partial economic decoupling takes place on terms not so unfriendly to America, and b) giving America levers to make sure China does not make such significant inroads into the world’s tech infrastructure, most notably with 5G but not only.

The stipulation of Chinese purchases of American exports, which probably they will not and cannot meet, is in fact a lever to give the United States enforcement power over the less tangible parts of agreement, which is indeed most of the agreement. We want China to be in default of the agreement terms, so we may threaten them with tariffs to enforce compliance elsewhere, and so that is a better rather than worse outcome for the United States.

I’ll respond to the specific points made by Tyler and then make a broader argument.

1. As far as I know, the “phase one” trade deal with China does not make economic decoupling any less painful for the US.  If it does, I’d like someone to explain which provisions do this.

2.  If decoupling were our goal, then it would be odd to insist that China become more open to trade and investment with the US, changes that would make China richer and more powerful.  Is that how we should be treating an enemy?  It’s not how we treat Cuba.  (I don’t see China as our enemy, although I understand that much of the foreign policy establishment disagrees with me.)

3.  I don’t believe that the trade war gives “America levers to make sure China does not make such significant inroads into the world’s tech infrastructure”.  We may have some levers in this area, but they have nothing to do with the trade war.  The US is in a very weak negotiating position on trade, as Trump’s political position is much weaker than Xi’s.

Tyler seems to acknowledge that at first glance his hypothesis doesn’t seem to make much sense.  Our trade demands don’t seem to align at all with the foreign policy goals that he thinks are motivating the trade war.  His explanation, however, seems a bit too clever to me. He’s right that China will not live up to its promises to hit certain import targets, but I don’t understand his claim that this gives us extra leverage to use in achieving the foreign policy goals:

We want China to be in default of the agreement terms, so we may threaten them with tariffs to enforce compliance elsewhere

If they are not complying “elsewhere” then we can simply impose tariffs in retaliation.  The silly export targets don’t give us any additional leverage.  It’s not like when the Feds got Al Capone for taxes because they couldn’t prove murder; the rule of law does not apply to the US government.  If we say that China is violating any provision of the agreement, then we can punish them any way we wish.  We don’t have to prove anything in a court of law.  All the various trade provisions of the deal give us zero additional leverage on the national security issues.

I don’t see Huawei as a threat to our national security, partly because I don’t see any evidence that they are spying on us, and partly because don’t think that spying has much impact on the balance of power.  But if I’m wrong then the appropriate policy is a boycott of Huawei, not a trade war.

I have a much simpler explanation for the seemingly ineffective parts of the trade deal.  Trump asks China for big trade promises for the same reason he asked Ukraine to undertake a useless investigation of Biden.  It’s all PR.  Trump wants to tell voters (especially farmers) that he got China to do what he asked of them.  All Trump’s actions can be most easily explained if you assume his only goal is to help Donald Trump, politically and financially.

(Note that Tyler was discussing the Trump administration, not just Trump, so the following is not directed at his post.)

Think about how implausible it is that Trump is motivated by foreign policy considerations.  The biggest threat to America is Russia, not China.  Russia is an expansionist power with far more nuclear weapons than China.  And yet Trump consistently acts in ways that provide aid and comfort to Putin’s Russia, while undermining our allies in Ukraine, Kurdistan, and elsewhere.  Trump even undermines our own intelligence services when he suggests that they are lying about Russian interference in the 2016 election and that Ukraine was the real threat.  I’m not saying that Trump is a paid agent of the Russian government (I don’t believe in conspiracy theories), just that he acts in such a way as to help our enemies and hurt our friends.  Why would a president who is sympathetic to Putin care about the smaller threat provided by China?

Today, Trump is surrounded by henchmen like Pompeo and Barr, but during the course of his 3 years in office he has had some top aides who were actual patriots, even if one disagrees with their views (as I often did.)  When they leave office they describe the administration as a clown show, using terms like “drug deal”, “idiot”, “moron”, kindergartener”.   But this is exactly what it seems like from the outside!  If an administration seems incompetent from the outside, and also seems incompetent to its own top officials, then the most parsimonious explanation is that it is actually incompetent.

People who disagree with me might argue that Trump himself is incompetent, but the “deep state” hijacked his trade agenda and diverted the negotiations away from mercantilism and toward neoconservatism.  Maybe, but the actual agreements looks much more like what you’d expect to get if you had mercantilists like Trump, Lighthizer, and Navarro running the show, but able to achieve only a small portion of their goals.  If containing China were the goal, then why did we make demands that would have the effect of making China more powerful, such as demanding that they open up their capital markets?

There’s a much simpler explanation.  Tyler’s right that the US government is trying to limit China’s power.  Thus the recent sanctions on Huawei were probably motivated by exactly the factors that Tyler describes.  But actions taken to limit China military power, such as export controls, sanctions on Huawei, etc., are essentially unrelated to the long trade war.

Tyler concludes:

In general, I am finding that commentary on the trade war is of relatively dubious value, in part for partisan reasons.  The key here is to set aside your political views, and spend a lot of time talking with national security people.

It’s hard to think of a more distinguished China expert than Henry Kissinger.  Here is the view of this leading advocate of realpolitik:

Former U.S. Secretary of State Henry Kissinger told an audience in Beijing on Thursday that China and the United States are in the “foothills of a Cold War,” warning that the current trade war between the two nations could escalate into an armed conflict worse than World War I if left unresolved. . . .

“If conflict is permitted to run unconstrained, the outcome could be even worse than it was in Europe,” Kissinger said. “World War I broke out because of a relatively minor crisis … and today the weapons are more powerful.”

“That makes it, in my view, especially important that a period of relative tension be followed by an explicit effort to understand what the political causes are and a commitment by both sides to try to overcome those,” Kissinger continued, according to Bloomberg. “It is far from being too late for that, because we are still in the foothills of a Cold War.”  (emphasis added)

That’s also my view, and yet I get called a starry-eyed naive idealist, who doesn’t understand power politics.

PS.  Some will say that my views of Trump’s policies reflect my political bias.  Is that also true when I lavish praise on his new kidney transplant policy:

The U.S. government proposed new rules Tuesday to increase organ transplants — steps to make it easier for the living to donate and to make sure that organs from the deceased don’t go to waste.

The proposals come after President Trump in July ordered a revamping of the nation’s care for kidney disease that included spurring more transplants of kidneys and other organs.

Or when I praise the corporate tax cut?  Or the recent reduction in labor market regulation?

And is my current pro-free trade policy view different from what my view was years ago, before Trump came on the scene?  How about the views of other Republicans (Rubio, etc.), who once favored free trade and are now born again trade warriors?  Who is letting partisan politics twist their views?

What is my outgroup?

A commenter recently claimed that I bashed the new China deal because Trump is in my “outgroup”.  Commenter anon/portly responded:

However, just because the rest of his comment is a blizzard of misunderstanding the ideas of two Scotts, doesn’t mean that the first sentence is untrue:

“Scott’s posts are really a vindication of Scott Alexander’s outgroups theory from “I Can Tolerate Anything Except the Outgroup”.

Well, since much of what we observe in the world – and especially the blogging world – is a vindication of that, this may well be true. But what *is* the (or a) Sumnerian Outgroup (hereafter “SO”)?

Anyone reading this blog for long would know that you can’t assign this based on the other Scott’s ur-example, the “blue” tribe’s attitude toward the “red” tribe. SS doesn’t belong to either the blue or red tribe. (It helps to remember that in criticizing Trump on trade, he’s criticizing ideas that in the past were much more closely associated with specific Democratic party politicians, e.g. Dick Gephardt, than with specific Republican party politicians; and if not closely associated with any non-crank economists on either the left or right, at least closely associated with one crank Democrat economist, Trump advisor Peter Bellamy).

So what is the SO? I’m not really sure, but one thought that occurs to me is what I have always taken to be the outgroup of engineers. By “engineers” I don’t mean the people they call engineers nowadays who do coding and use software and aren’t (necessarily) really all that great at math, I mean the old-style guys (and occasional gals) who were really good at applying various forms of math to the real world. I always thought their outgroup was something like “people – especially other smart people – who can’t or won’t do math, or use math creatively.”

Trump is certainly in my “outgroup”, as I dislike everything about him.  But I also root for the US to succeed.  So I root for Trump to succeed in areas where his success is good for America (say a cut in interest rates, labor market deregulation, or a corporate tax cut) and I root for him to fail where it’s bad for America (trade barriers, immigration restrictions, war on drugs, big budget deficits, etc.)

Anon/portly’s comment got me thinking about what sort of thought process distinguishes me from other analysts.  The following is highly subjective:

1.  I believe that I rely more on classical economic theory, and also general equilibrium theory.

2.  I try to pay a lot of attention to statistical data, with a focus on whether data is accurate and economically meaningful.

3.  I try to avoid “mood affiliation”.  My views tend to cut across all sorts of ideological lines, and I don’t see myself as either “left” or “right”.  I’m one of the very few people who have been strongly pro-monetary stimulus during much of the last decade, and also strongly anti-fiscal stimulus.  I see many people form into pro and anti-stimulus camps, and adopt the various other views of people in those camps.  I’m fine with very high tax rates on billionaire consumption, but am opposed to minimum wage laws.  I like carbon taxes but oppose wealth taxes.  I think we should be tougher on some criminals and softer on others.

Let me illustrate these points with the example of how the media reports on the recent Chinese agreement to buy more US farm products, which embodies all three problems.

Trump’s original motivation for the trade war was the large US trade deficit, which he wrongly thought was due to unfair trade practices in foreign countries.  Later his agenda was hijacked by foreign policy conservatives who worried about China threatening US hegemony with an alternative (illiberal) model.  Much of the news coverage of the China deal focuses on the promised food purchases, even though they are unrelated to either complaint.  Before Trump took office, almost no one was claiming that the problem with China was that they were not buying enough US farm products, or that they had unfair barriers on our farm products.  Indeed farm exports are one of America’s big success stories.  Trump has “fixed” a problem that did not exist.

I attribute that to “mood affiliation”.  Once you decide that China is a Bad Country, then any concession we can wring from China becomes a US “win”.

This policy is also based on a lack of understanding of general equilibrium theory.  The China deal will not affect the US current account deficit, which is determined by factors influencing US saving and investment.  I get annoyed reading endless commentary by people who seem oblivious to this point, and hence provide the sort of useless analysis you could get from just talking to the average man on the street.

Socialism and statism sound good to the average person, at least when the laundry list of proposals is presented one item at a time.  That’s why losers like Jeremy Corbyn keep insisting that the public agrees with them.  Even Republican voters often support socialist ideas when polled on the subject.  It sounds good if you tell average Americans that China will buy more US farm products.  Less good if you point out that the trade balance won’t be impacted, which means we will lose manufacturing exports and jobs as a side effect.  Sort of like how people support almost every spending proposal until you tell them that it requires higher taxes.

There’s also a problem with innumeracy.  Pundits often talk about how German fiscal stimulus could boost the Eurozone economy, whereas the German government spending a few more percentage points of GDP would have almost no discernible impact.  Similarly, the effects of Chinese promises to buy US agricultural products are trivial, for several different reasons.  First, the Chinese won’t buy $50 billion, as even Lighthizer admits.  Second, the extra sales to China will be mostly offset by fewer US exports to other areas, as displaced Brazilian exports to China seek out other markets.  Global commodity prices will rise by a trivial amount, and it’s global commodity prices that matter.  The net gain in US exports will be very small, relative to our $2.5 trillion in total exports.  Maybe zero to $5 billion.  It’s a “nothingburger”.

People who disagree with me on the trade deficit often point to the empirical work of Fred Bergsten and Joe Gagnon, which is the best defense I’ve seen of the alternative view, the view that we need to worry about foreign currency manipulation boosting our current account deficit.  But the Bergsten/Gagnon study says that every $1 increase in our budget deficit will boost our current account deficit by 52 cents.  That means that Trump’s reckless fiscal policies have “worsened” our current account deficit by nearly $200 billion.  And yet the press ignores this. (To be fair, I don’t think the current account deficit is a problem, but I do believe the budget deficit is a problem.)

The media is full of people with contempt for Trump.  Thus it’s ironic that most of the reporting on Trump’s policies is actually far too generous.  The new NAFTA and the China trade deal are discussed on the press in his terms, in terms of what the US “won” in the negotiations.  Tyler Cowen recently linked to a Christopher Balding post that is a nice example.  You’ll see very few news articles pointing out that Trump’s reckless fiscal policies have made the trade deficit much worse, and that none of these deals will do anything to fix this “problem”.

I’m sure a critic could look at my blog and see all sorts of biases that I’m blind to.  All I can say is that everywhere I look I see bad economic theory, inability to interpret economic statistics, and mood affiliation.  My in group is not Democrats or Republicans (both of which I dislike) it’s people who know how to rationally evaluate an issue and have good intuitive common sense when interpreting data.

PS.  Some will argue that I had already decided the trade deal would be a dud even before it was concluded.  That’s a fair criticism; so let me explain why I had this preconception.  I think I know enough about economics to know just how disruptive an actual Steve Bannon-style (i.e. nationalistic) trade policy would be.  Any policy that significantly moved the needle away from globalization would be highly disruptive and very unpopular with large segments of the public.  And I think I know enough about politics to know that Trump would not go that route.

Thus for the past three years I’ve simply been bidding my time, waiting for these meaningless symbolic deals to be announced as huge wins for America.  And now it’s happened.  So yes, I did pretty much have my mind made up long ago, although if Trump had actually done something dramatic I would have said so and predicted that it would greatly harm our economy.  The actual deals will have only a trivial impact on the economy, which is a relief.

And maybe this is actually good.  Before Trump, we were told we needed economic nationalism to bring blue-collar jobs back to America.  We were told we needed massive government infrastructure programs.  We were told we needed to crackdown on illegal immigration, and expel those who are already here.

Let’s say that people foolishly believe Trump did all that.  They believe there’s a shiny new wall on the border. That would be great!  Then the electorate would move on to other issues, as these issues have been “solved”.  If we have an actual policy of neoliberal cosmopolitanism, and yet people wrongly think that Trumpism has won, then no one will get any political mileage in attacking neoliberal cosmopolitanism.

The very worst thing that can happen to any policy agenda is to take office and then not implement your policies.  The public will think you have implemented the policies, and any problems will be blamed on your announced policies, not what was actually implemented.  No one will vote for a future Republican who says, “I’ll do what Trump promised but failed to do”.  Yeah, sure.

Remember that, “all political careers end in failure”.  The goal should be to avoid ever winning an election, rather to focus on getting the other side to implement your policies.  In Australia and New Zealand, it was the left that implemented neoliberalism.  Let them “own” neoliberalism and there’ll be no one to take it away.

Good news: It looks like a big win for China

The details are still a bit murky, but the new trade deal looks like a big win for China. And that’s means it’s a win for Americans (relative to continuing the trade war), but a loss for the Trump administration:

As described, the agreement does not address American concerns about China’s industrial subsidies and state-owned enterprises. There were no details on the currency provisions in the pact or how China will go about ensuring protections of American intellectual property. And there information about China’s plans to roll back its tariffs was murky.

I expected the Trump administration to lose, but not this badly. The US claimed they wanted China to become a more free market economy, but then demanded that their government step in and manage trade with the US, committing to buy an increased amount of US agricultural products. That’s the opposite of free trade.

Fortunately, it doesn’t make much difference. Commodities like soybeans are “fungible”, meaning there’s not much difference between the soybeans we export and those exported by Brazil. Agricultural commodities are traded in global markets, and thus re-shuffling who sends what to which countries won’t have much impact on overall farm prices, unless we can convince the Chinese to get much fatter, by eating more food.

Currency manipulation is a non-issue, as China’s current account is nearly balanced and it does not meet the Treasury Department’s official criteria for currency manipulation.

China always promises to crackdown on intellectual property rights, but there’s not much the central government can do to control the actions of 1.4 billion people. Fortunately, China is taking IP protection a bit more seriously in recent years, mostly because it now has lots of the world’s leading tech firms.

I find it amusing that Trump trumpets the farm sales as his big win. Thus his trade war “win” is to remove a problem that he himself created through an ill-advised trade war. But it won’t entirely fix the farm problem, as the continuation of US tariffs (at a slightly lower level) will continue to depress US exports, as will his reckless fiscal policies.

We’ve been told that we needed a tough guy like Trump to “stand up to China”, and now Trump’s caved into China like a dog backing off with its tail between its legs. When you combine this with the new Nafta, it’s clear that Trump has abandoned Steve Bannon’s vision of a muscular new industrial policy, and basically accepted that globalization is here to stay. That’s good!

Here’s Bloomberg:

Washington began this trade war with no clear idea of its objectives, how it would achieve them, or what sacrifices it was prepared to make. It’s now on the brink of a ceasefire that allows it to quit the field with a few shreds of dignity intact. It would have been far better had the battle never been joined.

That point deserves some fleshing out. Trump began with the (false) idea that China was taking advantage of the US, and that this explained our trade deficit. In fact, our deficit is caused by a shortfall of domestic saving, which Trump had no interest in addressing, and indeed has made even worse.

Trump needed a lot of foreign policy experts to help him deal with China, but these experts had a very different agenda. They wanted to weaken China, who they see as a threat to US hegemony. And this creates a dilemma. If we succeed in convincing China to become a freer and more open economy, then China will become much richer and more powerful. But our foreign policy establishment doesn’t want China to become richer and more powerful. It’s pretty hard to negotiate effectively if you don’t know what you want. So we ask for meaningless gestures like state-mandated agricultural purchases, instead of an open Chinese economy.

Of course we could stop trading with China, but that would immediately put the US into recession and lead to a Democratic president in 2020. So that’s not going to happen.

Trump is selling this as just “phase one”. He’d like to convince people that he’ll win a much better deal after the election. He won’t. This is as good as it gets. The phase one rhetoric is just a fig leaf to cover up the fact that Trump was beaten by the Chinese.

I hope all you commenters who claim I “just don’t understand” that we need right wing populist nationalists to help the working man in Ohio will now just shut up. Your man let you down, and it’s time to admit that your vision of mercantilism was always a chimera. If you want more blue-collar jobs, then reduce the trade deficit by reducing the budget deficit, as I have been recommending. Your guy is making the trade deficit worse.

PS. As new information comes out, I expect the deal to look even weaker, even more porous. This deal is intended for domestic consumption, not fixing actual economic problems. Recall when Trump asked Ukraine to investigate Biden. All he really asked for was a public declaration (on CNN News) that they would investigate Biden. Here he just seems to want China to say they’ll behave better in the future, without any reliable enforcement mechanism.

PPS. Over at Econlog I have some cheerier news for Trumpistas; the Conservative win in the UK makes it more likely that Trump will win again in 2020.