Economic nationalism in action
The Canadian dollar is up today on news that the new free trade agreement will be essentially identical to the old agreement.
This got me thinking about the 2016 campaign, economic nationalism and related issues. Here are a few observations:
1. Much of the punditry of 2016 now looks pretty hyperbolic, almost ridiculous. There was lots of talk that “neoliberalism” was passé, that American workers were being crushed by foreign trade, and that the Trump campaign represented a rejection of globalism. Two years into his 4-year term, Trump has precisely one major achievement to help blue collar workers—a big corporate tax cut. It’s hard to find a more neoliberal policy than corporate tax cuts. Any time you are reading a political pundit and come across the term “neoliberalism”, just stop. You will be getting dumber if you continue to read.
2. Some will argue that Trump never really believed in economic nationalism, that it was all an act to get votes. That’s possible; although I suspect he really does believe some of the nonsense he spouts about winning trade wars. But surely the people around him are serious economic nationalists. Peter Navarro, Wilbur Ross, Steve Bannon and others didn’t suddenly adopt these ideas for the 2016 campaign.
3. Economic nationalists are really, really, really dumb, and this has a big impact on how the events have played out. Their number one goal has been to reduce the US trade deficit, and they don’t even have a clue as to how this can be done. As a result, they flounder around trying to negotiate trivial changes in trade deals, while the rest of the Trump administration enacts policies that will make the trade deficit even bigger. What would a policy of reducing trade deficits look like? Something like this:
A. Large budget surpluses to boost national saving. Instead, Trump is increasing the budget deficit at a rate far beyond anything we’ve ever seen in a time of peace and prosperity.
B. A big increase in the corporate tax rate, to reduce domestic investment. Policies to discourage domestic homebuilding. Again, Trump has done mostly the opposite, although the incentive to take out a home mortgage was modestly reduced in the new tax bill.
C. Public policy changes to encourage domestic saving, as you see in places like Singapore. As far as I know, there’s almost nothing being done in this area.
As a result, the trade deficit will likely get bigger. (Especially the actual deficit. The recent change in the corporate tax code will lead companies to report more output as domestic, which would modestly reduce the measured deficit without impacting the actual deficit.)
No doubt commenters will insist that they can’t be that dumb; there is some sort of secret plan to fix the trade deficit. Sorry, but read the stuff written by Peter Navarro and Wilbur Ross; they really are that dumb. (The smart ones like Gary Cohn are gone.) These are guys who think the GDP = C + I + G + NX equation somehow demonstrates that trade deficits reduce GDP. No, I’m not joking.
Economic nationalism is a profoundly self-destructive philosophy, but we are blessed to have economic nationalists who are so incompetent that they don’t even know how to reduce the trade deficit. That’s why stocks are up today.
Tags:
1. October 2018 at 11:08
I wonder that the US people want to buy “Love Live!” goods from Japan or not.
1. October 2018 at 11:10
mercari.jp
1. October 2018 at 12:33
“Economic nationalism is a profoundly self-destructive philosophy, but we are blessed to have economic nationalists who are so incompetent that they don’t even know how to reduce the trade deficit. That’s why stocks are up today.”
And we avoided more reckless socialization of the economy? Hooray!
1. October 2018 at 12:58
In theory I agree with you, yet this statement looks a bit odd when you look at history. China’s rise to an economic world power is impressive yet it is hyper-nationalistic, especially regarding its economy. Chinese mercantilism is infamous, for example with its vast and opaque subsidies to its state-owned firms.
Interestingly enough, America also became a world power, at a time when free trade wasn’t really an issue but quite the opposite.
1. October 2018 at 14:52
Christian. You said:
“impressive yet it is hyper-nationalistic,”
This is 180 degrees from the truth. When China had a hyper-nationalistic policy they were one of the poorest countries in the world, poorer than India and with many people starving to death. Since they’ve adopted a policy of trading with the world, they’ve done far better, although they remain only a middle income country. The parts of China that are most open to the world (the southeast) are the richest. The northeast is more nationalistic, and more backwards. The overseas Chinese areas that are less nationalistic than China (Hong Kong, Singapore, Taiwan, etc.) are much richer. The evidence is clear, the less nationalistic the better.
North Korea is a hyper-nationalistic country, if that’s what you are looking for.
1. October 2018 at 15:39
So let’s approach this from a utilitarian point of view.
Number One
Do you believe that a policy that transfers the technology, skills, resources, and economic capacity needed for a powerful military to a country which has a dictatorial, genocidal and belligerent government is likely to increase our utility over the long run?
1. October 2018 at 15:51
Number Two
You have frequently stated that marginal utility decreases with each dollar of income (or consumption.) If this is correct and the results of trade are asymmetric, i.e. one factory worker loses all the income from their $50,000 job, and 50,001 consumers each save $1 buying trinkets at Walmart, then increased trade will result in a drop in aggregate utility (even though some economists incorrectly believe that the dollar benefit equates to an increase in utility.)
1. October 2018 at 17:39
Two years into his 4-year term, Trump has precisely one major achievement to help blue collar workers—a big corporate tax cut. —Scott Sumer.
For some reason, people forget that the Trump administration in combination with the US Congress, also doubled the standard reduction. I wish they had tripled the standard deduction and forgotten about the corporate tax cuts for a year or two, but set that aside.
The doubling of the standard deduction was a very useful tax cut, and I wish it got more recognition.
Also, I am not sure what credit or blame to give the Trump administration for the tax changes. The Trump administration’s legislative liaison is regarded as very weak and the Trump team as neophytes in Washington.
The GOP does what it always does when it’s in power and that is cut taxes on the rich and boost military outlays. And no, the Donks aren’t any better.
1. October 2018 at 17:43
Sounds about right.
@ssumner
Japan is pretty nationalistic (by the low trade as a %age of GDP definition). It’s not poor.
1. October 2018 at 20:54
OT but germane:
Scott Sumner has advocated an NGDP futures market, in which the Fed buys unlimited amounts of contracts to drive or retard NGDP to a target, such as 5% annual growth.
I think I like this idea. But the mechanics puzzle me.
Let’s look at the oil market:
“Record 1.4 billion barrels trade on NYMEX in U.S. LONDON, April 14 (Reuters) – A record 2.5 billion barrels of crude oil traded on April 13 on the world’s two main futures exchanges, the equivalent of almost 30 times the amount of oil used around the world each day, data showed on Wednesday.”
Assuming the oil contracts trade near $70 a barrel, about $175 billion of contracts traded on April 13.
Of course, buyers and sellers of contracts do not put up all the money before buying a contract. Usually about 25%.
Depending on the popularity of the NGDP futures market, it seems we are talking some serious money.
This is a fascinating topic, and I would like to know more about the mechanics of an NGDP futures market, with unlimited Fed buying of positions.
And where does the Fed get its money play in the futures markets?
2. October 2018 at 02:37
I like this kind of nationalism:
“Investor concerns over Italy continued on Tuesday, after Claudio Borghi, head of the lower house’s budget committee, said Italy would have solved its fiscal problems with its own currency.”
2. October 2018 at 07:18
The CAQ won big in Quebec yesterday. Combined with Doug Ford’s win in Ontario, hard to say that Canada is an exception to populism. Also, I think, harder for your “it’s a reaction to Islam” argument, Scott.
2. October 2018 at 10:10
What; Ford was pro-immigrant and Canada has lots of Muslim immigrants.
2. October 2018 at 12:10
E. Harding:
Exactly my point. Ford is a conservative populist, but (as I myself have noted in these comments) is a pro-immigrant populist who did very well among those of Asian backgrounds in Ontario, include Muslim South Asians. Thus, exactly as I said, the Canadian results disagree with Scott’s previous argument that populism’s successes are reactions to Islam.
2. October 2018 at 14:51
dtoh, You said:
“Do you believe that a policy that transfers the technology, skills, resources, and economic capacity needed for a powerful military to a country which has a dictatorial, genocidal and belligerent government is likely to increase our utility over the long run?”
No. I would add that I think that description fits Nazi Germany, not our trading partners. I do think America has a belligerent government (not genocidal), but I still want countries to trade with the US.
On your second question, I reject the claim that trade causes the unemployment rate to be higher than otherwise.
Any policy change, including corporate tax cuts, causes some economic reallocation. That doesn’t make the policy bad. Indeed the primary way that corporate tax cuts boost growth is by causing companies to replace workers with machines. This does not cause a higher unemployment rate, but some individuals do lose jobs. But that’s equally true if you do not change public policies.
Finally, if you worry about that issue, you should especially oppose protectionism, which also causes economic reallocation. Protectionism costs jobs in exports, construction, and other sectors. Countries with nationalistic trade policies have not been successful in avoiding layoffs.
Harding, What is the trade to GDP ratio in the US, compared to Japan?
Ben, I’d suggest reading one of my papers on NGDP futures targeting. There is one at Mercatus, you can google it.
John, I agree that Islam is not the big issue in Canada, but let’s not forget that Trudeau won a big national election a few years ago under a liberal platform. Canada still seems much less right-wing than America. Populism comes in many varieties. Is Ford opposed to international trade? Immigration?
2. October 2018 at 16:34
Scott Sumner:
I have just read your Mercatus papers.
You do not answer the question of how large an NGDP futures market could become (like the oil futures, hundreds of billions on any particular day?) Nor do you address where the Fed gets its money to play the futures market.
It is interesting to note that most of the oils futures market is not oil producers and users hedging positions, that is insuring themselves against sudden and unanticipated rises or falls in the price of oil. I guess we could characterize most of the oil futures market as a form of financial wagering.
I would like to see you address these mechanical issues of an NGDP futures market.
3. October 2018 at 03:31
Scott
“I do think America has a belligerent government (not genocidal), but I still want countries to trade with the US.”
Oh I get it. U.S is the belligerent. Funny. Was it funny when Chinese government murdered 20 million people in the Cultural Revolution. Funny that they’ve put 1 million Uighurs in concentration camps.
IMHO, we should not be trading with China at all.
“On your second question, I reject the claim that trade causes the unemployment rate to be higher than otherwise.”
If you really believe that everyone who lost their job when manufacturing moved to China/Mexico was able to subsequently find comparable work at comparable pay (and if this view is representative of mainstream economic academia) it fully explains why Trump got elected.
3. October 2018 at 07:49
I’m not sure discussing China with a guy who sees continuity of government between the Cultural Revolution and the Xi era is really a good use of time.
4. October 2018 at 14:25
@Typhoon Jim
What is your point about continuity?
Is Sumner or you claiming current government is not responsible for the excesses of the cultural revolution.
Continuity does exist in the sense that each leader since Mao seems to have picked his successor, and as such, Xi was indirectly endorsed by Mao Zedong. More importantly, to be free of these sins, the current government would have to denounce Mao Zedong. Also, the current crackdowns on dissent is indeed worthy of Mao and the cultural revolution.
Anyway, on China issues, I would rather listen to Christopher Balding than Scott Sumner.
4. October 2018 at 14:43
Scott,
of course, if North Korea is your benchmark, then no other country in the world is nationalistic, except Iran maybe.
It’s evident that China’s economic policy is extremely nationalistic, no matter how many sick twists you think up.
You sound like a whiny 10-year-old. The US government is not belligerent at all but China is extremely belligerent, especially against its own people.
In the US, 95% of the so-called intellectuals criticize President Trump extremely, including you. Most of you would probably lose their jobs and their echo chambers if they sympathized with Trump openly. Do the same thing in China against Xi and you are gone forever, tortured, killed, or imprisoned till the end of time. Tiny little difference.
4. October 2018 at 17:32
Ben, How did the Fed buy all those bonds in the QE program?
dtoh, First of all, I’m not sure how China relates to a post about Canada. Is Canada a belligerent genocidal country? When you make this point in a post about Canada, without naming China, how am I supposed to know you are even talking about China? We trade with other countries with horrible human rights records.
Second, I’m not being “funny”. I strongly believe the US is more belligerent than China. Our military is fighting all over the world, China’s is not. China has a much, much worse domestic human rights record, but I don’t think current Chinese citizens should be punished for the crimes of their government during the Cultural Revolution, which was 50 years ago. Everyone seems to think Nixon was a big hero for opening up links to China when it’s human rights record was 100 times worse than today.
The current Chinese government is certainly very bad, especially in Xinjiang, but not genocidal. North Korea is a different story; you can make an argue for sanctions there. But then Trump says he “loves” the leader of North Korea:
https://www.ft.com/content/acc8cc26-c49d-11e8-8670-c5353379f7c2
You said:
“If you really believe that everyone who lost their job when manufacturing moved to China/Mexico was able to subsequently find comparable work at comparable pay (and if this view is representative of mainstream economic academia) it fully explains why Trump got elected.”
Where did I say that? Or even anything close? Some workers gain from trade while others lose. The overall level of employment is not affected. That’s standard theory and the empirical evidence overwhelming supports the idea. The Eurozone has a massive trade surplus, the worlds’ largest, and 8.2% unemployment. TRADE IS NOT THE ISSUE!!!
As for the politics, the fact that Trump lied to his supporters about his view of Nafta type deals and no one is screaming “sellout” suggests that they don’t care about trade. So no, that’s not why he was elected. His supporters don’t care about the issues, they’ll support Trump whatever he does or says, not matter how offensive.
Viking: You said:
“Xi was indirectly endorsed by Mao Zedong.”
Now we are entering the twilight zone.
“Anyway, on China issues, I would rather listen to Christopher Balding than Scott Sumner.”
Then do so. Didn’t he say half the housing units in Beijing are empty?
Christian, Do I really have to explain that the term “belligerent” refers to foreign policy?
I never said that China was not at all nationalistic, obviously it is. But in economics the term ‘nationalism’ refers to opposition to foreign trade. It’s kind of weird to call the country that leads the world in foreign trade “hypernationalistic”, but heh, what do I know? I’m just an out of touch economist.
Everyone, Have a nice day!
5. October 2018 at 03:31
“I don’t think current Chinese citizens should be punished for the crimes of their government during the Cultural Revolution.”
1. Why do you think Chinese citizens are being punished. I suspect most people would give up some prosperity for more freedom and a less despotic government. (They’re just not given a choice.) If US policy leads to a less dictatorial regime, that’s a good thing for Chinese citizens.
2. That said, in general I don’t think we should be interfering just to help out citizens in another country (unless it can be done at minimal cost and risk to ourselves.) Our policy should be to do what’s best for our own citizens (which IMHO includes preventing the rise of powerful, non-democratic belligerent countries.)
3. I find it hard to believe you would think I was referring to Canada as a belligerent genocidal state unless you’re being deliberately obtuse. And BTW – I thought your post was about economic nationalism. You never mention Canada once in the post.. only a brief comment on their currency.
4. I don’t think one would normally define defensive military actions to suppress murderous groups and governments as belligerent. On the other, if a country was using, threatening to use or deploying its military in ongoing disputes with virtually every one of its neighbors, I’m pretty sure that would be considered belligerent.
5. Finally, I think it’s a huge mistake to believe that the current crop of Chinese leaders are any less sociopathic than their predecessors.
5. October 2018 at 07:40
Did Balding say half of housing units in Beijing are empty? Unlikely, as that would be BS. Balding is claiming the Chinese economy would be in trouble under under a freely convertible and floating RMB, and that official Chinese economic statistics are questionable.
Furthermore, I am claiming that the construction boom is the result of something akin to the American Community Reinvestment Act on steroids, where the unknowing ultimate risk takers are Chinese salt of the earth people naively depositing money in banks that are not practicing fiduciary responsibility. There is no doubt about this, these people are shouldering the majority of the risk, but don’t have a million dollar condo in Beijing.
Regarding your twilight zone ridicule of me, the current government does treat the old regime responsible for the great famine and the cultural revolution as deities.
https://en.wikipedia.org/wiki/Great_Chinese_Famine
https://en.wikipedia.org/wiki/Mausoleum_of_Mao_Zedong
If you want an analogy, it would be a world where WW2 ended in stalemate, Germany slowly got a normalized relationship to the rest of the world, and in the middle of Berlin, there is a mausoleum to Hitler.
6. October 2018 at 16:16
Scott, I know that you love your artificial, arbitrary separation between foreign policy and extreme domestic repression. There is no reason why anyone should follow this absurd rule. It is extremely shameful and hypocritical.
Besides: If a man even beats his own wife and children, abuses them and murders them for every little criticism, one must assume that the same man will become even more violent towards strangers. Unless the monster is controlled by a free, democratic protective power like America, so that he at least leaves the neighboring countries mostly alone (as long as they are not called Tibet or Taiwan).
I give you that. When looking at large, relevant countries China is “just” about fourth place after North Korea, Iran, and Putin’s Russia.
As with so many economic terms, there is absolutely no consensus here. A popular definition applies to China quite well: Gigantic state enterprises. Mercantilism. Very limited access to its own market from outside. Emphasis on state control over the economy, labor, and capital formation.
Of course China loves “foreign trade” (as you call it) but they are opposed to freedom in general and real free trade in particular.