In an interview onCNBCat the Asian Development Bank, Summers discussed the implications of steel tariffs for the US economy. The steel tariffs will do damage to the American economy "even before China retaliates" says Summers.
So if you believe a simplified version of conservative views on the economy, Trumponomics is pretty contradictory (and yes they are contradictory, even if one may doubts about why). Tax cuts should lead to growth, via supply side economics, and the recently proposed tariffs on steel and aluminum do exactly the opposite. Protectionism (not a very good name, I prefer managed trade, as I discussed here before) has made a come back, but while many heterodox economists have suggested that 'free trade' is not always beneficial to all, and those concerned with the fate of manufacturing and the working class in the United States have decried Free Trade Agreements (FTAs) over the years, it seems that the association of these ideas with Trumponomics has made them less keen on the recent tariff proposal.
A typical example is the recent op-ed by Jared Bernstein and Dean Baker in WAPO, and I cite them exactly for my respect for their economic views in general, and their commitment to progressive causes. In their view: "The bigger dangers to our economy are twofold. One, that our trading partners will retaliate by taxing our exports to them, thus hurting a broad swath of our exporting industries, and two, by leading an emboldened, reckless Trump administration to enact more bad trade policy." Essentially, they agree that tariffs would have a negative effect on employment, but perhaps not as big as some Cassandras have suggested, and that this 'bad protectionist' policies would continue. A similar argument can be found in Brad DeLong's op-ed, another progressive economist, in which he argues that the tariff is a tax hike for consumers. Brad, I should note, has recently published a very good book in which he praises the Hamiltonian system, that is, the use of managed trade to promote industrial development (I discussed it here).*
It's worth remembering that while on other issues Trumponomics is essentially Reaganomics (low taxes for the wealthy and increased military spending), on trade his views are a break with more recent Republican positions (and hence the push back in his own party against the tariffs) and closer to what many Dems, particularly those connected with trade unions, often defended. He has not signed TPP, has really started renegotiating NAFTA (something Obama promised to do as a candidate, but did not deliver as president) and now has imposed some tariffs (like, btw, Bush, so I'm not suggesting this is unprecedented; just that he has been more consistent on this topic).
Don't get me wrong, I'm not a big fan of Trumponomics, or even in particular of these tariffs. And this will not work probably, but the reasons are not the ones adduced by progressives. Their basic argument is that retaliation by other countries will make them innocuous. In all fairness, the US is already more 'protectionism' (manages trade) than most people understand. The ability to use trade treaties and organizations for defending the country's own advantage is considerably tilted in favor of advanced economies and their corporations that can use loopholes to creatively avoid rules and continue to subsidize their industries (and agricultural sector). The US use of the defense department, again used by Trump, is typical. Poor countries some times lack the basic technical capabilities (lawyers and economists) to face the trade teams of advanced economies. The complexity of the WTO dispute settlement process, the geopolitical role of the US and the importance of US markets for many developing countries render it a very ineffective tool for the interests of less developed economies.
It should not be a surprise that American corporations continue to thrive in international trade (it's the American working class that is in trouble). Manufacturing is doing well, with the support of what Fred Block has termed the hidden developmental state in the US. So the problem is not that tariffs could not work. In all fairness, tariffs together with significant expansion of domestic spending on infrastructure (and more steel demand), with a vigorous defense of trade unions, with higher minimum wages, with policies to improve income distribution, like progressive taxes on the wealthy, to strengthen the domestic market might actually be part of a Hamiltonian strategy of economic growth. Note also that the whole point of imposing tariffs is to depend less on exports and more on domestic markets, so that to some extent retaliation should matter less. A more closed (not closed, but more so, like Keynes suggested in his National Self-Sufficiency piece of 1933) international economic order, to role back of some of the excesses of the neoliberal, pro-corporate globalization process, used to be be, and should be, on the agenda of the left.
The problem, then is less the tariffs per se, and more the fact that the Trumpian agenda is empty, and has nothing for the working class. That was my biggest concern reading the progressive economists complaints about Trump's trade views. Their solutions are to stop protecting patents and professionals, that is more 'free trade,' and a more depreciated currency (I'll leave my skepticism about this one for another post, at any rate I discussed this before). While I'm more sympathetic to the skepticism on property rights, note that China, in part, thrives, exactly because they do explicitly infringe the rules on patents (the first Geely car was a knock off of a Mercedes, and they bought Volvo to have access to foreign technology; there are many examples; it's worth noticing that the US did that in the past too). That would not necessarily be good for American corporations. To weaken doctors, lawyers and other middle (and upper middle) class professionals is certainly not the way out of the hole for the American working class.
The political danger of these views, which I think still dominate the liberal wing of the Democratic Party, is considerable. I think, that even if his policies turn out not to be very helpful (for the reasons I outlined, meaning lower wages and protections for workers, lower taxes for the wealthy and corporations and so on) his true dislike of globalization and free trade policies would strengthen his position with working people in the Rust Belt, which were central for his victory (maybe you think it was Russia… oh, well). As I noticed before the election, this would make things so much hard for Dems in elections. I said back in September 2016 that: "Note that this doesn't mean he [Trump] is going to win the election. Demographic changes make it harder for Republicans to win now, since Dems get more of the electoral college to start with. And I hope he doesn't, btw. But there are good reasons to be afraid. This is going to be way closer than it should be." And so it was.
I'm afraid that his trade policies, and the Dems position that effectively are to his right (like Hillary, but not Bernie) would make it more likely (hopefully not enough) for a longer period of Trumponomics than is acceptable. This suggests that a good chunk of Dems are stuck in the model that Mark Lilla has referred to as identity liberalism (see his book here), and have become vulnerable to right wing populism. It's getting increasingly difficult to have hope in the dark.
PS: For discussions of trade policy see this two previous entries which provide a simple discussion of the Ricardian and neoclassical models of trade and its limitations. I would also recommend the paper by Robert Wade linked here.
* There are many others that have written on this in the last couple of days. Paul Krugman could, arguably enter the list of progressives here, but he has been consistently more of a free trade guy. Krugman complain is more macro than the others. In his view, the Fed would hike rates, since we are close enough to full employment and any additional gains from the tariffs will be eroded, even without retaliation from other countries. In part, that would happen because higher interest rates would lead to inflows and an appreciation of the dollar (see here).
So if you believe a simplified version of conservative views on the economy, Trumponomics is pretty contradictory (and yes they are contradictory, even if one may doubts about why). Tax cuts should lead to growth, via supply side economics, and the recently proposed tariffs on steel and aluminum do exactly the opposite. Protectionism (not a very good name, I prefer managed trade, as I discussed here before) has made a come back, but while many heterodox economists have suggested that 'free trade' is not always beneficial to all, and those concerned with the fate of manufacturing and the working class in the United States have decried Free Trade Agreements (FTAs) over the years, it seems that the association of these ideas with Trumponomics has made them less keen on the recent tariff proposal.
A typical example is the recent op-ed by Jared Bernstein and Dean Baker in WAPO, and I cite them exactly for my respect for their economic views in general, and their commitment to progressive causes. In their view: "The bigger dangers to our economy are twofold. One, that our trading partners will retaliate by taxing our exports to them, thus hurting a broad swath of our exporting industries, and two, by leading an emboldened, reckless Trump administration to enact more bad trade policy." Essentially, they agree that tariffs would have a negative effect on employment, but perhaps not as big as some Cassandras have suggested, and that this 'bad protectionist' policies would continue. A similar argument can be found in Brad DeLong's op-ed, another progressive economist, in which he argues that the tariff is a tax hike for consumers. Brad, I should note, has recently published a very good book in which he praises the Hamiltonian system, that is, the use of managed trade to promote industrial development (I discussed it here).*
It's worth remembering that while on other issues Trumponomics is essentially Reaganomics (low taxes for the wealthy and increased military spending), on trade his views are a break with more recent Republican positions (and hence the push back in his own party against the tariffs) and closer to what many Dems, particularly those connected with trade unions, often defended. He has not signed TPP, has really started renegotiating NAFTA (something Obama promised to do as a candidate, but did not deliver as president) and now has imposed some tariffs (like, btw, Bush, so I'm not suggesting this is unprecedented; just that he has been more consistent on this topic).
Don't get me wrong, I'm not a big fan of Trumponomics, or even in particular of these tariffs. And this will not work probably, but the reasons are not the ones adduced by progressives. Their basic argument is that retaliation by other countries will make them innocuous. In all fairness, the US is already more 'protectionism' (manages trade) than most people understand. The ability to use trade treaties and organizations for defending the country's own advantage is considerably tilted in favor of advanced economies and their corporations that can use loopholes to creatively avoid rules and continue to subsidize their industries (and agricultural sector). The US use of the defense department, again used by Trump, is typical. Poor countries some times lack the basic technical capabilities (lawyers and economists) to face the trade teams of advanced economies. The complexity of the WTO dispute settlement process, the geopolitical role of the US and the importance of US markets for many developing countries render it a very ineffective tool for the interests of less developed economies.
It should not be a surprise that American corporations continue to thrive in international trade (it's the American working class that is in trouble). Manufacturing is doing well, with the support of what Fred Block has termed the hidden developmental state in the US. So the problem is not that tariffs could not work. In all fairness, tariffs together with significant expansion of domestic spending on infrastructure (and more steel demand), with a vigorous defense of trade unions, with higher minimum wages, with policies to improve income distribution, like progressive taxes on the wealthy, to strengthen the domestic market might actually be part of a Hamiltonian strategy of economic growth. Note also that the whole point of imposing tariffs is to depend less on exports and more on domestic markets, so that to some extent retaliation should matter less. A more closed (not closed, but more so, like Keynes suggested in his National Self-Sufficiency piece of 1933) international economic order, to role back of some of the excesses of the neoliberal, pro-corporate globalization process, used to be be, and should be, on the agenda of the left.
The problem, then is less the tariffs per se, and more the fact that the Trumpian agenda is empty, and has nothing for the working class. That was my biggest concern reading the progressive economists complaints about Trump's trade views. Their solutions are to stop protecting patents and professionals, that is more 'free trade,' and a more depreciated currency (I'll leave my skepticism about this one for another post, at any rate I discussed this before). While I'm more sympathetic to the skepticism on property rights, note that China, in part, thrives, exactly because they do explicitly infringe the rules on patents (the first Geely car was a knock off of a Mercedes, and they bought Volvo to have access to foreign technology; there are many examples; it's worth noticing that the US did that in the past too). That would not necessarily be good for American corporations. To weaken doctors, lawyers and other middle (and upper middle) class professionals is certainly not the way out of the hole for the American working class.
The political danger of these views, which I think still dominate the liberal wing of the Democratic Party, is considerable. I think, that even if his policies turn out not to be very helpful (for the reasons I outlined, meaning lower wages and protections for workers, lower taxes for the wealthy and corporations and so on) his true dislike of globalization and free trade policies would strengthen his position with working people in the Rust Belt, which were central for his victory (maybe you think it was Russia… oh, well). As I noticed before the election, this would make things so much hard for Dems in elections. I said back in September 2016 that: "Note that this doesn't mean he [Trump] is going to win the election. Demographic changes make it harder for Republicans to win now, since Dems get more of the electoral college to start with. And I hope he doesn't, btw. But there are good reasons to be afraid. This is going to be way closer than it should be." And so it was.
I'm afraid that his trade policies, and the Dems position that effectively are to his right (like Hillary, but not Bernie) would make it more likely (hopefully not enough) for a longer period of Trumponomics than is acceptable. This suggests that a good chunk of Dems are stuck in the model that Mark Lilla has referred to as identity liberalism (see his book here), and have become vulnerable to right wing populism. It's getting increasingly difficult to have hope in the dark.
PS: For discussions of trade policy see this two previous entries which provide a simple discussion of the Ricardian and neoclassical models of trade and its limitations. I would also recommend the paper by Robert Wade linked here.
* There are many others that have written on this in the last couple of days. Paul Krugman could, arguably enter the list of progressives here, but he has been consistently more of a free trade guy. Krugman complain is more macro than the others. In his view, the Fed would hike rates, since we are close enough to full employment and any additional gains from the tariffs will be eroded, even without retaliation from other countries. In part, that would happen because higher interest rates would lead to inflows and an appreciation of the dollar (see here).
I've long hoped, probably naïvely, that one of the benefits of team Trump's promotion of generally ineffective (or worse) solutions to the downsides of trade could engender a debate about better ideas. Of course, the debate will also generate some really bad arguments, likethis onefrom economist David Boudreaux in this AM's NYT.
Boudreaux argues that trade (and, implicitly, anything else) can't be a problem for jobs because the US economy creates and destroys tons of jobs all the time. The nub of his case comes down to:
"…estimates of jobs destroyed by trade sound big, but they're actually tiny. Relative to overall routine job destruction and creation — "job churn" — the number of American jobs destroyed by trade is minuscule.
In January alone, the number of American workers who were laid off or dismissed from their jobs was 1.8 million. The number of workers who quit their jobs that month was 3.3 million. Adding in workers who left their jobs for other reasons, such as retirement and disability, the number of job separations in January was 5.4 million. But there were 5.6 million hires in January, too. Those numbers are typical of most months.
Awareness of job churn should calm Americans' fears about imports [good luck with that–JB]…Compared with the number of total annual job losses…job losses from trade shrink into insignificance."
He then cites some estimates of trade-induced job losses:
"Ms. Wallach's estimate that Nafta destroyed one million jobs in its first 20 years means that it took freer trade with Mexico two decades to destroy as many American jobs as are now destroyed every 18 days on average. Mr. Autor, Mr. Dorn and Mr. Hanson's calculation that 2.4 million American jobs were ended by trade with China from 1999 through 2011 implies that the 13-year "China shock," as the paper called it, eliminated as many jobs as are eliminated, on average, every 41 days."
By this measure, almost any amount of job loss attributed to any cause will be insignificant. Boudreaux has taken Panglossian economics ("don't worry—be happy!") to a new high. His trick, if you didn't notice, is a) conflating gross with net flows, and b) not giving a crap about the pain of job loss, dislocation, and the damage done to whole communities that found themselves on the wrong side of these global dynamics.
I asked David Autor—he's one of the economists whose work Boudreaux critically cites—what he thought about this argument that job churn somehow negates job loss. His response follows:
"It's unfortunate that a Ph.D. economist would not recognize the crucial difference between gross and net job losses. By Boudreaux's logic, since "in a normal year, then, the number of workers laid off or dismissed averages 21 million," the U.S. Great Recession was a negligible event: the U.S. lost fewer than 4 million jobs in the first year (a mere one-quarter's worth of job losses) and no more than another 2 million in the second year (only a month's worth). It's remarkable that we even noticed!
Yes, when the U.S. losesandgains 21 million jobs in a year, this is the normal ebb and flow of the labor market. Largegrossjob flows need not imply any net loss of employment. But when sharp changes in world trading conditions cause the U.S. manufacturing sector to close up shop on 14 percent of its base employment level (2.4 million of 17.3 million manufacturing jobs) in the space of a few years, and many of these displaced workers leave the labor force, that's a huge rise in concentratednetjob loss that isnot part of the normal ebb and flow. (By the way, 2.4 million is the conservatively estimated trade-induced fall. U.S. manufacturing jobs plummeted from 17.3 million in 1999 to 13.8 million in 2007, anet reduction of 3.5 million, followed by another 1.9 millionnetfall between 2007 and 2010)."
So, if you happen to read Boudreaux's oped and it seemed inconceivable to you that millions of net job losses magically "shrink into insignificance," be assured that you were right and he was very wrong.
As I've tried to stress in much recent work, this moment does, at least it should, create a moment to talk about what we should do for those hurt by trade.
I've argued:
–Much better work supports for job losers, including direct job creation in places with persistently weak labor demand.
–Improve the quality of existing jobs through much better labor standards (see Heidi Shierholz'srecent workon this). Though there are definitely pockets of weak labor demand, even today, broadly speaking, our labor market problem is less job quantity than quality.
–Help our smaller manufacturers by expanding the Manufacturing Extension Partnership (it's a small but venerable part of the solution—I've got a piece coming out soon on this with the details).
–Push back on currency intervention by trading partners with "countervailing currency purchases" (see Gagnon/Bergstenon this). Trump's new South Korean trade deal relegated currency rules to a toothless side agreement.
–See Lori Wallach and myagendafor more inclusive trade deals, including taking ISDS out of these agreements, putting a currency chapter in the deal with enforceable disciplines, and ensuring a much more balanced set of interests around the table when these deals are cast.
Oops, they did it again. After Republicans rammed through their big tax cut, there were a rash of stories about corporations using the tax break to give their workers bonuses. Have the media learned nothing from the Carrier debacle? After all, companies have every incentive to curry favor with a sitting administration by attributing nice things they would have done in any case to Dear Leader's glorious policies. Amid tightening labor markets lots of firms would have been trying to attract or hold workers by offering a bit of money; why not use the occasion to hype something that raises your after-tax profits?
Anyway, now we have enough information to start assessing the real impact of the tax cut. No, it isn't going into wages; you should never have expected that in the short run anyway. What's more, we aren't even seeing the kind of response that would raise wages in the long run. And it's even possible, as I'll explain, that the tax cut could reduce wages.
1. The optimists' theory of the case
What was the theory of the case for those who believed, or at least claimed to believe, that a cut in corporate taxes would be passed through into wages? The story, as told by people like Kevin Hassett or the Tax Foundation, was that (a) markets for goods and labor are close to perfectly competitive, and (b) America is part of a global capital market that more or less equalizes after-tax rates of return. The idea, then, was that by reducing the rate of taxes on corporate profits, America would attract inflows of capital from the rest of the world. A rising capital stock would drive pre-tax returns on capital down and, by increasing competition for labor, drive wages up. In the long run, they claimed, all the benefits would go to workers.
There were multiple reasons not to believe in this story. One reason is that the U.S., if only because of its sheer size, doesn't face a perfectly elastic supply of capital from the rest of the world; even in the long run, we would expect a tax cut to raise after-tax profits. Another is that we're nowhere close to perfect competition: a lot of corporate profits represent some kind of monopoly rent, and there's no reason to expect capital inflows to compete those rents away. indications are even less favorable than the critics expected.
And even if there were some truth to the optimists' case, it's about the long run. In the short run, before there has been time for a major change in the capital stock, we shouldn't expect to see any wage rise at all.
The only way you might see some immediate wage gains would be if two things were true: companies aren't in a highly competitive environment – they have some freedom to set wages – and they have some interest beyond profit maximization in keeping workers happy, either out of the goodness of their hearts or because management doesn't like being hated.
I don't want to totally discount this possibility. Once upon a time, when we had powerful unions and companies like GM saw themselves as having multiple "stakeholders" rather than simply maximizing profits, one could have imagined seeing corporations share some of a tax windfall with workers. And there might be a tiny bit of that mindset operating even today – but as I'll explain shortly, that might not have the implications that you imagine.
2. Tax cuts so far
After initially falling for the bogus bonus story, news organizations have mostly caught up with reality: the tax cut isn't being passed through to workers. Mainly it's being used for stock buybacks.
The failure to raise wages immediately comes as no surprise. It's what even supporters of the tax cut would have predicted, if they'd followed through on the logic of their own analysis.
The prevalence of stock buybacks is, however, another story. The pro-tax-cut case didn't predict a short-run rise in wages, but it did predict a big rise in investment, financed by capital inflows – not simple recycling of the tax cut to investors.
So far, however, as Dean Baker points out, there is no indication of an investment boom. Orders for capital goods aren't up, actual investment spending doesn't seem to rising any faster than before, investment intentions haven't spiked. What this means is that the process that was supposed to raise wages in the long run isn't happening, at least not yet.
One other indicator: if the tax cut were really leading to big inflows of capital, that should be lifting the dollar. In reality, the dollar is weaker than it was before the tax cuts:
So what story do the early data seem to tell? Well, they're consistent with the view that corporate profits include a large component of monopoly rents. In that story, if you give corporations a big tax cut, they don't invest more, compete for workers, or any of that stuff. They just take the money and run, which is what we seem to be seeing.
3. Can tax cuts actually reduce wages?
Let me finish with a possibility I haven't seen mentioned: tax cuts might actually provide companies with an incentive to reduce wages. What? Let me explain.
There's a large literature trying to explain why executive compensation rose so much from the 1960s to the 1990s. One hypothesis, as expounded for example by Piketty, Saez, and Stantcheva, is that CEOs used to pay themselves less than they could have as a way to "make peace" with workers, customers, etc.. And one reason for this self-restraint was that given high marginal tax rates, executives who extracted very high pay packages wouldn't get to keep much of the money anyway.
The point is that when tax rates came down, the payoff to greed went up, and outweighed the former fear of opprobrium.
Now suppose that a bit of that old reluctance to be quite as hard on one's workers as one might remains. And add in the growing evidence that many employers have substantial monopsony power – that is, they aren't facing a competitive labor market, but instead have quite a lot of ability to set wages.
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In this case, cutting corporate tax rates could actually have a perverse effect. Squeezing workers even harder than you already are raises pre-tax profits, but you might be reluctant to do it – and the price of your qualms is less if a substantial part of any profit gain goes to the IRS. Reduce that marginal tax rate, and exploiting workers to the max becomes a more attractive strategy.
I don't really think this is an important effect. But if you believe that corporations are going to share the benefits of tax cuts with workers out of the goodness of their hearts, you have to acknowledge that the price of a good heart has actually gotten higher, not lower, thanks to these tax cuts – because as conservatives like to remind us, it's the marginal rate that matters.
So are workers going to benefit a lot from these tax cuts? There was never a very good reason to think they would, and early indications are even less favorable than the critics expected.
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And even if there were some truth to the optimists' case, it's about the long run. In the short run, before there has been time for a major change in the capital stock, we shouldn't expect to see any wage rise at all.
The only way you might see some immediate wage gains would be if two things were true: companies aren't in a highly competitive environment – they have some freedom to set wages – and they have some interest beyond profit maximization in keeping workers happy, either out of the goodness of their hearts or because management doesn't like being hated.
I don't want to totally discount this possibility. Once upon a time, when we had powerful unions and companies like GM saw themselves as having multiple "stakeholders" rather than simply maximizing profits, one could have imagined seeing corporations share some of a tax windfall with workers. And there might be a tiny bit of that mindset operating even today – but as I'll explain shortly, that might not have the implications that you imagine.
2. Tax cuts so far
After initially falling for the bogus bonus story, news organizations have mostly caught up with reality: the tax cut isn't being passed through to workers. Mainly it's being used for stock buybacks.
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The failure to raise wages immediately comes as no surprise. It's what even supporters of the tax cut would have predicted, if they'd followed through on the logic of their own analysis.
The prevalence of stock buybacks is, however, another story. The pro-tax-cut case didn't predict a short-run rise in wages, but it did predict a big rise in investment, financed by capital inflows – not simple recycling of the tax cut to investors.
So far, however, as Dean Baker points out, there is no indication of an investment boom. Orders for capital goods aren't up, actual investment spending doesn't seem to rising any faster than before, investment intentions haven't spiked. What this means is that the process that was supposed to raise wages in the long run isn't happening, at least not yet.
One other indicator: if the tax cut were really leading to big inflows of capital, that should be lifting the dollar. In reality, the dollar is weaker than it was before the tax cuts:
Image
So what story do the early data seem to tell? Well, they're consistent with the view that corporate profits include a large component of monopoly rents. In that story, if you give corporations a big tax cut, they don't invest more, compete for workers, or any of that stuff. They just take the money and run, which is what we seem to be seeing.
3. Can tax cuts actually reduce wages?
Let me finish with a possibility I haven't seen mentioned: tax cuts might actually provide companies with an incentive to reduce wages. What? Let me explain.
There's a large literature trying to explain why executive compensation rose so much from the 1960s to the 1990s. One hypothesis, as expounded for example by Piketty, Saez, and Stantcheva, is that CEOs used to pay themselves less than they could have as a way to "make peace" with workers, customers, etc.. And one reason for this self-restraint was that given high marginal tax rates, executives who extracted very high pay packages wouldn't get to keep much of the money anyway.
The point is that when tax rates came down, the payoff to greed went up, and outweighed the former fear of opprobrium.
Now suppose that a bit of that old reluctance to be quite as hard on one's workers as one might remains. And add in the growing evidence that many employers have substantial monopsony power – that is, they aren't facing a competitive labor market, but instead have quite a lot of ability to set wages.
ADVERTISEMENT
In this case, cutting corporate tax rates could actually have a perverse effect. Squeezing workers even harder than you already are raises pre-tax profits, but you might be reluctant to do it – and the price of your qualms is less if a substantial part of any profit gain goes to the IRS. Reduce that marginal tax rate, and exploiting workers to the max becomes a more attractive strategy.
I don't really think this is an important effect. But if you believe that corporations are going to share the benefits of tax cuts with workers out of the goodness of their hearts, you have to acknowledge that the price of a good heart has actually gotten higher, not lower, thanks to these tax cuts – because as conservatives like to remind us, it's the marginal rate that matters.
So are workers going to benefit a lot from these tax cuts? There was never a very good reason to think they would, and early
Bad policies sometimes lead to interesting economics. For example, the disastrous turn toward austerity after 2009 was a kind of natural experiment that led to an upwelling of good work on the effects of fiscal policy.
And I'm starting to think that the Trumpian trade war, which finally seems to have arrived, will lead to some good work on international economic policy. Like the work on fiscal policy, it will of course be ignored by people in power. But still worth doing.
In this little essay I'm going to offer some analysis and a few numbers based on a chain of thought that begins with Trump's evident disdain for Japan and ends up in Atlanta, New Orleans, and Buffalo. What? Bear with me if you have a taste for things wonkish.
My starting point is a peculiar aspect of Trump's climb-down on steel tariffs. The ostensible justification for these tariffs was national security; but as was widely noted from the start – although this probably came as news to the Trumpies – most U.S. steel imports come from American allies. And now Trump has granted exemptions to allies that largely vitiate the supposed point of the exercise.
One country that has conspicuously not been granted an exemption, however, is Japan. Why not?
One answer may be that the Japanese aren't, you know, white.
Another answer may be that Trump, who often seems to have fixed ideas about the world that are long out of date – like his belief that American cities are gripped by a huge crime wave – is still living in the Michael Crichton era when Japan was going to take over the world any day now.
Yet a third answer may be that the U.S. does run a trade deficit with Japan – actually even bigger than the headline number if you include Japanese components embedded in Chinese exports – and Trump believes that (a) a trade deficit means that you're losing while someone else is winning and (b) trade balances are determined by protectionism.
Both propositions are, of course, untrue. In reality, trade balances are the flip side of capital flows: countries that attract more inflows of foreign capital than their own outflows must, by the sheer arithmetic, run current account deficits (that is, including investment income). Conversely, countries that are exporters of capital run current account surpluses.
And modern Japan is a country that really should be running current account surpluses, for one powerful reason: demography. Japan has a rapidly declining working age population:
Image
This means limited opportunities for investment, which means that it's a country that should be investing its savings abroad.
But the claim that trade surpluses often reflect weakness, while trade deficits reflect strength, is a very hard sell. And demographic drivers of trade imbalances are usually a lot less clear than this.
This, however, got me thinking: what about regions within the United States? We have sharply different growth rates across metropolitan areas, mainly driven by in- or out-migration. There are no protectionist barriers to muddy the picture, and capital is surely highly mobile within the country.
Unfortunately, we don't have comprehensive regional balance of payments data. Thanks to researchers at Brookings, however, we do now have a lot of information on the exports and imports of metropolitan areas – exports and imports to and from other parts of the U.S. as well as the rest of the world. I'm not sure how safe it is to use these data to estimate trade balances, but let me take a stab at it.
These data only cover goods; they don't cover either services or income transfers like, say, Social Security receipts, which as we'll see in a second can make a big difference. So I don't think I can run any regressions here. But I still think looking at metropolitan trade balances can be enlightening.
So let's look at the metros with the biggest goods trade deficits and surpluses.
First, the biggest deficits (data for 2010, in billions of dollars):
Washington: -$86 billion
Miami: -$68 billion
San Francisco: -$41 billion
Atlanta: -$35 billion
Baltimore: -$33 billion
OK, Washington runs a huge deficit in goods; basically, what it exports is garbage. No, literally: waste is the only product in which it runs a surplus. But this goods deficit is presumably offset by services, both the federal budget and stuff like payments to K Street lobbyists. My guess is that Baltimore has some of the same stuff.
Miami, meanwhile, is selling warm weather to senior citizens, who live largely off Social Security and Medicare.
The big deficit surprise here to someone with a Trumpist view of trade balances would surely be Atlanta, which has been one of our fastest-growing metropolitan areas: a 24 percent increase in population between 2000 and 2010. And we're talking about a big deficit – about 13 percent of metro GDP. What's that about?
The answer, surely, is that the deficit is a reflection of Atlanta's growth: we're talking about building lots of housing, office parks, and so on, and much of that is financed by capital inflows from the rest of the country.
Next, the biggest surpluses:
Los Angeles: +$63 billion
Memphis: +$29 billion
Greensboro: +$18 billion
Corpus Christi: +$18 billion
New Orleans: +$15 billion
Los Angeles is a very big metropolitan area, but also one whose growth has slowed a lot: it has run out of land, and zoning restrictions have kept it from building up. So its population rose only 3.7 percent from 2000 to 2010. As a result, it has probably become a big exporter of excess savings, hence a city with big trade surpluses, around 9 percent of GDP (probably even bigger if we had data on services).
I haven't done enough homework to know what's going on in the middle three here. But did you know that New Orleans runs huge trade surpluses? And I mean huge: almost 20 percent of GDP in 2010.
Now, I don't think many people would consider New Orleans an economic winner. In fact, its population declined 11 percent from 2000 to 2010, partly because of Katrina, but also because of wider problems. And that very decline means that savings generated in New Orleans go elsewhere in search of returns.
You can see the same thing in smaller cities with declining populations. Buffalo-Niagara Falls saw a 3 percent population decline in the 2000s; in 2010 it ran a trade surplus of 22 percent of GDP.
And what about the Big Apple? Greater New York ran a small goods trade deficit – 1.6 percent of GDP – in 2010, but thanks to the financial industry surely ran a huge surplus in services. (Remember, this is the metro area, not just New York, so there are plenty of goods exports from, say, the pharma complex in New Jersey.) So it's a big surplus economy overall – not because it's growing fast, but because despite immigration its overall population is growing slowly.
So to sum things up: within the United States we have large regional trade imbalances that don't reflect "unfair" trade policies, because interstate trade is totally free. And running trade surpluses isn't a sign of success, nor is running deficits a sign of failure. If anything, much of the time it's the reverse: fast-growing regions run deficits, stagnating regions run surpluses.
The same principles apply at the international level. And I'm sure experts in the Trump administration will explain to the president why his view of such things is all wrong. Oh, wait.--
Thomas Carothers has recently written an article in Foreign Affairs, the prestigious elite journal published by the US-based Council on Foreign Relations. The article asks: is the US hypocritical for criticizing Russian election meddling?
Given the place of publication, the unsurprising conclusion is that it is not. The problem is the US is a champion meddler. Consequently, the argument crumbles every time Carothers reaches for substance.
At the end of the day, the defense reduces to the claim that we (the US) are good and they are evil, so that our meddling is a net good and theirs bad: "the trends of US and Russian behavior are divergent, not convergent – with Russia on the negative side of the divide."
That is a moral superiority defense which is doubly flawed. First, the US can still be a hypocrite. Second, framing great power international relations in terms of moral superiority quickly promotes crusader thinking, which is a grave menace to all.
Meddling Since The Cold War
The first line of defense is that the US meddles less now than in the Cold war. But exactly the same can be said of the Russians. Moreover, since the US is far wealthier than Russia, its democracy manipulations now dwarf those of Russia measured in financial terms.
On top of that, the recent history of US meddling is of an order of magnitude worse than that of Russia. In the Ukraine, which is a highly sensitive space on Russia's border and historically part of the Motherland, the US helped promote a coup in 2014 three months before scheduled elections.
Moreover, this intervention in the Ukraine came on top of 20 years of the US pushing NATO into former Soviet bloc countries. That has put US forces closer and closer to Russia's borders, and violated the end of Cold War understanding that former Soviet bloc countries would remain outside NATO.
Elsewhere, in 2016, following an illegal and unconstitutional coup in Honduras, the US supported the junta's consolidation of power.
Going back to the previous decade, there was the internationally illegal invasion of Iraq and the promotion of a coup in Venezuela. And before that, in 1996 there was the mother of all interventions when the US intervened to influence Russia's election in favor its preferred candidate, Boris Yeltsin. Carothers fesses up to that, but fessing up does not mean acquittal.
In short, not only has there been a lot of US meddling since the end of the Cold War, it exceeds Russian meddling.
The Democracy Promotion Charade
The second line of defense is that the US is different because of its democracy promotion efforts, which are not matched by Russia.
It is absolutely true Russia does not have such programs. But we must be careful to distinguish between rhetoric and reality. Forty years ago, the Soviet Union was dedicated to liberating the workers of the world, but no one except a Soviet apparatchik would have counseled taking this at face value. Similar skepticism is warranted regarding US democracy promotion.
The US is for democracy promotion when it suits its interests, and against it when it does not. Strategically important undemocratic allies are given a free ride, while unfriendly undemocratic countries are subjected to subversive meddling in the name of democracy. Seen in that light, US democracy promotion is the twin of democracy meddling. Both are tactics serving US interests.
The hollowness of the US commitment to democracy promotion is evidenced by how quickly it is dropped when real interests come in to play. That is forever etched in the record by the way the Tiananmen Square protests were conveniently forgotten when trade with China was at stake. Similarly, democracy concerns are always excluded from the room in dealings with Saudi Arabia.
That is exactly how a great power with important interests is expected to behave. But it speaks to being done with the democracy promotion charade, which the US elite pumps up to gain rhetorical advantage in international relations and disingenuously enlist the support of common citizens.
The US Is A Double Hypocrite
Any honest assessment of US democracy would compel the admission that the real threats to it lie within the US. These threats include fake corporate-produced news, the political power of money and corporations, gerrymandering of congressional districts, voter suppression, built-in representational biases from the electoral college and Senate, and obstruction of change from the first-past-the post electoral system which blocks emergence of new political parties.
Compared to those problems, Russia's Facebook interventions are a small time side-show. Moreover, Russia's actions are par for the course of international relations, as long practiced by both the US and itself.
It is relatively easy to further secure the US voting system, and there is much that can readily be done to make US democracy more competitive and informed. But a high quality democracy is not the real goal. Instead, the US elite's obsession with Russia's election meddling is a circus aimed at distracting the public from domestic problems, and at increasing national security paranoia to justify more military spending and more domestic surveillance.
Warning: Don't Be Conned By The Democracy Meddling Narrative
How we got here, how to address authoritarian Russia's encirclement fears, and how to restrain the US imperial impulse are huge questions. A good starting place is to strip away US hypocrisy regarding democracy meddling and democracy promotion.
Doing so does not imply moral equivalence, but it has two huge benefits. First, it can help avoid getting locked into conflict on grounds of false principle. Second, it can help surface the real concerns and conflicts of interest that must be managed.
All of this is especially important for Europe, where the damaging backwash of US actions are now so often felt.
