While China fuels Asian integration, Japan longs for US role [feedly]

More signs that Asian strategic realignments are moving rapidly -- although the endgames are difficult to discern.

While China fuels Asian integration, Japan longs for US role
http://www.atimes.com/article/while-china-fuels-asian-integration-japan-longs-for-us-role/

ast week, it was reported that China is once again exploring the possibility of joining an Asia-Pacific trade pact once lead by the United States.

But experts see no realistic path for China to join what is now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – often referred to as TPP-11 following the US withdrawal – several core principles of which are at odds with key Chinese policies.

Meanwhile, some still have a cautious expectation that the US will eventually rejoin the trade regime, which is now spearheaded by Tokyo in Washington's absence. One option is that a future US administration could sign on after Trump has left office, but Japan is also exploring possibilities for the near-term.

"The Trump administration cannot jump into the TPP," Yasu Ota, who has covered trade for Japan's Nikkei Shimbun for more than 30 years, told Asia Times. But, he added, "something different but with the same function [as the TPP] could be possible."

Japanese officials, Ota said, have been discussing the possibility of creating a framework similar to the TPP, but more palatable from a domestic US political perspective.

When China first announced the Belt and Road Initiative in 2013, several months after Japan joined US-led negotiations for the TPP, it was widely seen as a response to the Obama administration's "pivot to Asia."

At the time, the TPP was the lynchpin of the US policy shift but has since been cast aside by the Trump administration, while the BRI continues in fits and starts in a quest to transform trade routes with infrastructure investment, expanding China's economic influence in the process.

The news that officials in Beijing are currently looking into the possibility of joining the TPP-11 is not earth-shattering considering they have expressed interest in the past. But it does suggest that the Trump administration's trade war, and the recently renegotiated North American Free Trade Agreement, have prompted a renewed sense of urgency in Beijing to avoid being left out of new trade deals.

"Yes, broadly the trade war is part of the story," Wang Yong, a professor at Peking University's School of International Studies told Asia Times. "It gives more incentive for China to think once again about the [TPP-11]," he added, in the context of the Trump administration's successful conclusion of a deal with Canada and Mexico.

The new Nafta, which has been dubbed the US-Mexico-Canada Agreement, was in some ways a step in the direction of the TPP for the Trump administration. It not only includes rules similar to many of the TPP-11's key provisions but also included an article directed at China, which grants the US freedom to renege on the deal if any party to the USMCA enters into a trade agreement with a "non-market economy."

Both the USMCA and the TPP-11 include articles dealing with the digital economy that require freedom of cross-border transfer of information and prohibit member countries from requiring the localization of data or the handing over of source code. All three of those rules are directly contradicted by China's domestic internet security laws.

But Wang of Peking University disagrees with the insistence among many in Washington that the BRI and TPP-11 are competing platforms for expanding influence. "I think we can work together. The two are complementary," he suggested.

Wang's comments echoed the official line from Beijing that downplays the role of competition in these trade-related initiatives, stressing that they are mutually beneficial. He also added that trade pacts like the TPP-11, and even the Trump administration's tariffs, help encourage China to reform.

At an event hosted by Washington DC-based think tank Center for Strategic and International Studies this week, attended by both Wang and Ota, there was a disagreement among panelists as to which initiative – the TPP-11 or the BRI – had more wind in its sails.

"Once [TPP-11] launches there will be a lot of countries on the outside looking at the investment that's going to be flowing into countries like Vietnam and Malaysia, if Malaysia ratifies," said Amy Searight, CSIS's resident Southeast Asia expert, contending that there was more momentum behind the Japan-led trade pact than there was behind the BRI.

Searight, who expects the TPP-11 to be officially launched next year, added that "countries in Southeast Asia are going to be looking jealously at their neighbors, which is why [Indonesian] President Jokowi keeps telling his cabinet that he wants them to look seriously at joining."

But other panelists saw the situation in a dramatically different light.

"The great momentum [for] business at the moment is [behind] the BRI because of the infrastructure projects," said former Thai commerce minister Apiradi Tantraporn.

"We have the third international airport underway, we have the high-speed train, and a web of highways to support this project," she said, stressing that "this Belt and Road Initiative is something that will support the economic integration in Asean"

"[The BRI] will have the short-term impact on the economies of the region," according to Tantraporn.

For the long-term, whether the United States wants to be involved in writing trade rules remains in question. What is not in question is that, while China injects investment into trade-related projects, Japan is hoping the US will come back into the fold.

 -- via my feedly newsfeed

Will Trump’s Policies Wreak Havoc on the US and Global Economies? An Interview with Gerald Epstein [feedly]

Will Trump's Policies Wreak Havoc on the US and Global Economies? An Interview with Gerald Epstein
https://www.globalpolicyjournal.com/blog/17/10/2018/will-trumps-policies-wreak-havoc-us-and-global-economies-interview-gerald-epstein

With the midterm elections rapidly approaching, many Americans will start thinking more and more about the economy before they decide how to cast their votes. In this context, Trump's claim that the US economy under his administration is the "greatest in history" needs to be thoroughly and critically examined in order to separate facts from myths. How much of the ongoing "recovery" is being felt by average American workers? And what about Trump's escalating trade war with China, which is already beginning to impact American consumers and various US manufacturers, while making European firms nervous? In this exclusive interview, Gerald Epstein, professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts at Amherst, clears the air on several myths and misconceptions about the developments that Trump has tried to frame as an "economic miracle."

C.J. Polychroniou: Trump likes to boast about an economic revival of historic proportions under his administration, which includes a strong labor market, a robust stock market, and a 4 percent GDP rate. What are the facts and myths about Trump's alleged economic miracle? Give us the full story.

Gerald Epstein: Trump is a gross exaggerator who loves to construct stories. When it comes to his claims about an economic miracle under way during his administration, I think my friend and colleague John Miller in the economics department at Wheaton College put it best in a September 30 presentation at the University of Massachusetts Amherst: "Compared to the standard of U.S. economic performance since 1948, we have been living through an economic expansion that has been historically long, historically slow, and that has done historically little to improve the lot of most people."

It is safe to say, as Miller and many other economists show, slashing corporate taxes has not generated an investment boom or a stock market boom. Data show that during the second quarter of 2018, housing investment continued to go down, and spending on new equipment, the largest component of investment, grew only half as quickly as it had at the end of 2017, prior to the tax cut. As the data discussed by Josh Bivens of the Economic Policy Institute show, business investment in structures such as office buildings and factories did increase far more quickly than before the tax cut, but most of that went into oil and gas drilling which resulted from higher world energy prices.

As Bill Lazonick, an economist at the University of Massachusetts Lowell has pointed out, slashing corporate taxes has created a torrent of stock buybacks that is on track to reach $800 billion by year's end.

What's the explanation for S&P 500 and Dow setting all-time records under Trump, and what impact do stock market trends have on the life and well-being of average Americans?

It is true that the stock market has increased since Trump was elected, but it has been on an upswing since the recession bottomed out in 2009. In fact, stock prices (the S&P 500 adjusted for inflation) increased just 2.1 percent from Jan. 1 to Sept. 1, 2018 — far slower than earlier in the expansion, and the near double-digit increase during the 1990s expansion.

Only in the third week of September did the S&P 500 Stock Index and the Dow Jones Index finally top their January 2018 highs.

Still, it is clear that since Trump was elected, financial investors have been quite happy and optimistic. The Republican agenda of tax cuts and deregulation have significantly increased corporate profits and the expectations of further corporate profits, and these drive up stock prices.

But most stocks are owned by the very wealthy. According to Edward Wolff, the richest 10 percent of the population own close to 90 percent of all stocks. So when the stock market goes up in value, it is the already very rich that mostly benefit.

Now some of this could trickle down as investment and jobs but this appears to be rather limited. As I mentioned earlier, we are not seeing much of an increase in investment in factories and equipment as a result of the tax cuts and corresponding increase in the value of the stock market. It is true that when the stock market goes up substantially it can increase the consumption of those that own stocks and some of that can trickle down when increases in consumer demand boost the economy. But here the question is the size of the impact — which is modest at best — and the impact on wages.

Up until now, this increase in consumption and decline in unemployment has not led to much in the way of increased wages, when the uptick in inflation is taken into account. People's paychecks might be a bit bigger but so is the cost of living. So, the economy seems to still be largely stuck in a period of stagnant inflation-adjusted wages, which has been plaguing us for more than 40 years. The Trump economy has yet to break free of that swamp.

The reasons for this seem myriad: a major one is the reduced bargaining power of workers due to a 40-year political assault on unions and workers' bargaining rights. A second is related to appearance of other global trade powers like China on the scene and the response of American capitalists and politicians to that crucial structural shift.

Trump has made the reduction of the trade deficit one of his central goals, which partly explains his gambles with trade wars, tariffs and protectionism and his so-called "America First" policies. Yet, the US trade deficit, ironically enough, has widened considerably (especially with China) under the Trump administration. Is the increase in the trade deficit a direct result of the trade war?

No. The increase in the trade deficit is mostly due to the fact the US economy has been continuing to grow and recently picked up speed. Any growing economy will increase imports; if exports are not leading the growth — which they are not in the US and haven't been for several decades — then the trade deficit is almost certain to grow. But what it does show is that Trump's trade policy has not reversed the secular dependence of the US on trade deficits, which has been increasing in the last 40 years or so.

Just recently, numerous US manufacturing companies testified how Trump's trade wars and tariff policies will increase both the cost of production and the cost of imports, cause layoffs and devastate lives, while failing to improve competition or spur additional growth. Given all this, what's the real purpose behind the trade war with China, and will tariffs boomerang on workers in the US and the global economy?

Trump believes that he can win political support from his base by bashing foreigners and "others" — be they Mexican and South American citizens, Muslims, African Americans and women, even if his policies hurt his base in economic terms. He is specializing in a type of [white nationalist] "identity politics" and is very good at manipulating people. For the rich, he delivers the goods…. He believes he can get away with this even if he hurts his base economically. He believes he can put lipstick on trade deal pigs and his base will buy it. Perhaps he is right. We will see.

So, yes: the trade war he has started might sound good to his base, but is likely to hurt many of them, as Canada, Europe and China are smart when they retaliate, knowing fully well that they will harm his base.

So part of his goal is to fire up his base by being tough on the foreigners. But the fight with China is much more than that. Trump has decided that the US is in a power struggle with China for global dominance. He is not the first US capitalist politician to believe that. US strategists have talked about making a pivot to China for more than a decade now. Trump has decided to lurch toward China.

His trade deals, such as the new NAFTA, contain sections which require that Canada and Mexico notify the US if they are going to make any trade deals with China; and there are various elements in them that attempt to discourage such deals with China. So this is all part of the attempt to create a new cold war with China.

Cold Wars are useful for capitalists. They can justify massive military expenditure; they can justify patriotism and squashing dissent; they can justify loyalty to the strong leader.

Another reason why Trump is pursuing these policies is that they can split the labor movement and the Democrats. When Steve Bannon was on his way out of the Trump administration, he contacted Robert Kuttner of the American Prospect and said he wanted to form a left/right coalition over trade. He and Trump have been partly successful in this. The United Steelworkers Union has supported his tariffs on steel. Much — but not all — of organized labor has offered tentative support for Trump's new NAFTA, even though there are very few positive features for labor in the agreement.

The new NAFTA also has a lot of very negative features, including the undermining of environmental regulations, the increase of patent protections, limitations on the ability to restrict pharmaceutical prices and other consumer-gouging provisions.

As a result, even labor unions and groups like Public Citizen have been reluctant to endorse it fully yet.

Do you have any predictions about how the story of Trump's trade war against China and his overall economic policies will end?

Overall, Trump's policies will prove to be extremely disruptive. The trading system will develop many cracks, the supply chains of trade will get mucked up, and the expansionary wave coming from the tax cuts will fade out with nothing left but deficits and bloated capitalists to show for it. But this will not necessarily mean political trouble for Trump and the Republicans. For that to happen, the Democrats and the left have to not only make clear what are all the problems in Trump's and the Republicans' economic charades, but have to promote their alternatives relentlessly, and in a unified fashion. The left has developed a strong set of policies that can address the ills facing the majority of US residents — single payer health care, raising the minimum wage, a Green New Deal, breaking up Wall Street banks and promoting financial alternatives, tax increases on the wealthy, real infrastructure investment, affordable and improved education, and a peace-oriented foreign policy. This is a winning agenda. If economists, policy makers and activists can continue to develop this program and promote it relentlessly, then when the Trump economy falls apart, it is the left that can win with a viable program that can truly work for the many.

 

 

C.J. Polychroniou is a political economist/political scientist who has taught and worked in universities and research centers in Europe and the United States. His main research interests are in European economic integration, globalization, the political economy of the United States and the deconstruction of neoliberalism's politico-economic project. He is a regular contributor to Truthout as well as a member of Truthout's Public Intellectual Project. He has published several books and his articles have appeared in a variety of journals, magazines, newspapers and popular news websites. Many of his publications have been translated into several foreign languages, including Croatian, French, Greek, Italian, Portuguese, Spanish and Turkish. He is the author of Optimism Over Despair: Noam Chomsky On Capitalism, Empire, and Social Change, an anthology of interviews with Chomsky originally published at Truthout and collected by Haymarket Books.

This wa reposted from TruthOut with permission.

Image credit: Matt Johnson via Flickr (CC BY 2.0)

 -- via my feedly newsfeed

Bernstein: What’s wrong with upside-down Keynesianism? [feedly]

What's wrong with upside-down Keynesianism?
http://jaredbernsteinblog.com/whats-wrong-with-upside-down-keynesianism/

ntroduction

I've got a piece in today's WaPo focusing on how the tax cuts have broken an important, fiscal linkage between budget deficits and the strength of the economy.

"When we close on full economic capacity, as is currently the case, tax revenues as a share of the economy should significantly rise, and deficits should fall. Instead, revenues have come way down, and deficits have climbed.

Why is the deficit 17 percent higher than last year, especially when the economy is growing faster, and unemployment is lower?

It's primarily because the tax cuts have significantly reduced the amount of federal tax revenue the economy will spin off for any given growth rate. Increased spending also played a role but not as large a one as the tax cuts…

Consider these numbers. Using data back to the mid-1940s, I calculated the average deficit as a share of GDP over every year since the late 1940s that the unemployment rate was lower than or equal to 4.5 percent (it's currently 3.7 percent). That average is -0.4 percent, as opposed to the -3.9 percent noted above for 2018. By the way, if I take this and last year's deficit (-3.5 percent) out of that average, the result is a small surplus (0.1 percent).

This figure below shows this heretofore tight correlation between deficit and unemployment rate. To make the relationship easier to see, I've inverted the unemployment rate, so e.g., 4 becomes -4. When the economy tightened up, deficits used to come down. But the circled area at the end of the figure shows that under today's fiscal policy that is no longer the case."

You can see, in the circled part at the end of the figure, that the two lines were tracking each other as usual (meaning the economy was strengthening and the deficit was falling) but changed course in just the past few years. My WaPo piece gets into some details of how this relates to the tax cuts/spending increases and what should be done to rejoin the lines.

But this piece is on the economics and political economy of what's going on in that circle at the end of the figure, what one might call "upside-down Keynesianism," (UDK) or stimulating an economy that's already closing in on full employment.

Before I get into the analysis, however, in case there's anyone here unfamiliar with my rants of last year, I should clarify that this conversation abstracts from the fact that the Republican tax cut is a regressive, wasteful mess of tax complexity that is already exacerbating income and wealth inequality while opening up new loopholes that will promote tax avoidance and evasion until it is reversed. But this post isn't about that. It's about the macroeconomics of stimulating an already strong economy, not the composition of the stimulus.

What are the upsides and downsides of UDK?

The most obvious upside of UDK in the current economy is the extent to which the stimulus—deficit spending on tax cuts and spending programs—is pushing the economy closer to full capacity than would otherwise have occurred. In fact, there is both theoretical and empirical support for this upside.

First, "secular stagnation" argues that structural factors—inequality, aging demographics, persistent trade deficits—prevent the U.S. (and other advanced economies) from achieving truly full employment absent a push from "non-market" sources, such as fiscal stimulus or accommodative monetary policy.

The other theoretical support for UDK's upsides is that economists must admit that we do not know our stars (u*, y*, r*)—the economy's capacity indicators (the lowest unemployment rate consistent with stable prices, the level of potential GDP, the neutral interest rate)—within a policy-relevant confidence interval, and we've generally erred on the side of caution.

Therefore, stimulus at alleged full employment can help achieve actual full employment. In fact, the next figure shows that as actual unemployment has fallen well below the Fed's estimates of u*, inflation is just now, after years of downside misses, hitting their 2 percent target (FWIW, I recently wrote up a related analysis which argues that their u* is about right; it's just that inflation is really well anchored; as far as UDK is concerned, the upside is the same).

Empirically, even if we accept that standard estimates of u* (e.g.) are not too high, actual unemployment has been above the CBO's u* for two-thirds of the quarters since 1980. In other words, the U.S. labor market has been slack far more often than not, a huge market failure, a significant factor in weakening worker bargaining power over these years, and a strong case for pushing beyond conventional measures of full employment.

The most obvious downside of UDK is overheating. Though the inflation line in the previous figure shows little evidence of such pressures so far, these dynamics can be non-linear, as long-dormant correlations can reawaken at high capacity levels. In their new World Outlook chapter assessing current risks, the IMF worries that since "the US economy [is] already operating above potential, expansionary fiscal policy could lead to an inflation surprise, which may trigger a faster-than-currently anticipated rise in US interest rates, a tightening of global financial conditions, and further US dollar appreciation, with potentially negative spillovers for the global economy."

The IMF are worrywarts about such developments, but economist Dean Baker, with whom I frequently collaborate on ways to gin up more demand, is clearly not. Yet, even he recently said that "…we are likely getting close to full employment, so we probably don't want too much larger of a deficit."

But there's a less obvious downside to UDK, one I raised in the WaPo piece and the one which concerns me most. Remember, Keynesian interventions are temporary injections of deficit spending to get over a negative, macro shock. But the tax cuts are intended to permanently damage our revenue-base, and as such, they are merely the latest installment of the Republicans' longer-term agenda to never raise, but always cut, federal taxes. As I argued in the WaPo, the dangers to this low-revenue path strike me as acute and threatening in real time:

"Based on our aging demographics alone, we've long known that we will need more revenue over the next decade, not less. Add in geopolitical threats, climate change and the damage from increasingly intense storms (which is tied to the warmer climate), infrastructure, the need to push back on poverty and inequality, counter-cyclical fiscal policy that will be needed for the next downturn, and, it's not hard to understand why a rising deficit at full economic capacity is so ill-advised. That is, unless you're being paid not to understand these fiscal realities."

In this regard, one of the biggest threats from the tax cuts that must be considered, even in the context of UDK, is the role it plays in emptying the Treasury's coffers so that Republicans can point to all that debt as a rationale for cutting social insurance and safety net programs.

Keynes v. Laffer

In this regard, UDK may be a misnomer, as Keynesian stimulus is by definition temporary and, though they made some of the their tax cuts temporary for budget scoring purposes, the advocates of the cuts want them to be permanent. And yet, if you look at any credible economic projection, you find that a Keynesian dynamic in the forecasts: as fiscal stimulus fades in late 2019, as shown in the next figure, GDP growth slows. This expected reversal in fiscal impulse give rise to forecasts like that of the Fed which has real GDP up 3, 2.5, and 2 percent, 2018-20.

Source: GS Research

Advocates of the tax cuts, however, view this forecast as wrong, as it discounts Laffer effects, wherein the cuts allegedly pump up supply-side variables—capital investment, productivity, labor supply—such that GDP moves to a permanently higher growth path (roughly 3 percent as opposed to 2 percent).

In other words, barring another round of significant deficit spending, which, ftr, I would not rule out, in a few quarters we'll have a real-time, cage-match of Keynes v. Laffer.

If GDP slows from its current underlying, short-term trend of around 3 percent to its pre-tax-cut trend closer to 2 percent, as the forecasts predict, Laffer loses…again. To be clear, as the WaPo piece argues, he and his disciples have already lost on the assertion that tax cuts pay for themselves, but that was never even remotely believable.

There is, however, a wild card in play here, one I've written about under the rubric of the FEPM: the full employment productivity multiplier. This idea, for which there's suggestive evidence, is that in slack economies, firms can maintain profitability without being particularly efficient. At chock full employment, and especially with anchored inflation expectations, rising labor costs are a disciplining mechanism, enforcing the discovery of efficiency gains if firms are to maintain profit margins. These dynamics can also drive more capital investment that would not have been "necessary" in slack labor markets.

Thus far we haven't seen much to suggest the "sugar-high" forecasts are wrong. Business investment is up, but no more than you'd expect at this point in the recovery. Productivity growth is still too low.

Moreover, even if there is a productivity multiplier that gets tapped as we close in on full employment, it will be hard to assign victory to either side. In theory, Keynes wins again, as the capital investments in the FEPM model are not a function of the lower, after-tax cost of capital as much as a Keynesian accelerator story, where full-employment-driven job and wage gains fuel stronger consumer demand. In response to higher demand and the desire to maintain margins, firms ramp up their investment. But empirically, it will be hard to tell one story from the other.

In sum, and abstracting from the awful regressivity, complexity, and aspiration permanence of the tax cuts, UDK has clear upsides. I don't think the unemployment would be as low as it is without it. The almost-50-year low in the jobless rate is finally starting to generate wage gains that will reach those who have heretofore been left behind in this expansion, even in year nine.

It also invokes the risk of overheating. Yes, the Fed has lots of firepower to deal with that if need be, but the IMF could be right and we could end up with a hard versus a soft landing.

But at the end of the day, my biggest concern is less about UDK and more that we're not really talking about temporary stimulus. We're talking about a permanent reduction in revenues, sought by hard-right conservatives who have been gunning for social insurance programs forever, and thus view this current strategy as a twofer to both enrich their donors while starving the Treasury.

 -- via my feedly newsfeed

New ideas about new ideas: Paul Romer, Nobel laureate

Chad Jones 11 October 2018

Paul Romer of New York University has been jointly awarded the 2018 Nobel Prize in Economic Sciences with William Nordhaus 'for integrating technological innovations into long-run macroeconomic analysis'. This column explains his key insights and their wide-ranging implications for our understanding of the process of economic growth.

When Paul Romer began working on economic growth in the early 1980s, the conventional view among economists – for example, in the models taught in graduate school – was that productivity growth could not be influenced by anything in the rest of the economy. As in Solow (1956), economic growth was exogenous.

Romer developed endogenous growth theory, emphasising that technological change is the result of efforts by researchers, entrepreneurs and inventors who respond to economic incentives. Anything that affects their efforts – such as tax policy, basic research funding and education, for example – can potentially influence the long-run prospects of the economy. 

Romer's essential contribution is his clear understanding of the economics of ideas and how the discovery of new ideas lies at the heart of economic growth. His 1990 paper is a watershed. It stands as the most important paper in the growth literature since Solow's Nobel-recognised work. 

The history behind that paper is fascinating. Romer had been working on growth for around a decade. The words in his 1983 dissertation and in Romer (1986) grapple with the topic and suggest that knowledge and ideas are important to growth. And of course at some level, everyone knew that this must be true (and there is an earlier literature containing these words).

But what Romer didn't yet have – and what no research had yet fully appreciated – was the precise nature of how this statement comes to be true. By 1990, though, Romer had it, and it is truly beautiful. One piece of evidence that he at last understood growth deeply is that the first two sections of the 1990 paper are written very clearly, almost entirely in text and with the minimum required mathematics serving as the light switch that illuminates a previously dark room.

Here is the key insight: ideas – designs or blueprints for doing or making something – are different from nearly every other good in that they are non-rival. Standard goods in classical economics are rivalrous – as more people drive on a highway or require the skills of a particular surgeon or use water for irrigation, there's less of those goods to go around. This rivalry underlies the scarcity that is at the heart of most of economics and gives rise to the Fundamental Welfare Theorems of Economics. 

Ideas, in contrast, are non-rival – as more and more people use the Pythagorean theorem or the Java programming language or even the design of the latest iPhone, there is not less and less of the idea to go around. Ideas are not depleted by use, and it is technologically feasible for any number of people to use an idea simultaneously once it has been invented.

As an example, consider oral rehydration therapy, one of Romer's favourite examples. Until recently, millions of children died of diarrhoea in developing countries. Part of the problem is that parents, seeing a child with diarrhoea, would withdraw fluids. Dehydration would set in, and the child would die.

Oral rehydration therapy is an idea – dissolving a few minerals, salts and a little sugar in water in just the right proportions produces a life-saving solution that rehydrates children and saves their lives. Once this idea was discovered, it could be used to save any number of children every year – the idea (the chemical formula) does not become increasingly scarce as more people use it. 

How does the non-rivalry of ideas explain economic growth? The key is that non-rivalry gives rise to increasing returns to scale. The standard replication argument is a fundamental justification for constant returns to scale in production. If we wish to double the production of computers from a factory, one feasible way to do it is to build an equivalent factory across the street and populate it with equivalent workers, materials and so on. That is, we replicate the factory exactly. This means that production with rivalrous goods is, at least as a useful benchmark, a constant returns process.

What Romer stressed is that the non-rivalry of ideas is an integral part of this replication argument – firms do not need to reinvent the idea for a computer each time a new computer factory is built. Instead, the same idea – the detailed set of instructions for how to make a computer – can be used in the new factory or indeed in any number of factories, because it is non-rivalrous.

Since there are constant returns to scale in the rivalrous inputs (the factory, workers and materials), there are therefore increasing returns to the rivalrous inputs and ideas taken together – if you double the rivalrous inputs and the quality or quantity of the ideas, you will more than double total production. 

Once you've got increasing returns, growth follows naturally. Output per person then depends on the total stock of knowledge; the stock doesn't need to be divided up among all the people in the economy.

Contrast this with capital in a Solow model. If you add one computer, you make one worker more productive. If you add a new idea – think of the computer code for the first spreadsheet or word processor or even the internet itself – you can make any number of workers more productive. With non-rivalry, growth in income per person is tied to growth in the total stock of ideas – an aggregate – not to growth in ideas per person. 

It is very easy to get growth in an aggregate in any model, even in Solow, because of population growth. More auto workers mean that more cars are produced. In Solow, this cannot sustain per capita growth because we need growth in cars per auto worker. 

But in Romer, this is not the case – more researchers produce more ideas, which makes everyone better off because of non-rivalry. Throughout history – 25 years, 100 years or even 1,000 years – the world is characterised by substantial growth both in the total stock of ideas and in the number of people making them. According to Romer's insight, this is what sustains exponential growth in the long run.

Finally, the increasing returns associated with non-rivalry means that a perfectly competitive equilibrium with no externalities will not exist and cannot decentralize the allocation of resources. Instead, some departure is necessary.

Romer emphasised that both imperfect competition and externalities to the discovery of new ideas are likely to be important. Monopolistic competition provides the profits that act as the incentives for entrepreneurs to innovate. And later inventors and researchers benefit from the insights of those who came before. 

Research on economic growth has been monumentally influenced by Romer's contributions, and all of us who follow are standing on the shoulders of a giant. While it may be difficult to compensate adequately for the knowledge spillovers, this year's Nobel Prize in Economic Sciences is a well-deserved reward. 

References 

Romer, Paul M (1986), 'Increasing Returns and Long-Run Growth', Journal of Political Economy 94: 1002-37. 

Romer, Paul M (1990), 'Endogenous Technological Change', Journal of Political Economy 98(5): S71-102. 

Solow, Robert M (1956), 'A Contribution to the Theory of Economic Growth', Quarterly Journal of Economics 70(1): 65-94. 

--

John Case
Harpers Ferry, WV

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CFR Setser: Wonky, but another deep dive into the winners and losers in his tax cut/ trade war policy

Trump's Stimulus Trumps his Trade Policy

Blog Post by Brad W. Setser

October 11, 2018

It is hard to think of a President more committed—at least rhetorically—to closing the trade balance than President Trump. The usual criticism of his trade policy is that it is overly focused on a single goal—reducing the bilateral, and ultimately the overall, trade deficit, to the exclusion of more traditional goals like liberalization (e.g. expanding trade) or expanding the scope of the traditional rules governing trade. President Trump has made it equally clear he cares about the manufacturing balance.   

Yet the results of the first seven quarters of his presidency show, ironically, the limits on what can be achieved through trade policy alone.

More on:

Trade

 

U.S. Economy

U.S. Trade Deficit

 

Donald Trump

To be sure, the impact of Trump's new tariffs (on China) and the new trade deal (with Canada and Mexico) aren't in the data yet. President Trump's trade policy for the first six quarters of his presidency consisted of halting further liberalization (by opting not to participate in the TPP) and a set of fairly narrow, sector specific trade cases (steel, solar, washing machines); the really big shift in policy is only now starting.  

But, well, the trade actions to date haven't come close to achieving the turnaround in manufacturing trade President Trump promised. Imports of manufactures are up significantly. (I forecast out the third quarter based on the first two months of data, if China's September numbers are indicative, I may have been too conservative).

   

I used a somewhat unconventional measure to look at changes in the real trade balance. I used the contributions data in the national income and product accounts rather than the trade data directly. And I calculated the contribution each quarter from the national income and product accounts data and then summed the contributions over time. This avoids the difficulties of scaling real trade measures to real GDP (I think) – and takes out the effect of price movement.

This allows me to paint a picture about what is happening to different sectors of the economy—manufacturing for example, petrol, and even services (though there isn't a story in the services data over the past few years)—as well as the overall numbers.*

What jumps out in the data on manufacturing trade? Well, two macroeconomic factors.

One: The dollar's 2014/15 appreciation led export growth to stall, and created a significant drag on the economy at a time when overall demand growth was weak. Falling exports added to the pressure on the manufacturing sector created by the fall in oil and agricultural investment (see Neil Irwin of the New York Times).

Two: Trump's stimulus has, as predicted, supported strong import growth—even in the face of Trump's "America first" trade policy.

Yep, so far Trump's overall policy mix—his combination of stimulative macroeconomic policies and more aggressive trade policy—has delivered a net stimulus of about 1 percent of U.S. GDP to the United States' main manufacturing trade partners. Trump's stimulus—and the still relatively strong dollar—are making German and Chinese exports great (again). In technical terms, the cumulative contribution of trade in core manufactures (capital goods, autos, and consumer goods in the trade data) has been negative 0.9 pp of GDP over the first six quarters of Trump's presidency, and based on the data for the first two months of the third quarter of 2017, the cumulative (negative) contribution will soon be over a percentage point of U.S. GDP.

Germany, Japan, Korea, China and many others certainly don't like Trump's challenge to the existing trade rules. But they all also have—to date—benefited from strong U.S. demand for exports. The recent import surge, when the q3 data is factored in, will have delivered a benefit to them that is roughly comparable in size to the swing associated with the dollar's 2014/15 rise.

We will see what happens when Trump's tariffs on China take place. Import growth could cool—the full tariffs would cover roughly a quarter of U.S. "core" goods imports (imports of consumer goods, capital goods, and autos). However, the net effect of putting tariffs on imports of around 2.5 percent of U.S. GDP depends on how much trade is diverted to other trade partners. And export growth also looks to be slowing on the back of the dollar's strength in the last two quarters, weakness in emerging economies and other countries' retaliation for Trump's trade action. Reducing your imports doesn't improve your trade balance if exports also fall.

At least for now, though, "macro" factors trump "micro" factors. Trump's stimulus has had a far bigger effect on the global economy than Trump's protectionism.

   

Analysts who look at the nominal trade data haven't observed the deterioration in the trade balance that I have highlighted, at least not yet. The current account balance has also stayed relatively constant.

That isn't primarily because of services. Or even because of the income balance, though the surplus generated by the offshore profits of U.S. firms remains large. The main offset to the quite significant widening of the manufacturing deficit over the last four years has been the U.S. oil boom.

Those who argue that the U.S. can never grow through exports (or substituting domestic production for imports) should take close look at the oil sector. Over the last decade, the fall in the real petrol balance (e.g. rising domestic U.S. production relative to U.S. demand) has added close to two percentage points to U.S. growth.   

   

The improvement in the real petrol balance over the last six quarters has been about 0.5 pp of GDP (based on cumulative contributions), roughly half the deterioration in the non-oil goods balance.

A payoff from Trump's policy of "energy dominance"? Perhaps. But it is more likely a function of changes in the oil price, and the evolving cost structure of U.S. production. Fracking the Permian basin (in West Texas and New Mexico) has generated an amazing amount of oil, at a fairly low cost. The shale boom started under Obama—not under Trump—and it was initially propelled by a combination of a high global oil price, a weak dollar, and good old-fashioned American ingenuity.

The dominance of macroeconomic factors extends to one other component of the trade balance—tourism (tourism generally accounts for the bulk of the U.S. services surplus with East Asia; many other services, alas, seem to be exported primarily to tax havens***).

U.S. tourism imports (Americans taking vacations abroad) rise when the dollar is strong— and U.S. tourism exports (foreign tourists visiting the U.S.) tend to grow when the dollar is weak (e.g. 2005 to 2014).

Trump's more restrictive immigration policies have added some friction at the border no doubt. But the "stop" in tourism exports actually came in early 2015, six quarters before Trump (and a couple of quarters after the dollar moved).  

   

One final point: I framed this as an argument that Trump's trade policy hasn't had the expected effect on the trade balance, as the evolution of the trade balance has been driven by macroeconomic factors—the dollar's strength, U.S. demand growth, and foreign demand growth. It equally could be presented as an argument that the overall macroeconomic effect of Trump's coming tariffs will be fairly modest so long as the Fed is free to react to any drag on U.S. activity from the tariffs. The aggregate effect on the economy of even relatively aggressive trade action—as Goldman Sach's economic research team has argued—ends up being fairly small in a standard macroeconomic model, absent a mistake by the Fed or a shock to "confidence." The sectoral effect, of course, remains significant (ask soybean farmers in the Dakotas). And, well, it is also worth remembering that the impact of the tariffs on China would also be expected to induce changes in China's policy mix. If China responds by using fiscal policy to stimulate domestic consumption demand, that's good for the world. But it stabilizes output by loosening monetary policy, that would typically be expected to result in a weaker currency —which would offset some of the impact of the tariff on China while shifting some of the pressure over to China's trade partners.

* Over the grand course of time, the contribution of exports and imports should generally balance out (no country can run a large trade deficit forever, though it is possible to run a modest trade deficit over time so long as the interest rate on a country's external borrowing is modest). A symmetric expansion of trade, if it reflects the healthy development of comparative advantage, raises the overall level of output as both partners specialize in what they do best. Such dynamic gains are by definition not captured in an analysis of the contribution of trade in the national income and product accounts. The national income and product accounts instead draw attention to the impact of trade on demand, and what matters there is the growth of exports relative to imports. Broadly speaking, what the trade data shows is that the U.S. has increasingly specialized in the production of goods and services for the domestic economy, rather than specializing in the production of goods and services for the global market. A drag on demand from trade has a much more negative overall economic impact if it comes at a time when overall demand is weak.

** The q2 data was heavily influenced by both changes in the petrol balance and changes in the food and feeds balance. In fact, the petrol and the "soybean" surge (measured in the food and feed balance) account for the entire increase in U.S. exports in q2. The available data suggests that the surge in soybean exports will reverse itself, but not likely until q4. For my forecast, I assumed 2018 q4 exports fell back to their q4 2017 level. They may be optimistic.

   

*** I am only partially joking. Ireland is the number one destination for a lot of IPR related service exports, the Caribbean is the number one destination for exports of financial services. See tables 2.2 and 2.3 in the BEA's services trade data.

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John Case
Harpers Ferry, WV

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