There seems to be a tentative Nafta agreement between Trump and the House Democrats. The fact that Trump and the “progressive” Dems agree on the trade deal while the congressional GOP is skeptical is itself a pretty good indicator of what’s in the package.

The former ambassador to Canada is a big fan of the deal:

Bruce Heyman, the former U.S. ambassador to Canada from 2014 to 2017, went even further.

“It’s one of those rare circumstances we’ve seen now for the last few years, where you have a win-win-win,” Heyman said on Yahoo Finance’s On the Move. “You have a win for not only the administration, but also Congress. You have a win for American workers, farmers, and the environment. You have a win for Canada and Mexico. And so altogether, I think that this should be a day to celebrate our trading relationship.”

He added that while his preference was that the aborted Trans-Pacific Partnership (TPP) would have served as the replacement to NAFTA, the new deal will have a similar effect.

“Lo and behold, the president said the TPP was bad and NAFTA was bad,” Heyman said. “But what did we get? 65% to 70% of the exact language in this new USMCA is TPP. They lifted it right out of TPP. The rest is pretty much the structure of NAFTA with the exception of these auto provisions that were put in.”

I’m not going to dispute the facts here, but I have a very different interpretation of the deal.

Unfortunately, much of the media doesn’t understand international economics, and hence has no framework for analyzing this sort of agreement.  I’ll start by trying to provide a framework.

There are basically two types of “trade policies”.  One set of policies influences the overall current account balance.  Those are macro policies affecting saving and investment.  Another set of policies impact the composition of trade, favoring one industry over another, without having any impact on the overall trade balance.  That’s clearly what we have with the new Nafta agreement.

The current account balance (by definition) is domestic saving minus domestic investment.  Trump’s macro trade policies are likely to boost the deficit, as they discourage domestic saving and encourage domestic investment.  Thus Trump’s huge fiscal deficits would be expected to result in a larger current account deficit, which is what has occurred. Indeed it might be even “worse” than the official figures show, as the new tax bill could lead to accounting changes that disguise the increase in the trade deficit.  (I use scare quotes for “worse”, as trade deficits aren’t actually bad, although the fiscal stimulus that is boosting the trade deficit is bad for other reasons.)

The new Nafta agreement has some bizarre provisions, such as the US telling Mexico how to run its labor unions, which are stupid but relatively meaningless.  More importantly, there a few provisions that favor specific US industries, such as auto parts and steel.  The effect on auto manufacturing is ambiguous, as the higher cost of auto parts and steel will make US cars less competitive against German, Japanese and Korean imports.

Most importantly, this is a zero sum game for the trade balance.  Because the new Nafta won’t impact the overall trade balance, it will hurt those sectors of manufacturing not explicitly aided by the agreement.  This is the “general equilibrium” perspective that non-economists often miss.  Thus areas of manufacturing outside steel and auto parts will suffer a loss of sales and employment.

The simple way to evaluate political actions is to look at what the policymakers claim they are trying to do.  The supposedly more sophisticated method is to look at who gains and loses, and then assume that the policymakers are motivated by special interest politics.  In this case, I don’t believe that either approach works.

I don’t see a shred of evidence that either Trump or the congressional Dems have any idea as to what they are doing here.  The new Nafta is similar to the old Nafta, with slightly less free trade.  But what’s the motivation for that?  If you think free trade is good, then why revise the original agreement?  If you think free trade is bad, then why not just let Nafta expire?  Treat Mexico and Canada like any other trading partner.  What’s the motivation for a new Nafta that’s slightly more protectionist than the old Nafta?

There is a lot of evidence that politicians have no understanding of basic trade theory.  Trump is known to be a fan of the views of Peter Navarro, who is one of his key advisors on trade issues.  But Navarro is unaware of even the most basic concepts in trade theory.  He believes that the famous expenditure identity (GDP = C + I + G + (X-M)) somehow shows that trade deficits reduce GDP. It is possible that trade deficits reduce GDP (I doubt it), but that equation certainly doesn’t show that.

Instead of looking at who gains and who loses, I would focus on the mistaken views of Trump and congressional Democrats.  I doubt that either group set out to punish manufacturing firms that do not produce auto parts and steel, but that’s the effect of their actions.

While this is a bad agreement, it’s also not very important.  Indeed in some respects it’s very good news.  Trump’s ignorance of trade theory makes it more likely that he’ll settle for a similarly meaningless deal with China, one that doesn’t accomplish what he seems to want to accomplish.

Some commenters suggest that I don’t care about how our trade deficit hurts blue collar workers in America.  It’s true that I don’t care about our trade deficit, but I do favor policies that would reduce our trade deficit (albeit not because they would reduce our trade deficit.)  Most notably, I favor policies that would dramatically boost domestic saving, making us more like Germany and Japan.  I’m an outlier here, most economists and pundits favor going in the opposite direction.

So if you were to line up all economists, financial reporters, politicians, and other pundits, my policy views are clearly at the extreme “pro-saving” end of the spectrum, and hence most conducive to a smaller trade deficit.  Trump’s views are at the opposite extreme.  My policy views are effectively “pro-American manufacturing”.

Motivations are one thing, but in the end it’s results that matter.

PS.  It’s funny that the language for the new deal was lifted right out of the supposedly awful TPP agreement.

PPS.  My claim that fiscal deficits increase current account deficits does not mean that other factors are not important.  It’s a “ceteris paribus” claim.  I realize that the two variables are only very loosely correlated over time.  Thus the current account deficit fell even as the budget deficit rose during the Great Recession.  The recent increase in the budget deficit is more unusual, occurring during a period of economic boom.  I suspect this has had a causal impact on the current account.

This is from the WSJ:

WSJ: Has the Fed done enough work to explain to the public why low inflation is actually a problem? Most people hear “inflation’s low” and they say, “Great. Good job.” They hear you say, “Well, we want it to be a little bit high.” Have people done enough work to explain to people why actually this is a problem?

MR. KAPLAN [Dallas Fed President]: Well, the answer is I don’t think it is well understood out there. And this is why when I talk about low inflation, I prefer to talk about in the context of nominal GDP. People understand if nominal GDP is too low, why that’s an issue. They understand higher nominal GDP is better. I think I prefer to talk about lagging inflation in the context of nominal GDP. It is what pays the debt service on the U.S. debt. And we want to grow nominal GDP even though we, the published GDP numbers are [adjusted for inflation]. Nominal GDP is ultimately where it gives you the cash flow to service your debt and to spend on other priorities of the country. And so talking about low inflation in isolation, yes, it may be a challenge for us to do more communication to explain why that’s an issue. The way I’ve tried to explain it when I talk to people in my district and throughout the country is in the context of GDP. It’s important to have higher nominal GDP.

HT: Alex Schibuola, David Beckworth

As I expected, many people missed the point of my previous post. Some people used examples like modern dentistry to make the argument for progress. That completely misses my point. I may be wrong, but not because I don’t understand that modern dentistry reduces teeth pain.  Unfortunately, it makes broken fingernails hurt even more.

If you went back to the Stone Age, or if you visited a primitive tribe today, you’d meet people who would brush off ailments that you’d be crying and whining about to your doctor. They were much tougher than us. Indeed when I do construction, or spend a week camping, I become more impervious to pain than when I have a cushy office job.

Pain is nature’s way of encouraging us to avoid trouble. But while Americans of 2019 objectively experience less “pain” than those of 1919 or 1819, we subjectively suffer just as much from pain.  The pain “thermostat” adjusts to the conditions in which you live.  And that’s not just true of pain; it’s true of many things.  You might be programmed to be angry during 4.3% of your life.  If there’s nothing bad happening to you, then you’ll start getting angry over trivial things.

Similarly, having all these nice gadgets is great, but they devalue the previous gadgets we bought and hence don’t make us happier. That seems obvious to me.

So why do I advocate utilitarian public policies? Two reasons:

1. I might be wrong about progress and happiness.
2. The public policies I advocate make us happier for reasons having nothing to do with “progress” as usually defined. That requires some explanation.

Let’s take rent control. The primary reason why I oppose rent control, minimum wages and similar laws has little to do with the standard pros and cons in an econ textbook. Rather these restrictive controls encourage landlords and bosses to act like jerks.

I suspect that people in Stone Age tribes treated each other with a certain degree of respect. (Albeit only within the tribe).  As population boomed, humanity developed political structures that caused people to be mean to each other. Feudalism, slavery, communism, fascism, etc., encourage people to act like jerks.

I see liberalism as a way of returning to the Stone Age, where we treat each other with some respect. When people are free and transactions are voluntary, then people will be incentivized to treat each other well.

One side effect of classical liberalism is that it makes societies richer.  But that’s not the main point.

So you could argue that political liberalism is a sort of “progress”, making us progress back to where we were in the Stone Age.  But I hope we can advance beyond cavemen in one respect.  Get rid of tribes, get rid of nationalism, and treat everyone on Earth as belonging to a single global tribe.

PS.  My view of the Stone Age may be factually incorrect, but that has no bearing on my current political views.

I’m an agnostic on the question of whether we are making progress, and I’d like to start by considering one type of progress, the war against dirt and germs. Over the course of my life, I’ve seen society put non-trivial resources into making our world cleaner and more germ-free. That sounds good! But I’m not entirely convinced, for numerous reasons:

1. When I go to another region, like East Asia, I see lots of examples that seem slightly unhinged. Lots of people wearing surgical masks in public. Waiters with plastic face guards. People forced to take off shoes every single time they enter a house. (Actually, my house is the same, as I defer to my wife.)

2. Intertemporal comparisons also seem dubious. Younger people (which is most people for a 64-year old like me) seem excessively fastidious. If I tell my daughter stories about how my dad used to take me to the “dump” when I was a kid, to search for useful stuff that people had thrown away, she’d be horrified. Ewww! Or that people didn’t pick up after their dogs in the 1960s. Indeed, I’m still a trash collector; the office chair I’m sitting in as I type this post was out at the curb of a neighbor’s house on Newton.  It looked useful so I grabbed it.

I’m self-aware enough to understand the “OK boomer” absurdity of what I’m doing here. I’m horrified when I read about how in the 1800s the streets of NYC were full of horse manure. Or the drinking water situation in London in 1840. Ewww!  It’s all relative.

If you put a gun to my head and forced me to defend the 1960s level of dirt and germs as optimal, I’d say the 1800s really did involve heath risks, but the recent improvements are mostly psychological. And I’d argue that due to the “hedonic treadmill” we are no longer getting better off, because we keep getting pickier about what we consider disgustingly dirty. Even worse, there are theories that too much cleanliness might actually make kids more susceptible to asthma.

But I’m not going to end up trying to defend the boomer generation, who I regard as just as irrational as any other. I plan to question All Progress.  So let’s take some examples:

1.  We obviously have better stuff, like iPhones.  But that’s not the issue. Just having iPhones makes us more impatient, less able to enjoy life’s simpler pleasures.  New York City has recently added a number of 100 story skyscrapers for billionaires to live in.  But that hasn’t made New York’s skyline any more impressive, as it diminishes the more beautiful art deco masterpieces from the 1920s.  It’s all relative.

2.  Suicide rates are rising.  Even worse, many deaths of despair (from drugs) are quasi-suicides.  The standard view is that this is due to hard times in Middle America.  But life expectancy only began declining after 2014, and has continued declining even as the labor market has improved dramatically (especially for low income groups.)  Hispanic life expectancy is nearly 82, far above whites and far above countries like Denmark.  And yet the economic situation of Hispanics supposedly approximates what caused all these deaths of despair—lots of low wage jobs.  If we are making so much progress, why do deaths of despair keep rising?

3.  What about progress made by formerly oppressed groups like blacks and women, and more recently gays and lesbians?  I consider this the single strongest argument for progress.  But even on the cultural front there are setbacks.  Some businesses now ban office romances.  Previous generations would be horrified by these modern killjoys.  Some of the most modern countries, such as Finland and Japan, are seeing a big drop in sex.  That’s a big deal given that we are talking about one of life’s most important pleasures.  Social media brings pleasure to some, but bullying to others.  People 18, 19, and 20 have lost the right to drink a beer.  Our legal system has removed many of life’s pleasures, as when public swimming pools are closed down due to liability issues.  People (including me) used to date people with differing political views—now we are far more intolerant of others.

4.  The Inuit of Canada were brought into the modern world, and it was a complete disaster.  They were a fairly happy group when they lived in their traditional societies, but are miserable today, despite all the “progress” that Canada gave them.

5.  Better health and longevity.  This is the strongest argument for progress, isn’t it?  But I’m one of those rare people who don’t believe in personal identity, just a flow of mental states.  Suppose we go from a society where families have 4 kids than live to 40, to one with two kids that live to 80.  The total number of “man-years” experienced by the family is the same, but recall that the first 40 years are far more enjoyable than the next 40.  So the flow of pleasure is greater in the society with shorter lives.  Once I hit 55, I got an ever increasing number of annoying ailments (fortunately all minor).  More importantly, you lose some of the youthful zest for an adventuresome life.

6.  Novelists are some of the keenest observers of life as it is actually lived.  Are people in 21st century novels experiencing a happier life than those in 20th or 19th century novels?  Most bizarrely, modern characters don’t even seem to suffer from less physical pain, even though we have all these new technologies like novocain.  In my own life, I subjectively “experience” just as much physical pain when I’m sitting around my office as when I do construction work, even though the latter job is objectively far more painful (as when I hit my thumb with a hammer.)  More hedonic treadmills.

7.  I experienced a brief rise in utility as the Milwaukee Bucks went from a 40-win team to a 60-win team.  But now that I’ve internalized their new level, I don’t enjoy games any more than before.  Today, a mere 9-point win over Atlanta is actually slightly annoying.

If you reply that you love your iPhone and would hate to live in the 1960s, then you’ve completely missed the point.  I agree that it would be annoying for a millennial living in 2019 not to have an iPhone.  That’s not the issue.  The issue is whether you would have enjoyed life in the 1960s, or the 1860s, when no one had iPhones, and no one even knew they existed.

There’s a reason why old people are annoyingly reactionary.  They recall a previous time when people were happy despite not having modern tech.  As for moral progress, they recall really nice sweet people who used to spank their children, and thus they don’t consider spanking to be a monstrous form of child abuse.  If you weren’t there you’ll never understand (just as I’ll never understand how dueling was once considered acceptable.)

Because I’m agnostic, I’ll continue working for Progress.  If there’s only a 15% chance that it’s good for us, that’s better than the 5% chance that it’s bad for us.  Pascal’s wager.

Let me conclude with a couple of anecdotes that drive home my skepticism about progress.  In April, my wife and I celebrated our 25th anniversary with a once-in-a-lifetime trip to Bora Bora, staying in two different “over water” hotels on stilts that cost three times more than any other hotel I’ve ever stayed in.  We also had the roof on our house redone this year, a major project as it’s a complicated house with Tuscan tiles and flat (leaky) aluminum sections.  There were lots of workers for three weeks, lots of pounding of nails, lots of mess.  Also the stress of cost overruns.

If you met me during the roof project, I would have told you that I couldn’t wait until it was over.  Bull****!  Deep down I never wanted it to end.  At the end of each workday I’d get up on the roof and chat with Isidro, the project manager, who was from Michoacan, Mexico.  I spent some time in Michoacan as a teenager, and we talked a lot about places we both knew.  He seemed to enjoy chatting to me; most (affluent) people he worked for probably ignored him.  He was also clearly proud of his work, and liked explaining how he solved each technical problem.  I used to do construction for my dad, so I was very interested and at least somewhat informed about his work.  We’d spend an hour or two at the end of each workday, up on the roof chatting as the sun went down over Lake Mission Viejo.  I enjoyed talking with him far more than I’d enjoy talking with an intellectual about public policy.

The Bora Bora trip?  I was sick the entire time, bundled up on the hot sunny beach in long pants and a sweatshirt, watching the young people in swimsuits enjoying life.

Have a nice Thanksgiving!

There’s a new Hypermind NGDP prediction market, which you should definitely check out. It’s still early, but right now the mean forecast for growth from 2020:Q1 to 2021:Q1 is 3.05%. That suggests that money is a bit too tight.

In contrast, the consensus forecast of economists, which is published by the Philadelphia Fed, shows monetary policy is right on course.  They don’t provide NGDP forecasts, but they do have RGDP growth and PCE inflation:

If you combine the 1.8% RGDP growth with the 1.95% PCE inflation, it looks like the consensus forecast for NGDP growth is about 3.75% (albeit for 2019:Q4 to 2020:Q4).  Thus Hypermind forecasters expect nominal growth to be significantly lower than the consensus forecast of economists.

Let’s revisit this post in about 18 months.

PS.  Each forecaster at Hypermind provides a distribution in their new set-up.  So those long tails are not point estimates of individual forecasters. 

Hypermind is actually much easier to use than you’d think.  I encourage people to participate.  You will help to move the economics profession out of the Stone Age and also win free money.

PPS.  The 5-year TIPS spread is 1.55%.  That’s for the CPI, and implies about 1.3% for the PCE.  If you add 1.3% to the Philly Fed’s 1.8% RGDP forecast you get 3.1%.  Interesting.  (I expect inflation to be higher than that.)

PPPS.  FWIW, I predict 3.4% NGDP growth (which includes 1.6% RGDP growth).  That’s midpoint between Hypermind and the Philly Fed.  I believe money’s a bit too tight.