Lnyx, potential auto tariffs, yield curves and recession

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Lnyx, potential auto tariffs, yield curves and recession // Jared Bernstein | On the Economy
http://jaredbernsteinblog.com/lnyx-potential-auto-tariffs-recession/

Happy 4th.

Now, down to biz.

Over at WaPo, I reflect on how to get back to WITT (we're-in-this-together), away from YOYO, and note how the Democratic Socialists are plowing similar ground.

Next, I see where the president is thinking about imposing 20% tariffs on imported cars and car parts. Oy. Once again, I don't see how this helps anyone, including American car producers and especially American workers/consumers.

Apparently, his motivation was seeing too many foreign cars on our streets. Look, I'm all for gut instinct, but you then need to check out whether your gut is accurate or if that was just a gas bubble. (A hint that it might have been the latter stems from the acronym of a bill the administration is allegedly working on to take us out of the WTO called the United States Fair and Reciprocal Tariff Act, aka: the US FART Act.)

The key reason Trump's instinct was wrong is because auto production is so thoroughly globalized. As such, the classic foreign/domestic distinction which provides the essential rationale for tariffs goes up in smoke. Consider:

–There are no American-made cars that do not contain foreign parts. Thus, tariffs will raise the prices of domestic cars, as well as imports.

–We have particularly close ties with Canada in this space. Many auto-workers there belong to American unions and joint projects abound (which is why I suspect the UAW may ultimately oppose these tariffs). The two most American cars, by content, are Hondas made by US/Canada.

–Trump specifically complains about seeing too many German cars. Well, the largest BMW plant in the world is in Spartanburg, SC.

–Talk about entrenched globalization: Volvo is a Chinese-owned company, HQ'ed in Sweden, with a big plant in SC.

–It's true that Europe charges a 10% tariff on US car exports, compared to our existing tariff of 2.5%. But we keep out their larger vehicles via a 25% tariff on light trucks/vans.

If Trump follows through on these auto tariffs, it represents the opening up of the biggest front yet in his trade war. I suspect he'll back down, but there's a decent chance he won't.

As I've always said in this debate, Trump exploited something real and important by elevating the negative side of globalization. But his and his team's lack of understanding of the policies necessary to actually help those hurt becomes clearer every week.

Finally, check out this Twitter thread. I'm writing this up for tomorrow in the WaPo, but here some extra wonkiness for OTE'ers.

Part of what has people worried about recession is the flattening of the yield curve. Well, copying some work of Fed economists, I ran two models below that use the yield curve to back out recession probabilities.

Source: my estimates of Fed model (see text).

Even the traditional model (blue line) doesn't show much, but the other line is flat. Whussup w/that?

Longer term interest rates, like the yield on the 10-year Treasury, can be broken up into the expectation of the average of future short-term rates and the term premium, or the extra yield investors require to lock up their money for the term of the loan. Since it's thought to be the first part–expected rates–that correlates with a future downturn, it makes sense to net out the term premium from the model. When you do so, you get the flat line in the model. (This is all written in shorthand for those familiar with these models, but they're simple and well-explained in the Fed link above if you want to pursue.)

To be very clear, none of this means a recession is not around the corner! I don't see it, but economists can't help you with this one. Therefore, as the thread stresses, it makes much more sense to focus on recession readiness, as we are seriously not ready.


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