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 workingman 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, than 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.

Nafta 2.0: What’s the point?

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.

That’s “progress”

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

Further thoughts on progress and happiness

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.