US Imposes Tariffs, and the 2018 Trade Deficit Rises: Lessons? [feedly]

US Imposes Tariffs, and the 2018 Trade Deficit Rises: Lessons?
http://conversableeconomist.blogspot.com/2019/03/us-imposes-tariffs-and-2018-trade.html

Early in 2018, President Trump began instituting a series of tariffs on international trade. As he tweeted in March 2018: "When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don't trade anymore-we win big. It's easy!"

Last week, the US Department of Commerce announced the US trade figures for year-end 2018. After a year of President Trump's tariffs, the US trade deficit is larger in 2018 than it was in 2017. The bilateral US trade deficit with China is up, too. The government report notes:

For 2018, the goods and services deficit was $621.0 billion, up $68.8 billion from $552.3 billion in 2017. Exports were $2,500.0 billion in 2018, up $148.9 billion from 2017. Imports were $3,121.0 billion, up $217.7 billion from 2017. The 2018 increase in the goods and services deficit reflected an increase in the goods deficit of $83.8 billion, or 10.4 percent, to $891.3 billion and an increase in the services surplus of $15.0 billion, or 5.9 percent, to $270.2 billion. As a percentage of U.S. gross domestic product, the goods and services deficit was 3.0 percent in 2018, up from 2.8 percent in 2017. ... The deficit with China increased $43.6 billion to $419.2 billion in 2018. Exports decreased $9.6 billion to $120.3 billion and imports increased $34.0 billion to $539.5 billion.

Thus, a fairly common situation arises. A politicians claims that a certain Problem has a certain Solution. But when the politician is elected and the Solution is tried, the Problem is either the same or worse. It is rare for any politician in this situation to reconsider their Solution. Instead, the usual approaches are to argue that an even bigger and longer dose of the Solution is needed, or that the Solution was somehow sabotaged by poor implementation and political opposition.  

It will be interesting to see if President Trump acknowledges at some point that using tariffs to reduce the US trade deficit failed in 2018. My expectation is that any such acknowledgement would be followed by a claim that his tariff Solution was somehow undercut and thus only needs to be redoubled in the future. 

But for those with eyes to see, it should be apparent that trade deficits and surpluses rise and fall as a a result of large-scale macroeconomic factors, not because of fluctuation in "unfairness" that can be fine-tuned and adjusted with tariffs. I've tried to explain this point in more detail a few times: for example, see "Misconceptions about Trade Deficits" (March 30, 2018), "Some Facts about Current Global Account Balances" (August 7, 2018), and "US Not the Source of China's Growth; China Not the Source of America's Problems"(December 4, 2018). Here, I'll just focus on events of 2018. 

The US economy had solid economic growth in 2018, driven in part by the short-term effects of the tax cuts signed into law in December 2017. When an economy grows briskly,  consumption tends to rise, including its consumption of imported products. This pattern is standard. For example, the US trade deficit fell sharply during the Great Recession, because consumption of all kinds--including imports--fell as well. Meanwhile, China has been experiencing a slowdown in its rate of growth, so there has been less of a rise in consumption and imported products than would have been expected.

The health of the US economy has led the Federal Reserve to raise interest rates several times in the last few years. As a result, global investment funds have flowed back to the US economy, and the additional demand for US dollars in foreign exchange markets has pushed up the foreign exchange value of the US dollar. This makes US exports more expensive overseas, and also makes it cheaper for US consumers to buy imported products. 

It's also a completely standard dynamic that if the US imposes tariffs, other countries will respond with tariffs on US products. In my home state of Minnesota, for example, Trump's tariffs have tended to raise prices and help iron ore producers in the northern part of the state, but China's countertariffs on soybeans have hurt farmers in the central and southern part of the state. 

The idea that exports and imports are the outcome of of macro variables like levels and shifts between consumption and savings across different econmies, which are also affected by exchange rates, is completely standard intro-level economics. News stories on the Department of Commerce announcement made these points. 

The US and other  high-income countries have legitimate concerns about how China's government and firms treat intellectual property. That's a real Problem, and it's worth working to actual  Solutions--like having high-income countries form a united front against these Chinese practices through organizations like the the World Trade Organization and the World Intellectual Property Organization. If internationally-coordinated tariffs targeted on the main Chinese offenders emerged from that process, I suspect that even a lot of economists with free-trade leanings would see a case for such a step. But broad overall trade deficits are not the Problem to be chasing, and even if it was the right Problem,  the year 218 has shown that Trump's tariffs are not the Solution.

 -- via my feedly newsfeed

Medicare for All is Doable; Most Americans Want It [feedly]

So says Dean: Medicare for All is Doable; Most Americans Want It
http://cepr.net/publications/op-eds-columns/medicare-for-all-is-doable-most-americans-want-it

Dean Baker's arguments for progress are always tinged with a rouge of tongue and cheek, or, as Springsteen says about the Jersey Shore, a tint of fraud. They combine an often ironic literary wit and very competent economics to deliver paradoxes in appealing wrappers.

Example: Dean says: Medicare for all is doable (other countries do it, and save money). Most americans believe in universal coverage for modern society. 

However, Dean also says Medicare for All will put a big part of the insurance industry out of business.  In addition, he notes, the Higher paid US doctors and health professionals, plus (I would add) dislocated employees and patients vulnerable to changes in coverage, will all become enemies. These are powerful interests, so.....the changes will have to be incremental.  

However (again...turtles all the way down)...Recent history  shows that billionaires -- esp those in the insurance and energy spheres -- view incremental socialization of their property the same as taking the whole thing. Green New Deal will play the same, in may respects, as MFA. They will exert ALL their power to crush both, and appeal to billionaires in other economic sectors that if the state can take health and energy property, it can take yours too. They will act as if both are existential threats to the class structure of US society, which in their mind, equates completely with their "freedom".

So Dean says we got to have it, and its doable, but can't get past the the class structure of US society that is the obstacle. In other words, he won't be betting any money on it REALLY getting done. There is the wit, if a bit harsh for me.

Further, most of the countries that have socialized medicine established it BEFORE the global private insurance industry became huge and deeply integrated with financial and industrial capital, as they are in the US. The establishment of these health systems in Europe was also the direct result of socialist, labor and social democratic parties and coalitions (including Communists) coming to power between and after the wars. 

Both MFA and the GND imply a general social-democratic revolution and restructuring of US class and political power to realize. If that is correct, every struggle going forward for progress will embody degrees of the tensions now reflected  among Democrats along the axes between Bernie/AOC social democrat (aka Democratic Socialists) and Biden-O'Rourke liberal approaches to ending the conditions of growing oppression, poverty, insecurity, institutional failures, and violence arising from corrupt, increasingly fascist, authoritarian Republican rule. I submit the tension among Democrats is a reflection of a natural (and healthy, fundamentally) aversion to revolutionary upheavals until all other paths are closed. Baker's wit plays on this dilemma 

I think the two tendencies will continue to regard each other as potential adversaries, pressed again and again into alliance by both reason and necessity to resist the advancing corruption and decay of the billionaire regime. I think of Frederick Douglas, or Thaddeus Stevens, and William Henry Seward. All opposed slavery, but could not agree on how it should pass on. The confederacy decided the matter for them. 

Another version of an analogous dilemma. In an old Vietnamese proverb I learned from a speech by Madame Binh,  the block of wood and the nail are adversaries  -- "The job of one inflicts pain on the other. The block of wood sees no end to conflict. The job of revolutionary is to explain to both: the problem is the hammer."

If our past history is any teacher, the billionaires themselves will hammer together the building that will become their own reckoning and imprisonment.

 -- via my feedly newsfeed

Dean Baker To Reduce Inequality, Let’s Downsize the Financial Sector [feedly]

To Reduce Inequality, Let's Downsize the Financial Sector
http://cepr.net/publications/op-eds-columns/to-reduce-inequality-let-s-downsize-the-financial-sector

Matt Bruenig — the president of the progressive, grassroots-funded People's Policy Project think tank — put forward a creative set of policy proposals last month on child care and family policy under the title of the Family Fun Pack. It prompted a major discussion in progressive circles on child care policy, helped in part by Sen. Elizabeth Warren's important proposal in this area that was released the next week.

In the hope of prompting the same sort of debate on policy directed toward the financial sector, I am putting forward the "Finance Fun Pack." While the full list of policies to rein in finance would be far more extensive, this one has three main components:

1. A modest tax on financial transactions;

2. Complete transparency on the contract terms that public pension funds sign with private equity companies; and 
   

3. Complete transparency on the contract terms that university and other nonprofit endowments sign with hedge funds.

The goal of these policies is to have a smaller and more efficient financial sector. They are also likely to reduce the opportunity for earning huge fortunes in the sector. People looking to get fabulously rich will instead have to do something productive.

A modest tax on trades in stock, bonds and derivatives (like options, futures and credit default swaps) can raise a large amount of money while making the financial sector more efficient. According to the Congressional Budget Office, a tax of 0.1 percent on trades, as proposed in a new bill by Sen. Brian Schatz, would raise close to $100 billion a year or 0.5 percent of GDP.

While this is a good chunk of change (it's almost 50 percent more than we spend on food stamps each year), the really fun part of it is that it comes almost entirely out of the pocket of the financial industry rather than investors. The reason is that most research finds that the volume of trading is highly elastic, meaning that the volume of trade is likely to fall by a larger percentage than the increase in trading costs as a result of the tax.

Suppose that Senator Schatz's tax increases the cost of trading for a typical investor by 30 percent. The research implies that most investors (or their fund managers) are likely to reduce their trading volume by at least 30 percent. This means that they will pay 30 percent more for each trade, but they will be doing 30 percent less trading. As a result, their total trading costs are likely to remain unchanged or even decline.

While every trade has a winner and a loser, on average these net out. This means that most investors will not be harmed if they or their funds trade less frequently. The only losers in this story are the folks in the financial sector who make their money on needless trades.

We do want active financial markets, but even if volume fell by 50 percent we would still be at the levels we were at in the 1990s. No one questions that the United States had a very deep financial market in the 1990s. If we could get back to this level of trading volume and save $100 billion a year or so in trading costs, this would be a huge gain for the economy. It would also reduce inequality, since many of the people doing the trading that would be eliminated are very rich.

The next part of the financial fun pack would be a requirement to make fully public all the terms that public pension funds sign with private equity companies and other investment managers. Their returns would also be fully public. This would mean that anyone could go on the website for any state or local pension fund and see exactly the terms of any contract it signed with a private equity company and also whether the investment turned out to be a good deal for them.

Private equity companies engage in many dubious practices, typically loading up firms with debt and often pushing them into bankruptcy. These practices raise many issues, but a really simple point is that pension funds often don't make money on these investments. The private equity partners get very rich (think of Mitt Romney), but the investors often don't.

As it stands, private equity companies typically require that the terms of their contracts be kept secret, making it difficult to know whether pension funds are being ripped off. Federal legislation requiring full disclosure could be a remedy for this situation.

There is a similar story with hedge fund types who are the favored investors for university endowments. It seems that these millionaires and billionaires have cost places like Harvard billions of dollars with their bad investment choices in recent years.

A recent study found that the average return on the Ivy League's endowments substantially lagged a portfolio with an indexed 60 percent/40 percent, stock-to-bond mix. Harvard led the underperformers, falling behind this portfolio by more than three percentage points. On its $40 billion endowment, this would imply Harvard was throwing more than $1 billion a year into the toilet to make its investment managers rich.

The government could require that to keep tax-exempt status a non-profit has to make all the terms of its investment contracts fully public. This way, everyone at Harvard could know who was getting rich at the expense of students' financial aid and workers' salaries.

Anyhow, that's the Finance Fun Pack. It may not make the rich people in the financial sector very happy, but it should provide plenty of entertainment for the rest of us.

 -- via my feedly newsfeed

2020 Trump Budget: A Disturbing Vision

2020 Trump Budget: A Disturbing Vision https://www.cbpp.org/research/federal-budget/2020-trump-budget-a-disturbing-vision

Larry Summers: The left’s embrace of modern monetary theory is a recipe for disaster

The left's embrace of modern monetary theory is a recipe for disaster  

Larry Summers:
We've seen this movie before.

There is widespread frustration with the performance of the economy. Traditional policy approaches are not delivering hoped-for results. A relatively unpopular president is loathed to an unusual extent by a frustrated opposition party that lost the previous presidential election while running a pillar of its establishment. And altered economic conditions have led to the development of new economic ideas that reflect a significant break with previous orthodoxy.

And now, these new ideas are being oversimplified and exaggerated by fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone.

During the late 1970s, this was the story of supply-side, Laffer-curve economics. It began with the valid idea that taxes had important incentive effects and that, in conceivable circumstances, tax cuts could raise revenue. It grew into the ludicrous idea that tax cuts would always pay for themselves, and this view was then adopted by a frustrated extreme wing of a major political party. 

George H.W. Bush was right during the 1980 presidential primary campaign to call such thinking "voodoo economics." In the decades following, that doctrine did substantial damage to the U.S. economy.

Modern monetary theory, sometimes shortened to MMT, is the supply-side economics of our time. A valid idea — that traditional fiscal-policy taboos need to be rethought in an era of low real interest rates — has been stretched by fringe economists into ludicrous claims that massive spending on job guarantees can be financed by central banks without any burden on the economy. At a moment of economic and political frustration, some in the more extreme wing of the out-of-power political party are seizing on the possibility of a free lunch to offer politically attractive ways out of economic difficulty.

Modern monetary theory is fallacious at multiple levels.

First, it holds out the prospect that somehow by printing money, the government can finance its deficits at zero cost. In fact, in today's economy, the government pays interest on any new money it creates, which takes the form of its reserves held by banks at the Federal Reserve. Yes, there is outstanding currency in circulation, but because that can always be deposited in a bank, its quantity is not controlled by the government. Even money-financed deficits cause the government to incur debt.

Second, contrary to the claims of modern monetary theorists, it is not true that governments can simply create new money to pay all liabilities coming due and avoid default. As the experience of any number of emerging markets demonstrates, past a certain point, this approach leads to hyperinflation. Indeed, in emerging markets that have practiced modern monetary theory, situations could arise where people could buy two drinks at bars at once to avoid the hourly price increases. As with any tax, there is a limit to the amount of revenue that can be raised via such an inflation tax. If this limit is exceeded, hyperinflation will result.

Third, modern monetary theorists typically reason in terms of a closed economy. But a policy of relying on central bank finance of government deficits, as suggested by modern monetary theorists, would likely result in a collapsing exchange rate. This would in turn lead to increased inflation, increased long-term interest rates (because of inflation), risk premiums, capital fleeing the country, and lower real wages as the exchange rate collapsed and the price of imports soared.

Again, this is not just theory. Numerous emerging markets have found, contrary to modern monetary theory, that they could not print money to cover even their domestic currency liabilities. The same is true of industrial economies. The Mitterrand government in France in 1981 and the Schröder government in Germany in 1998 began with MMT-type approaches to policy and were forced to reverse course. The British and Italians both had to call in the International Monetary Fund during the mid-1970s because of excessive reliance on inflationary finance.

Supply-side economics was an unreasonable extension of valid ideas; few today advocate the top corporate tax rate of 46 percent and rates above 50 percent for a substantial swath of taxpayers that prevailed in the late 1970s. So, too, in a new era when the Fed chairman thinks that neutral real interest rates are well below 1 percent, we can approach federal borrowing with much less trepidation than we have traditionally.

But for neither the right nor the left is there any such thing as a free lunch. It's the responsibility of serious economists, whatever their political party, to make this clear. 

--

John Case
Harpers Ferry, WV

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Rithotz: When breaking up makes no sense [feedly]

A contra view on Senator Warren's proposal to break up big tech companies Facebook, Amazon and Google (Microsoft, Apple, Intel.. gets left out now???)

When breaking up makes no sense
https://digitopoly.org/2019/03/08/when-breaking-up-makes-no-sense/

Elizabeth Warren wants to break up Facebook, Amazon and Google. Why?

In the 1990s, Microsoft — the tech giant of its time — was trying to parlay its dominance in computer operating systems into dominance in the new area of web browsing. The federal government sued Microsoft for violating anti-monopoly laws and eventually reached a settlement. The government's antitrust case against Microsoft helped clear a path for Internet companies like Google and Facebook to emerge.

The story demonstrates why promoting competition is so important: it allows new, groundbreaking companies to grow and thrive — which pushes everyone in the marketplace to offer better products and services. Aren't we all glad that now we have the option of using Google instead of being stuck with Bing?

There is alot to unpack here. First, while the government wanted to break-up Microsoft, it didn't end up being able to do it. Yes, there was traditional antitrust enforcement (in the US and also notably in Europe) but that isn't a breakup.

Second, did it help clear a path for Google and Facebook? That is, had the antitrust enforcement not proceeded, would they have been in trouble? Well, of course, we know that we didn't need to break Microsoft up. But it is very unclear what the other antitrust actions did with regard to Google and Facebook. What was Microsoft doing that might have stopped them? I don't really know. Maybe something to do with Java? Maybe they would have thwarted Google at the level of Internet Explorer or blocked Chrome? But it is far from clear. We know that in competing with Google, the well-resourced Microsoft was unable to really get inroads on them despite actually having a search engine that was likely equivalent or just a shade worse. Compare that to other inferior Microsoft products that actually succeeded and the case is really hard to parse.

Third, how crippled is Microsoft exactly? Today, when I looked at company valuations, Facebook is at $481b, Amazon is at $793b, Google is at $799b and Microsoft is …. checks notes .. at $840b (even higher than Apple at $810b). So Microsoft is the world's most valuable company. It wasn't just the tech giant of the 1990s but it is the tech giant of today!

Fourth, it is pretty odd that Warren is targeting Facebook, Google and Amazon when Microsoft is out there as the tech giant. Moreover, why is Microsoft the tech giant? It is pretty obvious why: it has a virtual monopoly over PC operating systems and PC Enterprise software? You know, the things it actually had a monopoly over in the 1990s when it was pursued by the DOJ. Now we don't perceive it as so bad as there are alternatives to both of these but, in general, Microsoft does not appear to be operating like a company facing brutal competition. I am not saying it should be broken up. I'm just saying that I don't understand where Warren is drawing some line. I mean if those other companies are bad for democracy because of their power, why doesn't that apply to larger ones?

Now all this is not to say that there aren't significant reasons to look at all of these companies for antitrust reasons. For instance, I think we should get innovative in dealing with Facebook and I am worried about Google's vertical integration that favours some of its own services over potential competitors. In some cases, divestiture may be the only remedy. And I think the weaker antitrust pushes in the US should be strengthened considerably.

When you delve into a few more of the details, Warren wants a vertical breakup of at least Google and Amazon — by isolating their "platform utilities" (something that I couldn't see a definition of). For Amazon, this is odd since it opened up its marketplace to third parties when it didn't have to for regulatory reasons. For Google, it is unclear how breaking up its ad exchange in places will lead to greater competition in search.

But when someone comes out and says these three companies should be broken up and suggests some, in some cases, just punative ways of doing that, we have to take it seriously. Crazy policies have been proposed recently in the US and UK that no one thought could ever be done and then they just happen. I worried that a breakup rather than an innovative approach to opening up to enhance technology competition will end up being another of those things that ends up hurting many without any benefit to anyone.

 -- via my feedly newsfeed

A close look at recent increases in the black unemployment rate [feedly]

A close look at recent increases in the black unemployment rate
https://www.epi.org/blog/a-close-look-at-recent-increases-in-the-black-unemployment-rate/

Everything from weather to furloughs made it hard to draw any major conclusions from this month's employment report, but one recent worrisome trend persisted—a continued increase in unemployment for black workers.

The Labor Department's February employment report showed job growth effectively stalled last month, rising just 20,000. That was much lower than anticipated and substantially weaker than the prevailing trend of the last few years. The average over the last three months came in at a more solid 186,000, likely a better reflection of underlying trends, given the unusually harsh weather in February. At the same time, wages grew 3.4 percent over the year, the highest so far in the economic recovery from the Great Recession.

Turning to the separate household survey, the unemployment rate ticked down to 3.8 percent, while the labor force participation rate and the employment-to-population ratio (EPOP) held steady. The overall unemployment rate has sat at or below 4.0 percent for the last twelve months, averaging 3.9 percent over the year. The black unemployment rate, on the other hand, averaged 6.4 percent over the last year and has been increasing in recent months. For comparison, white unemployment tracked the drop in overall unemployment in February and has averaged 3.4 percent over the last year.

Given relatively small sample sizes and data volatility, I try to not to make a huge deal about any month-to-month trend. So, when the black unemployment rate started rising in December 2018, there was a good chance it was a blip. That so-called blip has happened for three months in a row. Black unemployment hit a low of 5.9 percent in this business cycle back in May 2018 and has exhibited relatively normal fluctuations in the ensuing months. It rose from 6.0 percent in November to 6.6 percent in December, then again to 6.8 percent in January and 7.0 percent in February. The black unemployment rate hasn't been above 7.0 percent in over a year. Because of the volatility and concerns about monthly data reliability, the figure below smooths out the black and white unemployment rates, graphing both the monthly data (in light blue and green, respectively) as well as a three-month moving average (in dark blue and green, respectively). The three-month moving average is in a darker shade because that's what I think that's the underlying trend and what we should focus on.

Jobs Day

Over the last three months, black unemployment averaged 6.8 percent, up from 6.1 percent the prior three months. This significant uptick is concerning. It does appear that the labor force participation rate ticked up slightly between the prior three months and the most recent three month (62.3 percent to 62.5 percent). Taken on its own, this is a sign that black workers may be (re)entering the labor force in the hopes of finding jobs. But, at the same time, the black employment-to-population ratio fell twice as far over the same comparison period. The black EPOP averaged 58.2 percent the last three months, down from 58.6 percent the prior three months.

The rise in black unemployment did not happen at a time when white unemployment also increased sharply. Over the last three months, white unemployment averaged 3.4 percent, exactly half as much as the black unemployment rate (6.8 percent), and only ticked up slightly over the previous three months (from 3.3 percent). As the economy continues to more towards full employment we would expect there to be some closing of the black-white unemployment gap, so the recent trend is troubling.

We cannot definitively say this is a trend that is going to continue, but it is certainly an indicator to watch in coming months. That's especially true given widening wage gaps between black and white workers in recent years.

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