The China that can say no

I’m not at all a fan of the Chinese government, especially Xi Jinping.  But I do wish the best for the Chinese people, so I’m offering some advice in this spirit.

Right now the Trump administration is pressuring China on a number of fronts.  I believe that China is in a far stronger negotiating position than many people realize, perhaps stronger than they realize.  Here are some factors to take into account:

1. China is a huge country.  It has the world’s biggest economy and the gap with the US gets wider every year.  It has more than 4 times the US population.  It does far more trade than any other country.  Its current account is approaching balance.  Trade with the US is a small share of China’s GDP.  The US does have a big military advantage, but that’s of no use in trade negotiations.

2.  It’s true that China has a large trade surplus with the US, but that cuts both ways.  We could hurt China by cutting off Chinese imports, but that action would hurt the US just as much.  Imagine consumers showing up at Walmart or Target and finding no Chinese goods—the shelves would be almost empty.  Now imagine Walmart’s buying manager calling up their Indian purchaser, and asking how long it will take India to make up for the lost output from just the Pearl River delta.  A decade?  Two decades?  Are American consumers that patient?

3.  The Chinese people have been through much greater hardship than the American people, and are much better positioned to survive the unpleasantness of a trade war.  (BTW, the greater Chinese tolerance for hardship has been noted by historians going way back in history.)  In addition, Trump has little support for his trade war in either the Democratic or Republican Party leadership, whereas the Chinese government is more unified. Trump may lose the House in November, and has to think about the 2020 election as well.  The Chinese should delay, delay, delay. Time is on their side.

Overall I think it’s in China’s interest to stand up to Trump.  Bullies like Trump tend to be cowards, who back down when someone actually puts up a fight.  If the Chinese do want to grant any concessions, they might consider lowering a few trade barriers, which would actually help China and thus not really be a “concession” at all.

What about Chinese rules that force foreign companies to provide intellectual capital as a pre-condition for entering the Chinese market?  It’s hard for me to get worked up about this issue, for a number of reasons:

1. The US does far worse things, such as putting extreme sanctions on companies that do business with Iran, even if those companies are located in countries that have perfectly good relations with Iran, and who support the Iran deal along with 90% of the rest of the world.  The US is a big bully that tries to force the whole world to do as we do.  We also bully smaller countries like Canada in international trade disputes, often ignoring our own agreements.  We are the last people who should be criticizing China for not playing by the rules.

2.  One can make a good case that it’s efficient for foreign companies to be forced to transfer technology to China. Intellectual property laws are too restrictive, and the benefit of the technology to the 1.4 billion people in China probably far exceeds the cost to the companies and their stockholders.  And who are we to complain about a country using its size to get its way?

From a fairness perspective, keep in mind that China’s size is a disadvantage in international trade.  China contains by far the most homogenous large population anywhere; indeed there is nothing else on Earth like the 1.26 million billion strong Han ethnic group.  This means that China is constantly suffering from disadvantageous terms of trade whenever it goes into a new industry.  In contrast, Switzerland can specialize in a few industries without driving prices down to rock bottom.  So from a “fairness” perspective, the forced technology transfers merely offset the huge disadvantage China faces in trade due to its massive size and homogeneity.  (This homogeneity is a gold mine for US corporations—why shouldn’t they have to “pay to play”.)

(It would be different if the job skills in various Chinese regions were as diverse as in Europe, but they are not.)

I didn’t even mention other possible Chinese advantages, such as their strong authoritarian dictatorship, because I’m not convinced dictatorships actually do have more power.  However, others might cite that factor.

PS.  Several commenters asked me about an article claiming that the Chinese thought Trump was a formidable negotiator.  Here’s how I responded:

Trump’s been in office 18 months and done an amazingly bad job of negotiating.  For instance, he desperately needed McCain’s vote to repeal Obamacare, and instead mocked the fact that he was captured by the North Vietnamese (where he was tortured.)  Is that how smart negotiators win people over to their side?  He gave N. Korea the recognition it wanted and got nothing meaningful in return.  He tore up the Iran agreement and failed to negotiate anything better.  The EU president ran circles around him in yesterday’s agreement.  Putin made a fool of him.  He blabbed out top secrets to Russian officials in a White House meeting.  Where is the evidence that he’s a good negotiator?  I know; it’s all a secret master plan that only a select few can understand.

I’m guessing that a few of these glowing comments from the Chinese are a tactic to butter Trump up so that they can more easily use their vastly superior negotiating skills to run circles around him, just as Juncker did yesterday.



38 Responses to “The China that can say no”

  1. Gravatar of Sam Sam
    26. July 2018 at 17:23

    1.26 million –> 1.26 billion

  2. Gravatar of John Dreystadt John Dreystadt
    26. July 2018 at 18:18

    I am curious about your statement that the Chinese economy is larger that the US economy. Most articles I read usually put the Chinese economy somewhere between 80% and 60% of the US. Just the other day, I read a quote from a senior member of their government who said their economy was 2/3 the size. I am curious what sources you are using for your number. I have been wondering if China is bigger than we think because of how high their electricity consumption runs. What say you?

  3. Gravatar of Massimo Heitor Massimo Heitor
    26. July 2018 at 19:10

    McCain campaigned on repealing Obamacare in 2016, voters elected him on that platform, then in 2017 he did the exact opposite of his campaign pledges and voted down the repeal bills.

    Sumner is saying that McCain turned against his own voters and supporters because of a petty spat with Trump? It’s not clear that if Trump had behaved differently that McCain would have honored his own campaign pledges.

  4. Gravatar of ssumner ssumner
    26. July 2018 at 20:35

    Sam, Thanks, I fixed it.

    Massimo, Even if it weans’t decisive, do you seriously think it helps to personally insult the people who you need to support you? How does the Obamacare fiasco show Trump’s negotiating skill? I’d like to hear your explanation. After all, Trump took office backed by a party that strongly opposed Obamacare, and couldn’t even get it to support him. Can you point to ANY evidence of Trump’s negotiating skill?

  5. Gravatar of Benjamin Cole Benjamin Cole
    26. July 2018 at 20:56

    The US does have a big military advantage, but that’s of no use in trade negotiations.–Scott Sumner.

    Actually, I agree with much of Sumner’s post (although I think many of these topics are too large to comprehend or play out over generations, so every view becomes interpretation), but I would re-word the above sentence to:

    “The US probably has a big military advantage, but that’s increasingly of no use (and often counterproductive) at all in politics or economics, and in classic macroeconomic terms is a parasitic drain.”

  6. Gravatar of Benjamin Cole Benjamin Cole
    26. July 2018 at 21:07

    OT but fun and in the ballpark.

    The IMF says the US should cut wages to balance trade deficits.

    The IMF is worried about global “external imbalances.”

    Here is the latest view from the IMF: “Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.” Specifically, “Over the medium term, sustained [current account trade] deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments.”

    In English, for American readers this translates as: “Dudes, the US is running huge trade deficits, leading to capital inflows and soaring asset prices. This could lead to a Hyman Minsky moment, asset prices will collapse, thus taking down banking systems and economies along the way.”

    Is the IMF hinting at dollar collapse too? That one is always good from some mileage.

    The IMF solution?

    “In general,” says the IMF. “reforms that encourage investment and discourage excessive saving (for example, through reduced entry barriers and stronger social safety nets) are necessary in excess surplus countries, while focus on reforms that reduce labor costs and improve competitiveness are more appropriate in excess deficit countries.”

    Yes, “reduce labor costs” in the US! The globalists say so! Does that sound like “cut wages”? Oh, maybe.

    And members of the US employee-class are supposed to choose the globalists over Trump?

  7. Gravatar of E. Harding E. Harding
    26. July 2018 at 21:09

    Trump’s negotiating skill is clearly real, but far from perfect. On domestic policy, it is extremely weak. It is found in foreign policy to some degree (e.g., Syria, North Korea, arguably Iran).

    “Putin made a fool of him.”

    Quite the reverse. I am astonished to the degree that Trump made a fool of Putin at the meeting (or Putin made a fool of himself -take your pick). Putin even openly admitted in Helsinki he supported Trump during the election -how utterly c*ckish, mindless, and weak is that?? I am quite angry as to how Putin has allowed the foreigners (including the extremely Russophobic Trump) to conspire to keep Russia down. He is far too moralistic and insufficiently Machiavellian in his foreign policy, thinking far too much good faith in his opponents than actually exists. Stalin had a far superior foreign policy from a national interest perspective. Under him, the Soviet Union became the world’s second-largest economy and the world’s only other superpower. Under Putin, Russia has transformed from a defeated and weak, but not hated country to a somewhat stronger and more assertive one under relentless outside pressure which Putin, whether for domestic political reasons or incompetence, failed to prevent.

  8. Gravatar of Jean Jean
    27. July 2018 at 05:46

    And this latest outburst shows why utilitarianism is such a bad school of philosophy. More than one million Uighers in concentration camps, the largest surveillance system the world has ever seen, illegal occupation of, and environmental damage to, off-shore islands, flouting of UN sanctions against North Korea and global treaties on things such as CFCs.
    At the end of the day, utilitarianism is just a variant of Marxism – living standards over everything else. In the real (none propagandized) world people have other values. Eradicating poverty is very important, but totalitarianism isn’t the way to get there. Your hatred of Trump is blinding you to some basics.

  9. Gravatar of Mike Rulle Mike Rulle
    27. July 2018 at 06:14

    This topic is the most important topic in the world today. It far transcends who is the US president today. As soon as you sidelined into Trump is a dope mode I lost track of your very interesting positioning of the issues and needed to re-read. A few comments. PPP is very hard to measure between an advanced modern economy and one which is half modern and half 18th century. So I am not sold on the idea their economy is larger than ours. I remember when Tom Friedman argued in favor of their command economy, which you properly seem to reject. I believe half of their domestic investment is spent directly by the State and Provincial governments. That cannot be efficient. 28% of their population works in the Agricultural sector. I find that astonishing (US 1-3%). And they still need to subsidize feeding their people. They are demographically like Japan, except,10 times bigger. Maybe you are correct in that we should “share” our technology with them. But that will never happen except in a free market way. I believe Xi’s takeover represents panic on their part. They will continue to grow, I assume, but they have more paper tiger in them than is generally perceived.

  10. Gravatar of dtoh dtoh
    27. July 2018 at 07:09

    Off topic, but you predicted 1.5% growth during Trump’s term. Five quarters in, we’re averaging 3.1%. I reckon that means that if you’re right, growth will average 0.77% for the next 11 quarters.

    Are still sticking with your prediction?

  11. Gravatar of Justin Justin
    27. July 2018 at 07:11

    We can add to this list more open immigration. The Chinese are really missing out on refugees and economic migrants from poor countries. China could pick up the ‘$100 bills Trump wants to leave on the sidewalk’. With China’s GDP per capita far higher than in population-exporting regions, and likely to converge with Taiwan’s, it will increasingly be an immigration destination, if only CCP would reform their laws on this front. This could help offset China’s low birth rate.

  12. Gravatar of ssumner ssumner
    27. July 2018 at 09:25

    John, I’m using PPP figures, which is what matters.

    Jean, You said:

    “And this latest outburst shows why utilitarianism is such a bad school of philosophy. More than one million Uighers in concentration camps, the largest surveillance system the world has ever seen, illegal occupation of, and environmental damage to, off-shore islands, flouting of UN sanctions against North Korea and global treaties on things such as CFCs.”

    On the contrary, those evils are precisely why utilitarianism is the right approach, it explains why we need to fight against Chinese government repression. Those evils are bad on utilitarian grounds.

    Mike, You said:

    “So I am not sold on the idea their economy is larger than ours.”

    There’s no doubt in my mind that it’s much bigger—I visit there often and it’s pretty obvious.

    You said:

    “As soon as you sidelined into Trump is a dope”

    Almost every day he says something idiotic. Are we just supposed to ignore this—like the story of the Emperor with No Clothes? It’s his supporters who are utterly blind to reality. Read smart conservatives like Douthat, Brooks, Will, Goldberg, etc., don’t watch idiots like Sean Hannity if you want to understand what’s actually going on with Trump.

    You said:

    “Maybe you are correct in that we should “share” our technology with them. But that will never happen except in a free market way.”

    Wrong, it’s already happening.

    “I believe half of their domestic investment is spent directly by the State and Provincial governments. That cannot be efficient.”

    Yes, most is not, but some is (high speed rail, subways, airports, etc.)

    Why you don’t seem to understand is that China can be mindbogglingly inefficient, with productivity less that 1/4th US levels, and still have the world’s biggest economy. Not wanting to believe a fact is no reason not to believe it.

    dtoh, Yes, I’m sticking with my prediction, see my new post. It contains exactly the same prediction I made a year ago.

    And we are six quarters in—The Trumpistas insisted from the beginning that 2017:Q1 was a Trump quarter. Go back and check if you don’t believe me.

    BTW, I think I said the trend rate of growth is 1.5%. Is that correct?

    Justin, There is already increasing immigration into China, and it will pick up dramatically in the years to come. Eventually most of the menial jobs will be done by people from places like Philippines and Indonesia.

  13. Gravatar of Massimo Heitor Massimo Heitor
    27. July 2018 at 10:12


    Regarding Trump’s strategy of insulting people and realpolitik negotiation strategy… I have no idea. I’m not an expert at all on realpolitik. I don’t insult people in my own life, even people who insult me or wrong me, but I would also be a terrible politician or big leader type.

    On the GOP health care failure in 2017, I blame the broader Republican party. There was zero political strategy or messaging ready. Democrats had the simple predictable message that Republicans were just jerks that were trying to simply take away health care from the sick and the poor and the Republicans did nothing to counter or stop that perception. Even a lot of GOP types admit that they were simply caught unprepared as they didn’t expect to win the Presidency in 2016.

    I believe John H Cochrane at the grumpyeconomist blog best articulates the problems of US health care and ideal policy solutions, but the GOP seem unable to put together a policy plan that even gain his approval or enthusiasm. I hope that Trump appoints Cochrane to do some good. Or appoint Whole Foods Founder + recent CEO John Mackey, who also is a passionate advocate of free market health care reforms.

    McCain and Alaska Republican Senator Murkowski were happy to vote for earlier pre-Trump Obamacare repeal bills that had no chance of passing, but in 2017, when they had the chance to vote on repeal bills that would pass, they balked, because they didn’t think the bills would be viewed well in hindsight.

  14. Gravatar of E. Harding E. Harding
    27. July 2018 at 10:37

    There’s no doubt in my mind that it’s much bigger—I visit there often and it’s pretty obvious.

    Even outside the cities? China has a much higher percentage of the population in rural areas than the U.S. And its urban-rural productivity gap is vast, unlike in the U.S.

    I believe China’s economy to be around 5-10% larger than the U.S., and that China’s economy is growing roughly two to three percentage points faster than the U.S., and will continue to do so until around the time it reaches roughly half the GDP per capita of the U.S., after which point it will stagnate. Chinese growth statistics have always been overstated. As of 2016, the richest post-Communist country (Czechia) has around 54% the GDP per capita of the U.S. Russia and Hungary around 44%. China around 24% (though there’s massive regional inequality, and the leading parts of China are as advanced or almost as advanced as the leading parts of Russia).

    To understand what’s going on with Trump, just examine Trump’s behavior over the past few decades. He’s a con man with an above average amount of business acumen. The thing he cares most about is publicity. In all other areas, he just goes with the default.

    Read smart conservatives like Douthat, Brooks, Will, Goldberg, etc.

    Douthat and Goldberg are smart, but not that smart, and are barely conservative. Brooks is dumb, and a centrist. Will is dumb, an outright liberal.

    Yeah; Trump says a lot of stupid sh*t every day.

    Eventually most of the menial jobs will be done by people from places like Philippines and Indonesia.

    Doubtful. Both are developing, and even if a majority of their population comes to China (which won’t happen), that won’t remotely satisfy the Chinese requirements for menial labor.

  15. Gravatar of Brian Donohue Brian Donohue
    27. July 2018 at 10:38

    OK, I’ll give you and the Trumpistas 2017Q1 as a Trump quarter. 1.5% over 4 years still means growth of less than 0.8% per year over the next 2.5 years. You seem to be hoping hard for a recession, like a lot of people are.

    $100 even money, I’ll take the over. Deal?

  16. Gravatar of rayward rayward
    27. July 2018 at 11:48

    In the initial trade negotiations with China, the American negotiators demanded a veto power over China’s fiscal policy. My reaction is two-fold: First, did they actually believe China would acquiesce? Second, isn’t the demand an admission that China’s approach to fiscal policy is an advantage rather than the disadvantage it’s supposed to be?

  17. Gravatar of dtoh dtoh
    27. July 2018 at 14:25

    Here is what you said on December 10, 2016

    “If you want my prediction, it’s 1.5% average growth over Trump’s term in office….

    I think tax cuts raise growth, but not by very much. (I was predicting 1.2% before the election)…”

    Just to reiterate—my growth predictions are for 4 years, not for 2017. “

    So…. unless my math is wrong and assuming you really are sticking to that prediction then that implies you think that a) RGDP growth over the coming 11 quarters will average 0.77%, and b) that the effect of the Trump election during his term of office (deregulation plus tax cuts) will total 1.2% (1.5% minus your pre-election prediction of 1.2% x 4 years.)

  18. Gravatar of Woody Pfister Woody Pfister
    27. July 2018 at 18:09

    Someone who has a hard on for despotic Communist and Shiite theocratic regimes can’t wish the best for their people. What a bunch of intellectual masturbation on this blog.

  19. Gravatar of ssumner ssumner
    28. July 2018 at 08:22

    dtoh, The complete quote was:

    “Go back and read the earlier things you wrote. That’s what I’m holding you and Trump to. If he doesn’t succeed, I’m right.

    The claim is that Trump will boost the economies growth rate to 4% to 6%, and not just briefly but as the new normal. That’s the criterion for success.

    “If you want my prediction, it’s 1.5% average growth over Trump’s term in office. That doesn’t mean it can’t bounce around (I think 2017 will be more than 1.5%). Even in this recovery we sometimes have a couple quarters above 3%.”

    So far we’ve had one quarter above 3%, and another at 2.99%.

    Unemployment has certainly fallen more than I expected, and if Trump serves one term and if there is no recession then growth will average above 1.5%, as you say. But my prediction in my most recent post is the same as the one I made numerous times last year, and I’m sticking with that prediction.

    Meanwhile, are you sticking with your predictions? 🙂

    BTW, growth has averaged 1.575% over the past 11 years.

  20. Gravatar of ssumner ssumner
    28. July 2018 at 08:33

    Massimo, Trump campaigned on the promise that he’d deliver a vastly better medical system. He promised voters that he’d FORCE Congress to give him what he asked for.
    If Trump’s as weak as you say, why not just elect someone like “Jeb!”

    Harding, You said:

    “I believe China’s economy to be around 5-10% larger than the U.S., and that China’s economy is growing roughly two to three percentage points faster than the U.S., and will continue to do so until around the time it reaches roughly half the GDP per capita of the U.S., after which point it will stagnate. Chinese growth statistics have always been overstated.”

    This is not even internally consistent. The very growth statistics that you trash suggest that China’s economy is only about 10% larger than the US economy.

    As far as menial labor, don’t forget Bangladesh and India. There will be enough, just as Mexico and Central America has enough for the US.

    Brian, You said:

    “You seem to be hoping hard for a recession”

    You really are one of the stupidest people alive. And you support Trump too?

    Woody, You said:

    “Someone who has a hard on for despotic Communist and Shiite theocratic regimes can’t wish the best for their people.”

    I completely agree.

    Everyone, Please stop throwing me softballs!

  21. Gravatar of Brian Donohue Brian Donohue
    28. July 2018 at 11:02

    Hey Scott,

    Did I hit a nerve? I’m actually really smart. I think you’re really smart too. Also, I voted for Hillary and don’t like Trump.

    But given how much space Trump is taking up in your smart brain, It’s probably best for you to decline making bets related to economic prognostication for the time being.

    Get well soon.

  22. Gravatar of E. Harding E. Harding
    28. July 2018 at 11:21

    This is not even internally consistent.

    It is.

    The very growth statistics that you trash suggest that China’s economy is only about 10% larger than the US economy.

    This is confusing growth rates and levels. The last ICP (to determine relative international price levels) was held in 2011, with the results published in 2014. Exaggerated growth rates by one to two points don’t add up to much in a span of a few years.

  23. Gravatar of E. Harding E. Harding
    28. July 2018 at 11:22

    Also, if you include South Asia rather than just Southeast, then, yeah, your scenario becomes more plausible.

  24. Gravatar of dtoh dtoh
    28. July 2018 at 12:48

    So to be clear, I said that tax cuts (not Trump) would boost the economy.

    Specifically, what I said was…

    “And just to clarify, I never said the economy would average 4%. I said tax cuts would “result” in 4 to 6% growth. I don’t think we will get there on January 20, 2016. I’d expect 3 to 3.5% average over Trump’s entire term with at least a couple of years above 4%.”

    I’m a little less optimistic but for sporting sake, I’ll stick with the prediction. I’m pretty confident, we will be closer to my 3 percent than your 1.5%.

    The reasons I’m less optimistic are…

    1) The actual tax cuts contained some sunset provisions, were excessively complex for small businesses and most importantly did not include a cut in the capital gains tax rate (which I happen to think is particularly important.)

    2) When I made the prediction, I was of the opinion that most of a tax cut would go into increased investment, but upon reflection I’m of the opinion that more might go into consumption through the channels of reduced prices and higher wages.

    And for clarity are you sticking to your December 2016 prediction, and is it the same as “the one I made numerous times last year,” or have you already revised your 2016 prediction. I.e. is it or is it not 1.5%? 🙂

  25. Gravatar of Benjamin Cole Benjamin Cole
    28. July 2018 at 19:34

    Regarding China and GDP.

    There are people who study satellite photos of China and other countries taken at night. The amount of city lights is a proxy for bona fide development.

    I recently eyeballed such photos. It is true, North Korea is a black hole on such photos.

    But S. Korea, Japan and the Eastern seaboard of China look about the same.

    There are plenty of Western businesses, such cruise lines, spending billions of dollars to serve the China market. I assume these guys do not risk capital on a whim.

    That said, China has become increasingly repressive for the last 30 years. In China, higher living standards are not associated with human rights, civil rights, free speech, democracy, or legal rights, in fact the opposite has happened.

    Given the internet and face-recognition software, and other technological marvels, the China repressive state makes 1984 look like travels with Peter Pan.

    Also, all China companies, including those publicly held, are controlled through entitled China Communist Party (CCP) board seats, voting stock and internal CCP cadres. Beyond that, every China company operates on state-owned land and usually has accepted state capital and financing, or loans from state-owned banks. China companies can only operate as extensions of the CCP, and the CCP grip is growing tighter.

    Making predictions is hard, especially about the future. But if there is a China collapse scenario, perhaps it will be due to CCP suffocation.

    But that is a Westerner’s outlook.

  26. Gravatar of Jerome Barry Jerome Barry
    29. July 2018 at 05:07

    Your admiration of the ability of the Han people to suffer is noted. The somewhat prosperous Han along the coasts of China have no cultural experience of losing as much as they will if Xi stubbornly forces them to suffer while the U.S., the E.U, Canada, Mexico, and Great Britain if they ever get Brexit done, along with the mini-TPP, go about doing commerce with one another in a generally low tariff and patent respecting manner.

    By making China a relatively unattractive partner in trade, Xi can begin to homogenize with North Korea. The lights will go out in China.

  27. Gravatar of ssumner ssumner
    29. July 2018 at 08:34

    Brian, I’ve devoted 10 years of my life to trying to prevent recessions, without pay, AND AM STILL DOING SO, and you tell me I’m rooting for a recession? It’s hard to imagine a more moronic comment. Why would I want there to be a recession? It goes against everything I value in terms of ideology (and as an aside, it would also hurt my stock portfolio.) Have you understood anything I’ve said over the past 10 years? Stop saying moronic things and I’ll stop calling you a moron.

    dtoh, Sorry, but your comment is factually inaccurate. After Trump was elected you said he would achieve his tax cuts and it would boost growth dramatically. Full stop.
    There was no “if”, it was an unconditional forecast. I recall it vividly and it’s still somewhere in the comments. Even if there was no tax cut at all, you were predicting much faster growth.

    It’s true that you later backed off somewhat, as did I after the quote you provided. Let’s revisit this in 2021, I still think I’ll be closer to the truth.

    Jerome, Come back in a year and tell me how the Brexit fantasy is working out.

  28. Gravatar of dtoh dtoh
    29. July 2018 at 18:26


    🙂 I’ll check the record. All our memories tend toward bias favorable to ourselves. You may be right, but I have never been a particularly enthusiastic Trump supporter (other than the fact that I thought Hillary’s election would probably doom human civilization.) I have however always had a strong view on the efficacy of cuts in taxation on capital as way of stimulating economic growth.

    But let’s just be sure we have properly quantified this predictive contest. I said 3.0 to 3.5% during Trump’s term of office and you said 1.5%.

  29. Gravatar of dtoh dtoh
    29. July 2018 at 18:29

    And BTW and just to repeat, I don’t see this in anyway as reflection on Trump’s presidency. To me, it’s just a question (albeit an extremely important one) on the effect of capital taxation on growth.

  30. Gravatar of Brian Donohue Brian Donohue
    30. July 2018 at 02:50


    Suggesting you were rooting for a recession was dumb. A lot of people with TDS are rooting for a recession though. But you were right. I have made several observations, and you wisely latched on to the dumb thing I said and ignored the stuff that suggests your recent track record on economic predictions is… lacking for some weird reason.

    Anyway, thanks for pointing out my dumb comment and giving me a chance to reflect on it and understand its essential dumbness.

    See how that works?

    Thanks, and you’re welcome.

  31. Gravatar of ssumner ssumner
    30. July 2018 at 15:12

    dtoh and Brian, Thanks for the comments. Just to be be clear, if there’s a recession it most likely won’t be Trump’s fault, and YOU CAN QUOTE ME ON THAT. I’m on record saying Presidents have little impact on the business cycle, and still believe that. I’d add that most people agree with me if pushed. For every Republican who thinks Presidents explain the cycle, ask them about Bush’s 2 recessions, and the long expansion and stock market boom during Obama. They’ll change their minds right away. Obviously I’m not a fan of Obama’s policies, and think we should have done better during 2009-17. But we did do far better under Obama than Bush, for reasons mostly unrelated to the actions of either one.

    The only way I’d blame Trump for a recession is if there’s some huge trade war, RGDP drops, and NGDP growth stays strong. That’s really unlikely.

    As far as jobs, I did put too much weight on demographics (retiring boomers etc.) and obviously underestimated employment growth. I suppose the boomers didn’t save enough to retire. It’s still true that Trump did not cause the rate of job growth to increase, but it certainly didn’t slow as I had expected. It’s even plausible that he played some role in preventing it from slowing. (Dereg, tax cuts, etc.) In my defense, predictions about labor force participation growth are not part of my core competency. When my market monetarist forecasts start going off track (say a recession w/o falling NGDP growth) then I’m really in big trouble. 🙂

    And don’t forget that I made some good labor forecasts early in the recovery. I did a post on “job-filled non-recovery” when other pundits were still talking about “jobless recoveries. In the end I was right on that call.

  32. Gravatar of dtoh dtoh
    30. July 2018 at 18:17

    Agree (and always have) about the President’s ability to effect the business cycle. Just a few small quibbles.

    I do think the President can impact the cycle to a limited degree with their choice of Fed appointments. Case in point, Obama’s failure to fill open Fed slots. I also think, if Obama had known anything about monetary policy (unlikely in the case on any President,) he could have provided Bernanke with enough political and moral support to have allowed Bernanke to forge a consensus for a more expansive monetary policy.

    I also think that while tax cuts have largely a structural effect (and this is hugely important in choosing a President), expectations of tax cuts can also somewhat effect the business cycle, but this probably has more to do with the President’s party than the actual President.

    Finally I think given what we have seen with the LFPR, that we should now allow that the gist of Trump’s 18 to 20% unemployment comment was directionally correct. (Or at least that it resonated with those too discouraged to look for work and who were being ignored by mainstream economists in both parties who were so busy ridiculing Trump they didn’t have time to actually consider the plight of many Americans who had been pushed out of the work force.)

  33. Gravatar of LC LC
    31. July 2018 at 21:16

    Having Chinese and American people endure hardships sure sounds like a race to the bottom, and are these the only ways to escape this trade war? Are there other strategies that can be used that will lead to lower tariffs and not cause harm? For instance, can Congress go back to a MFN approach and grant Chinese imports a lower tariff rate? Similarly, can the Chinese lower tariffs after Congress acts? What other positive strategies can the Chinese side use rather than the retaliatory tariffs to help the Chinese consumer?

  34. Gravatar of ssumner ssumner
    1. August 2018 at 10:48

    dtoh, Agree with most of what you say, but not the final point. If Trump’s claims about 20% to 40% unemployment were correct, then we are still in a huge depression. But he claims the economy is great. He’s lying then or now. And the LFPR has changed very little under Trump. Check this out:

  35. Gravatar of dtoh dtoh
    1. August 2018 at 17:18

    A few points without getting into what Trump said.

    1) We define depression/recession by growth not by LFPR or unemployment.

    2) I think it’s logical to assume that you would see a drop in the unemployment rate (less discouraged workers) first before you start to see an increase in the LFPR (more discouraged workers.) Recent job growth with flat or increasing unemployment would seem to support that theory.

    3) Don’t forget that the unemployment rate and the LFPR have very different denominators.

    4) If the post 2007 drop in LFPR was in fact cyclical, then our assumptions about LFPR elasticity was off, … and if LFPR is elastic in both directions, then 20% no longer seems at all unrealistic.

  36. Gravatar of SnoopBillTwinkle SnoopBillTwinkle
    2. August 2018 at 12:19

    Something to note about the whole trade war fiasco; he’s managed to get the politicians in other countries on both sides to unite behind free trade. For example, in Canada, the center-right Ontario Premier, Doug Ford is united behind Canadian PM Trudeau. Meanwhile, the only people who want this trade war/protectionist mania are Trump and his followers.

  37. Gravatar of ssumner ssumner
    3. August 2018 at 18:02

    dtoh, There are lots of possibilities here, but I have one observation about when a time series declines in a sort of step function. In that case, the trend is probably gradually lower, and the LFPR falls faster than trend during recessions and slower than trend during booms. The boom periods show up as roughly flat, and recessions it falls very steeply, but the long run trend may still be gradually downward.

    Having said that, I probably overestimated how many boomers would retire at 65, so it may do a bit better than I forecast.

  38. Gravatar of ssumner ssumner
    3. August 2018 at 18:03

    Snoop, Good point. I wish the EU and Chinese would join forces, but so far they don’t seem to be doing so.

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