Monday, July 30, 2018

Germany Organizing Anti-Trump Coalition

Mark Thoma today links to a story in Der Spiegel about a visit to Japan by new German Foreign Minister, Heike Maas.  He met with PM Shinzo Abe, and apparently the two of them agreed on the need for creating a network of like-minded nations that wish to maintain portions of the "post-war order," especially in the areas of trade policy rules and climate change agreements.  All of this is in reaction to actions by Donald Trump in both areas.  While Maas is fairly new in his office, reportedly the planning for this started under his predecessor and in conjunction with discussions in Paris and Brussels.  Supposedly the last straw was Trump's performance at the NATO summit.

Supposedly non-EU nations that may be joining this erstwhile coalition include beyond Japan: South Korea, South Africa, Australia, Argentina, Mexico, and Canada, with the foreign minister of the latter about to visit Berlin.  I guess we shall have to see how this works out.

Of course, much of the US media that should know better is still oohing and ahhing over the sjupposedly great deal cut between Trump and Juncker, which happened apparently on the same day as this meeting between Maas and Abe.  Today's WSJ had a headline quoting Kudlow that US-EU negotiations on "agriculture" are about to start.  Almost certainly, to the extent this is true at all, this will involve only to get more specific about Juncker's promise that the EU will increase soybean imports from the US (see pgl's recent post here on all that).  It absolutely will not go beyond soybeans, even if somehow Trump thinks it will. 

An earlier Der Spiegel article reported that Trump specifically requested of Juncker that the increase in ag imports go beyond soybeans, and Juncker firmly said no, soybeans only.  Anybody fantasizing that some big and general US-EU ag negotiation is about to start is seriously ignorant.  The Common Agricultural Policy (CAP) of the EU is both expensive and extremely politically and diplomatically complicated and controversial, having developed after many heated disputed among EU nations.  No way is Trump going to be allowed to just barge into that mess, where he might get sprayed with manure by French farmers (they did that once to an earlier French leader they were unhappy with).  The only reason soybeans are not such a big deal in the EU is that few countries grow them and they are just not that much used in European cuisines, for better or for worse.

Addendum:  I have just checked on EU soybean production.  No EU member is among the top 11 producers, and no EU member is among the 53 soybean oil producers.  Really. Some other European nations are in on the latter, including Norway and Switzerland, and Russia is 11th in soybean production. My bet on which one is the largest soybean producer in the EU is probably Italy, which is among the top three in soybean yields, with Turkey tops in that category.

Barkley Rosser

Saturday, July 28, 2018

The Soybean Boom

Via TalkingPointsMemo AP notes:
Private forecasters cautioned that the April-June pace is unsustainable because, they say, it stems from temporary factors, including a rush by exporters of soybeans and other products to get their shipments out before retaliatory tariffs took effect. They predicted the rest of the year is likely to see solid, but slower growth of around 3 percent. The transformation is also not as dramatic as Trump claims — and in many ways the 4.1 percent annualized growth during the second quarter is in line with an economic expansion that just entered its tenth year. During Barack Obama’s presidency, there were four quarters when annualized growth exceeded the level that Trump praised on Friday. And in 2015, full-year economic growth nearly reached the 3 percent level being targeted by the Trump administration this year when it hit 2.9 percent.
Is this “fake news” being peddled by those socialists at TPM? What do these private forecasters know anyway! Well AP does lead with what the White House wanted to emphasize:
President Donald Trump on Friday celebrated the release of new economic data, claiming the U.S. is now the “economic envy of the entire world.” Trump was responding to new growth numbers announced on Friday that show the U.S. economy surged in the April-June quarter to an annual growth rate of 4.1 percent — the fastest pace since 2014. “We’ve accomplished an economic turnaround of historic proportions,” Trump told reporters during hastily arranged remarks on the South Lawn of the White House, where he was joined by Vice President Mike Pence and flanked by members of his economic team. “Once again, we are the economic envy of the entire world,” Trump said, adding that “America is being respected again.”…Trump, who has repeatedly attacked the economic record of his predecessor’s administration, pledged during the 2016 campaign to double growth to 4 percent or better. And he has been tring to highlight economic gains ahead of the midterm elections. But Trump, ever the salesman, predicted even higher growth as he renegotiates the nation’s trade deals, saying, “We’re going to go a lot higher than these numbers.” And he insisted the economic numbers are “very sustainable” and not “a one-time shot.”
Now that’s telling it like Sean Hannity and Fox & Friends would do! OK – time to listen to an actual economist such as James Hamilton:
Growth in consumption, nonresidential fixed investment, and net exports helped produce the strong numbers. Higher oil prices stimulated a big boost in spending on mining exploration, shafts, and wells. That was one factor in higher investment spending; growing business confidence may have also played a role. Tax cuts likely contributed to the growth in both consumption and investment. Some of the export growth may have come in anticipation of coming tariffs. I count the contribution from exports as a soon-to-disappear plus, though it’s balanced by a big minus in inventory investment that’s also likely transient.
We’ll get back to the soybean boom which led to real exports growing by more than 9% per annum last quarter. While residential investment fell a wee bit, nonresidential fixed investment has been growing at a 9% per annum clip for the past two quarters. Is this due to temporary facts (see the Econobrowser comment section for more) or is it sustainable as Trump argued? We shall see but permit me to repeat what I said on this in the comment section:
Trump lies about everything. He correctly noted that real business fixed investment has been growing by 9% over the past two quarters but then we have not seen this for decades? Really? We had this rate of growth back over the 2011/2012 two year period. From 1995 to 2000, real business fixed investment grew by about 10% per year. We had double digit growth rates both during the 1976 to 1978 period and the 1964 to 1966 period. I guess it does not count if the President during these periods was a Democrat.
OK now that I got that out of my system, I want to turn to Trump’s argument that we can sustained high growth if we can get a large boost in net exports. Never mind the fact that the soybean boom will turn to a soybean bust now that China’s tariffs on our soybeans are in place. Of course there are other aspects to this stupid trade war but focusing on that may be missing the point that Menzie Chinn articulated last fall:
Since current account surpluses and deficits are primarily macroeconomic phenomena, driven by saving and investment decisions, attempts to reduce the United States' trade deficit by way of protectionist trade measures, such as anti-dumping tariffs and countervailing duties, and withdrawals from free trade agreements, are unlikely to be effective. Instead, they will redistribute the trade balances between our different trading partners. On the other hand, fiscal policy measures – such as the large tax cuts on the order of $2.2 trillion over ten years currently envisaged by the Trump Administration and the Republican led Congress – are very likely to drastically increase budget deficits and hence current account deficits.
We did see significant growth in consumption as noted by the AP:
The numbers were driven by consumers who began spending the tax cuts Trump signed into law last year and exporters who have been rushing to get their products delivered ahead of retaliatory tariffs…Private forecasters cautioned that the April-June pace is unsustainable because, they say, it stems from temporary factors, including a rush by exporters of soybeans and other products to get their shipments out before retaliatory tariffs took effect.
Trump supporters are likely saying now “there you liberals go again” with your prediction that the net export surge will reverse itself but let’s assume both fixed investment and consumption continue to rise strongly. Then Menzie may be right as a fall in national savings and a rise in investment demand will translate into a drop in net exports much like we saw under St. Reagan. Of course maybe I’m missing one possibility – a dramatic drop in government purchases as Kudlow’s plea that we cut government spending “Reagan style”. Dr. Hamilton’s chart shows government purchases rose decently but that masks the fact that Federal nondefense purchases and state/local government purchases grew slowly whereas we had a large rise in defense purchases. Of course that is “Reagan style” fiscal policy – increasing government purchases so John Bolton might have one of his desired wars paid for by reducing domestic government purchases. And I would submit that is not sustainable – at I hope it is not.

Thursday, July 26, 2018

Meanwhile, Saudis Stuck On Oil Thanks To MbS Crackdown

Saudi Crown Prince Mohammed bin Salman (MbS) has a plan to get Saudi Arabia off oil, with an immediate push to create 1.2 million private sector jobs by 2020.  However, as Juan Cole reports, his political crackdown last year in which over 300 people were tossed in jail  for various supposed crimes, with many of them now having frozen bank accounts and other restrictions placed on them, has somewhat scuttled this project badly.  700,000 foreign workers have left,and foreign direct investment has fallen from $7.42 billion in 2016 to $1.32 billion in 2017.  Oooops!  This is not the way to  wean the nation off oil.  Nobody wants to invest because they fear MbS will go on another rampage, seizing money and putting people in prison.

Of course, it is now clear that Trump and his son-in-law, Jared Kushner, encoureaged MbS in his coup against his cousin, former Crown Prince Mohammed bin Nayef.  They also supported his stupid war in Yemen and initially encouraged him in his campaign against Qatar, still ongoing although a total flop, although on that one Trump has figured out that the largest US air base in the Persian Gulf, al-Ubeid, is there, so he has lost his enthusiasm for this particular stupid project of MbS's.  Unfortunately, there is little prospect this 32 year old leader will be removed from power any time soon.

Barkley Rosser

Wednesday, July 25, 2018

Has Trump Won This Easy Trade War With Our Greatest Foe, The European Union?

So Sean Hannity would have us believe this evening after the press conference earlier today by Trump and EU Commissioner Jean-Claude Juncker.  According to Hannity they have signed a "deal" that will help US businesses, workers, and farmers. Yowzah!

As it is, what appears to have been agreed to (no signed deal) is that the US will not impose tariffs on autos imported from the EU as he had threatened to,  a proposal not supported by the US auto industry, the erstwhile beneficiary of such an action.  This means that the EU in turn will not impose a bunch of retaliatory tariffs against various American products.  So, the trade war sits where it is, with US tariffs in place on foreign steel and aluminum, with a set of retaliatory tariffs on a variety of US goods all still in place.  The war has not been won, merely that its momentum has slowed.

Ah, but then there was the dramatic announcement by Trump that there will be negotiations with the EU that will move to end all tariffs, subsidies, and other non-tariff trade barriers in all non-auto industrial sectors.  He then reeled off a set of other sectors in which negotiations would occur, although with not quite such a strong promise regarding what might result, with at the end of the list being soybeans, which Trump declared "is very important."  Indeed.

What all this brings up is how does this relate to the long-running negotiations over trade and investment that went on between the US and the EU that Trump shut down last year?  This would be the Transatlantic Trade and Investment Plan (TTIP, or T-TIP for some parties).  This negotiation began under Obama in 2013.  Between July 2013 and October 2016 there were 15 weeklong rounds of negotiation regarding 28 topic areas, some of them those mentioned in today's press conference by President Trump.  On none of those 28 was there a full agreement as of the final round of negotiations, although some were further along than others. It had been estimated that it might take until 2021 to complete this negotiation, and that made back when there still were negotiations.

So how might these revived negotiations go, and it must be noted that this past March? Commerce Secretary Ross actually raised the possibility of them being restarted, although that drew little attention at the time.  Well, back in 2014 a draft of a possible agreement was leaked and drew considerable opposition, more from the EU side than the US one.  It must be noted that the proposed TTIP had many similarities to the TPP, which Trump also withdrew from. Among issues raised involved environmental, safety, and broader regulations, along with investment issues, with the agreement supposedly granting US corporations power to challenge such rules.  As it is, however, details of the negotiations are classified; we do not know what they are, only broad indications of the degree of agreement.  So, will what Trump and Juncker agreed to today amount to a restart of these stalled TTIP negotiations, or will we see a whole new round of negotiations starting fresh that will lack all those issues or problems that have created problems in the past for the TTIP?

It should be noted that since Trump became president, the EU and Canada have ratified an agreement, and also the EU and Japan have more recently done so as well.  The US was never a part of the first negotiation, although it was a clear parallel to  the TTIP.  Regarding the latter the US withdrawal from the TPP made Japan not interested in having the US involved.  These agreements may have flaws as many (including me) think the TPP did (although its worst part was the favoritism given to the US pharmaceutical industry, which meant that many in it did  not mind seeing the US leave), but whatever lowering of actual trade barriers are occurring mean that the businesses in those nations will gain competitive advantages over US firms not a part of those agreements, quite aside the now-in-place tariffs due to Trump's supposedly "easy" trade war, even if today's announcement means that the war may not get more intense in the near future.  This is no victory in a still ongoing war.

Barkley Rosser

Yes, Trump Is Bailing Out Soybean Farmers

And maybe dairy farmers as well.  As suggested in a recent post here, indeed it will be by using the Commodity Credit Corporation, and Trump has announced a $12 billion package, starting in September, two months before the mid-term elections.  That is not quite the estimated $14 billion expected to be lost due to retaliatory tariffs on US soybean farmers, although it would cover a lot, although reportedly also hurting US dairy farmers will also get some of that action, which would reduce the aid soybean farmers will get.

It is unclear where the financing for this will come from.  This will  apparently involve no  action by Congress, but where the money will come from has not been announced. As it is USDA Secretary Perdue who has been identified as overseeing this bailout, presumably the money is coming from existing USDA budgets. But it is unclear what other USDA activities might suffer from cuts in funding for this blatantly political scheme.  It appears the CCC has some funds sitting around in some accounts, but nowhere near the amount that has been announced.  Will the CCC borrow the money?

While I guess this should be obvious, former W. Bush OMB Director, Douglas Holtz-Eakins has denounced this move as violating the purpose of the CCC as laid out both in 1933 when it was established, as well in terms of all of its subsequent practice.  Its support is supposed to be for damages farmers experience due to bad weather and other such natural events.  While aid has extended somewhat beyond that over time, it has never been to compensate for the costs engendered by a policy action of a president as is the case this time. This is without precedent, and even a lot of farm groups are not expressing enthusiasm for it, perhaps because some of them may be worrying that the funds for this will come out of other ag support programs that they are receiving.

Barkley Rosser

Tuesday, July 24, 2018

Screenwriter Dies at Age 100, Of "Rashomon," 1950, Greatest Film of Japan Ever.

Shinobu Hashmoto just died at age 100. His original screenplay for the greatest movie ever made in Japan was initially written while he was recovering in a Japanese hospital for war veterans.with him having tuberculosis. It is famous for showing how different observers of reality may have different views of that reality. The film's director was Kurowsawa, who worked closely with Hashimoto on many of his films. Regarding the greatest of them all, "Rashomon," even though now many see it as the ultimate inside view of Japanese culture, not to mention its far broader philosophical implications, when the film was being made,three assistant directors objected to the making of as they "did not understand" what the film was about. The following is an English translation of Kurowoawa's reply to his assistant directors,  as reported by Harrison Smith in his WaPo obit of Hashimoto:

      "Human beings are unable to honest with themselves.  They  cannot talk about themselves without embellishing.  This script portrays such individuals - the kind who cannot survive without lies to make them feel better than they really are...You say you can't understand this script at all, but it is because the human heart is impossible to understand. If you focus on the impossibility of truly understanding human psychology and read the script one more time.  I think you will grasp the point of it."

Barkley Rosser

Sunday, July 22, 2018

The Most Important Issue At Helsinki

No, folks, it was not the much ballyhooed issue of Russian election interference in 2016, which got so much attention because of Trump's bungled and false statements at the press conference.  Oh yes, for those of us who are convinced he is a bought out stooge of Putin, this all was very delicious, but it was far from the most important issue dealt with in Helsinki.

As always, the most important issue between Russia and the US is nuclear weapons, not Ukraine or NATO expansion eastward or even Putin murdering innocent opponents.  Of course we have this awful problem that we in the US do not know what was discussed for 2 hours privately between Trump and Putin in Helsinki. We are getting claims out of Moscow about supposed deals made, mostly about Syria in terms of specifics, but there remains zero  knowledge among US authorities supposedly responsible for these matters of what the deals are or their details.  As it is, most of the Syrian stuff looks like basically status quo arrangements made on the ground between US and Russian military, most of this dating back to the Obama era.  We needed a summit for this?

Anyway, getting back to the most important issue, nuclear weapons, what we have been provided with is a vague and confused statement: that the INF and "new" START treaties "will be extended."  Well, that sounds nice, but it has some problems, especially with the INF part, although given that START was an Obama treaty with Medvedev, this is some solace given Trump's propensity to simply end anything that Obama did, just because.

The Intermediate Nuclear Force (INF) was agreed to in Dec. 1987 by US President Ronald Reagan and Soviet President Gorbachev.  It is a permanent treaty requiring no special extension.  It bans missiles of intermediate range of especial danger to NATO nations in western Europe.  Until 2014 it was followed by both sides.  Then in 2014 Putin adopted the RS-26 missile that violates the treaty, although he has denied it does.  But US SecDef Mattis thinks it does.

So, what Trump should have had as his top priority in Helsinki and before while visiting NATO allies, whom he dissed, including the EU as our "worst foe," would have been to demand that Putin get rid of the RS-26 missile that violates the INF treaty.  Instead we are told that he and Putin have agreed to "extend" it and the START.  This  is plain awful, but not surprising.

Barkley Rosser

Thursday, July 19, 2018

Trump Tariffs Hit Largest US Aluminum Company, ALCOA

In the history of antitrust law, one of the most important rulings by the US Supreme Court came in 1945, when the Aluminum Company of America (ALCOA), long based in Pittsburgh with heavy Mellon family ownership, was ordered broken up for being a monopoly, following a ruling by Judge Learned Hand.  This was the famous "per se" ruling that said that simple domination of an industry by size was sufficient in the end to justify breaking it up.  However, with the entry of Reynolds and Kaiser into the industry, ALCOA was in the end able to fend off being actually broken up, and today it is still the largest aluminum company in the US and sixth in the world, with Century Aluminum second in the US and Kaiser third. While still with most activity in the US, ALCOA is a multinational company operating in many nations around the world.  Until 2016 it operated in all sectors of the industry, but then spun off some of its specialized processing for auto and aerospace inputs into the Arconic company.

Today stock of ALCOA fell over 4 percent on a report from the company of it expecting to see a , substantial decline in profits in the coming quarters due to the imposition of tariffs on aluminum by President Donald Trump.  So, his imposition of tariffs on aluminum, designed to aid US aluminum producers, will be causing a substantial decline in profits for the largest aluminum producing company in the US.  What is going on here?

It appears that the problem is that the US is increasingly a net importer of unprocessed aluminum that is the main input for companies that process aluminum, which is what ALCOA mostly does, even after spinning off Arconic.  The US has never been a major producer of bauxite, the original source of most aluminum, only producing about 1 percent of global supplies of it.  In term of producing unprocessed aluminum, the US reached a peak in 1980s, with this now only about a quarter of that level today. The US imports $23.4 billion of aluminum products, with nearly half of that, 46.8 percent to be precise, being unprocessed aluminum.  So ALCOA is importing a lot of the unprocessed aluminum it uses to produce aluminum products.  Unlike American steel companies, whose main inputs of iron ore and coal are domestically produced, ALCOA is more like an automobile company that is hurt by the tariffs on steel, which raise its costs.  Thus it is not surprising that the US aluminum industry more broadly has opposed the Trump tariffs, in contrast to American steel and coal companies supporting the steel tariffs.  I note that the US exports some finished aluminum products, but far less than it imports.

The top five nations from whom the US imports aluminum are Canada (36.3 percent), China (15.1 percent), Russia (7.0 percent),UAE (6.5 percent) and Mexico (4.3 percent).  When the tariffs were first announced, meanie Canada and Mexico were exempted due to ongoing NAFTA negotiations, but on May 31, they were included given the apparent breakdown of the NAFTA negotiations.  Back in 2006, ALCOA tried to take over Canada's Alcan, originally a started by ALCOA, but was blocked as Brazil's Rio Tinto took it over instead.  So ALCOA imports a lot from Canada, meaning tariffs on meanie Canada are hitting ALCOA especially hard.  As for meanie China, well, the yuan/rmb has hit a new low for the year against the rising US dollar, which will mean it will still be exporting to the US even as its economic growth rate declines somewhat to about 6.5 percent.  But obviously we have nothing to fear as our "Art of the Deal" president assures us that "trade wars are easy to win."  The meanies will be put in their place, and ALCOA will  just have to have a stiff upper lip and be patriotic along with all our soybean farmers.

Barkley Rosser

Saturday, July 14, 2018

Is Trump Bailing Out Soybean Farmers Or Not?

Chinese tariffs on US soybean exports have now kicked in, with China half the US soybean market, and exports much more important for soybeans than for corn, with the US producing half the world's corn, but exporting less of it than soybeans.  Upshot is that while soybean prices have fallen roughly 20% since Trump started his trade war, corn prices have fallen noticeably less.

Recognizing that soybeans are very important in some key pro-Trump states like Iowa, North Dakota, and Indiana, he has promised to provide aid for them, even as he has at times said that the victims of his trade war will be "patriotic" and continue to support him, even as they lose their jobs, farms, businesses.  Googling suggests that he has himself has not followed through on supporting his damaged soybean farmer supporters, but in fact the situation is unclear.

I have made my annual visit with my old friend who is an Indiana farmer, among other things.  He is glad that he planted more corn than soybeans this year, given that corn prices have fallen so much less than have those of soybeans.  But he tells me that even though the internet says Trump has done nothing to follow up on his promises to help out the soybean farmers, there is a new USDA program to  provide some sort of assistance to soybean farmers.  He has signed up for it, but so far has received no clear information of what is going to come out of it.

As near as I can tell what this might be is a resurrection by somebody at USDA inspired by Trump of the old Commodity Credit Corporation programs that date back to the Great Depression and are still on the books.  I do not know if this is the case or not, but it is hard to see what else it might be. As it is, my friend is curious and hoping to get some assistance, but whether any will actually be forthcoming, much less how much or to what degree Trump actually has anything to do with it specifically, remains up in the air, as does so much else about the Great New Trade War of Donald J. Trump.

Barkley Rosser

Monday, July 9, 2018

How Much Do the NATO Members Spend on National Defense?

Josh Marshall provides a nice discussion of the difference between how NATO is funded versus how much each of its members spends on national defense, which begins with:
As we move toward the NATO Summit and the Putin-Trump summit, I thought it made sense to review some of the details behind the President’s demands that NATO member countries pay up and stop doing what he regards as freeloading on the US taxpayer dime. Most people have a general sense that Trump doesn’t seem to grasp how an alliance works, that it’s not meant to function as a protection racket. But the actual details are both sillier and more significant than it may seem on the surface.
While I applaud his discussion, something is amiss here:
The vastly greater amount is the combined military budgets of all the member countries combined, which was $921 billion in 2017. The great majority of that is made up of the US military budget. In 2017 the US military budget was $610 billion. The coming fiscal year puts it at $700 billion. (That big run-up is significant and we’ll return to it.) Some of that difference is driven by the fact that the US economy is far larger than any individual NATO member state. But the US also spends much more on a per capita basis. Staying with the 2017 numbers, the US spends 3.61% of GDP on defense. The next major NATO member is the UK down at 2.36% while most other major NATO powers are significantly under 2%. (Examples: France, 1.79%; Germany, 1.2% Canada, 1.02%)
Actually, U.S. national defense spending was over $744 billion in 2017, which came to 3.8% according to this source. Call me a pacifist but maybe we should all be spending less on the ability to wage war.

Saturday, July 7, 2018

The Value of Life and the Metaphor of Choice

Perhaps no topic generates such bewilderment between economists and the general public as the monetary valuation of human life, or the value of a statistical life (VSL) to use the term preferred by professional economists.  Economists insist that longevity is a commodity bought and sold on markets like anything else, which means it has a price and an underlying schedule of willingness to pay just as we would find for any other good or service.  Most noneconomists regard this as madness: surely the value of a human life can’t be expressed as the equivalent of a certain number of pizzas, even a very large number of pizzas.  But, respond the economists, you do trade off longer life against pizzas, or at least the money that could be used to buy them, since there is a limit to how much you’ll spend to reduce a physical risk.  And then there is a reply to the reply: yes, but that has nothing to do with the value of being alive, which can’t be reduced to a monetary price.  And it goes back and forth from there, with neither side able to understand the other.

Elsewhere I have made substantive arguments for why we are better off without putting monetary values on our lives, but I won’t get into that here.  My interest at the moment is the incomprehension on all sides of the VSL debate.

Here’s what I think it comes down to: the metaphor of choice.  This metaphor is so deeply ingrained in economic analysis most economists can’t think beyond it, but the moment it is invoked the very notion of what it means to be alive rather than dead is rendered irrelevant.

No need to reinvent the wheel.  I discussed the metaphor of choice in my introductory micro text:
What about the metaphors used in economics?  First consider choice.  Much of what we do in the economy does involve choosing: we choose where to work, where to live, and paper or plastic in the check-out line.  No doubt many of the choices we make are unconscious, but it might not be too far off the mark to think about them as if they were conscious and “rational” as we will describe in the following section.  Nevertheless, the metaphor of choice can be misleading in some instances.  There are two reasons for this. 
First, many of the actions we undertake are governed by a process very different from conscious choice.... 
Second, many activities are not choices at all.  You can choose whether to buy white or red potatoes, but cooking the potatoes is an act of (household) production, not a choice.  Working, doing the actual tasks that make up a job, is not choosing; it is working.  Spending days or weeks searching for a new house is not making a choice; it’s doing a search.  Of course, subject to the qualification we made in the previous paragraph, all these activities lead up to or follow from a choice.  In other words, what the metaphor of choice is telling us is that what is deemed important about any economic activity is the element of choice connected to it.  This is a simplification of great power, because it enables us to make general statements that apply to the many aspects of life through their common element of choice, but it downplays the economic importance of the non-choice element.
This applies in flashing neon to the valuation of life.  To an economist, it is obvious that the salient moment, the one that determines everything else, is when you make a choice about something that increases or decreases the probability of an early death.  The tradeoffs you make in that moment, or that are implicit in it and could be teased out using statistical methods, are the very substance of value.  When a normal person—someone who hasn’t been trained to view existence as nothing more than a sequence of instantaneous choices—thinks about life, however, they think about living (and dying).  What’s the value of that?  It might have something to do with the attitude you felt when you were making a choice that changed your odds of survival, but that barely begins to cover it.  The value that matters is the value of being, to you and to those who know and care about you. 

What’s the lesson here?  It’s not that economists are “wrong” to reduce all of being and doing to choosing; there is great power in this simplification, and few insights of modern economics would be attainable without it.  But economists would do well to remember this crucial step and acknowledge it limits the scope and applicability of what they think they know.  Allowing that there are values to being alive that VSL doesn’t begin to address would be a useful place to start.

In Defense of the Francois-Baughman Analysis of the Trump Tariffs

Dr. Joseph Francois and Laura M. Baughman are being criticized for writing:
This policy brief examines the potential net impacts on U.S. jobs across all industries of the proposed steel and aluminum tariffs applied to targeted steel and aluminum imports from all countries. It does not take into account any potential retaliation against U.S. exports; only of the tariffs themselves. We find that the tariffs would indeed have positive impacts on U.S. steel and aluminum producers, but negative impacts on producers who use steel and aluminum, both imported and domestically-produced. Those impacts, both positive and negative, would ripple through the economy. We find: The tariffs would increase U.S. iron and steel employment and non-ferrous metals (primarily aluminum) employment by 33,464 jobs, but cost 179,334 jobs throughout the rest of the economy, for a net loss of nearly 146,000 jobs ..
How did they arrive at this alarming conclusion?
We base our analysis on the Global Trade Analysis Project (GTAP) database. The GTAP database covers international trade and economy-wide inter-industry relationships and national income accounts, as well as tariffs, some nontariff barriers and other taxes. This includes value-chain related linkages across industries and borders. These data are included in a computer-based model of production and trade known as a “computable general equilibrium” (CGE) model. This is the same model used by the Commerce Department to arrive at the tariff rates it argues will yield increases in U.S. steel production sufficient to bring the industry to 80 percent capacity utilization… In addition to economy-wide impacts, we focused on the impacts of imposing the tariffs on the U.S. workforce. For the analysis conducted here, we treat wages as “sticky,” meaning changes in demand for labor (positive or negative) are first reflected in changes in employment rather than changes in wages. This is appropriate for an examination of the immediate impacts of the tariffs on workers.
In other words, they concede that these are short-term impacts and their model has Keynesian features. For some reason, this offends Robert Scott of the Economic Policy Institute (EPI):
This EPI report explains why the actual economic impact of the tariffs will be quite minor, and why Francois and Baughman’s 2018 study should be treated as an odd outlier in studies of tariffs, and not as a study to guide policy decisions. Our key findings are: The Francois and Baughman (2018) results are driven overwhelmingly by a nonstandard modeling assumption: that growth in the U.S. economy is constrained by aggregate demand. This is not how the vast majority of trade modeling analyses are done. Even with the assumption of demand-constrained growth, the Francois and Baughman (2018) results are totally implausible. There is no credible evidence that these tariffs could drag on growth in demand anywhere near enough to generate employment losses as large as the authors report…While Francois and Baughman (2018) look at the effects of raising tariffs on steel and aluminum, the textbook case for arguing that lowering tariffs will boost economic efficiency relies on the assumption that the economy operates at full employment, meaning that overall economic growth is constrained only by growth in the economy’s productive capacity and not by spending decisions made by households, businesses, and government. This means that economic growth is not constrained by too-slow growth in aggregate demand. This full employment assumption lies behind the vast majority of analyses of trade policy and is a necessary condition for many of the findings that lower tariffs boost economic efficiency. Such full employment modeling would imply extremely modest economic losses from the steel and aluminum tariffs. The standard rule-of-thumb for converting tariff increases into economic losses is: [0.5*(t/(1+t))^2*m*e]. Here, t is the percentage tariff, m is the share of imports in the nation’s gross domestic product (GDP), and e is the elasticity of demand for imports with respect to price.
First of all it would have been nice had this EPI discussion given Paul Krugman credit of this “standard rule-of-thumb”. But since when has the EPI embraced the New Classical macroeconomics model? To be fair, I have made similar arguments that trade policy has no net aggregate demand effects. For example, my post on Navarro’s Nonsense on Net Exports dusted off the Mundell-Fleming IS-LM-BP model:
My concern was that Navarro was all Keynesian with no consideration of where output was relative to potential GDP or the impacts on potential GDP. Navarro proposed using some sort of trade protection to raise net exports by $500 billion per year. That might have a big aggregate demand impact under the assumptions of fixed exchange rates and fixed interest rates, which of course is the most basic Keynesian model that Navarro both mocks and uses. One can wonder whether the output gap now is really that large. Of course, I have suggested that perhaps the output gap may indeed be as much as 5 percent but other economists suggest it is smaller. Scott is noting, however, the Trump wants to increase defense spending and massively cut taxes which push aggregate demand so high that the Federal Reserve would have to raise interest rates. We should also note how various policy positions work in a standard Mundell-Fleming model.
One of the implications of this model is that any expenditure-switching policy such as reducing imports will so appreciate the currency that export demand falls as much imports rise. Of course the EPI has often dismissed this conclusion on the grounds that we do not live in an idealized world of freely floating exchange rates. Then again – even Keynesian economists would argue that a well designed monetary policy could offset any negative aggregate demand effects – providing we do not hit that liquidity trap again. So yea – I have argued for a full employment modeling in the past. But what worries me is that Trump’s follies may match or rival the macroeconomic mess we had during the early years of the reign of St. Reagan. To suggest that in such an environment that we should ignore aggregate demand effects is something I would have never expected from the EPI.

Tuesday, July 3, 2018

Pruitt's EPA Trashing Benefit-Cost Analysis Of Environmental Policy

Scott Pruitt increasingly looks the worst of the worst out of the appalling cabinet of President Trump, quite aside from his race to become the single most corrupt cabinet member in the entire history ofthe US.  The latter is trivial compared to his policy change after policy change that will increase pollution in the environment and end up killing people, to be blunt about it.  But now the Environmental Economics blog reports that since June 7 Pruitt's EPA has been planning to distort benefit-cost in a way to make it less likely to support environmental policy enforcement (sorry not able to make link to site work).

In particular they are planning to eliminate counting "co-benefits" of policies. Only what a policy is specifically directed at can be counted. So, if one looks at coal burning and wishes to limit particulate emissions, then one cannot count co-benefits such as reducing SO2 and mercury emission.  This is simply outrageous and makes no sense whatsoever. But indeed, Scott Pruitt may be the worst cabinet member in US history, and Trump seems to be in no hurry to remove him, indeed, defends him.

Barkley Rosser

Three-day Workweeks and Four-day Weekends

David Gelles interviewed Richard and Holly Branson for The New York Times Saturday
David Gelles (NYT): What do you think those in positions of power should do to address social problems like income inequality? 
Richard Branson: A basic income should be introduced in Europe and in America. It’s great to see countries like Finland experimenting with it in certain cities. It’s a disgrace to see people sleeping on the streets with this material wealth all around them. And I think with artificial intelligence coming along, there needs to be a basic income. 
David: Because of job displacement? 
Richard: I think A.I. will result in there being less hours in the day that people are going to need to work. You know, three-day workweeks and four-day weekends. Then we’re going to need companies trying to entertain people during those four days, and help people make sure that they’re paid a decent amount of money for much shorter work time. 
David: That’s a pretty rosy vision of what business can do. Is it really so simple? 
Holly Branson: If all businesses start doing the right thing for their communities and the world as a whole, all of the world’s problems could be solved.

Meanwhile, In The 'Not Too Distant Future'...

In the early days of the 1956 presidential campaign, U.S. Vice President Richard Nixon envisioned the achievement of a four-day, 32-hour workweek in the "not too distant future." Sixty years later, the average workweek in the U.S. for full-time workers was 42.5 hours. Seventy percent of all employed persons worked 40 hours a week or more.

Nixon was not the only seer to misjudge the future of working time. In the 1930s, John Maynard Keynes had famously speculated about a 15-hour workweek as an economic possibility for "our grandchildren." Towards the end of World War II, he offered a more modest, but more imminent opinion that a 35-hour workweek would be appropriate for the post-war U.S. economy.

In 1954, Fortune editor Daniel Seligman predicted a 32-hour workweek by 1980 – or sooner if workers chose to take a greater portion of their share of productivity gains in leisure rather than income. The First National City Bank of New York calculated in 1957 that it would take 31 years to achieve a 32-hour workweek, assuming the same mix of income and leisure as had prevailed from 1909 to 1941. Alternatively, a four-day workweek could be attained in eight years if productivity gains were applied exclusively to work time reduction. Four years later, economist Clyde Dankert suggested 1980 as the date by which "the thirty-hour workweek should be widely established and some progress made toward the twenty-five-hour week."

As it turned out, from 1954 to 1989, annual productivity gains averaged 2.1 percent a year. Assuming 40 percent of actual historical productivity gains, ten paid holidays, and four weeks annual vacation, a 32-hour workweek should have been realized by around 1990 – leaving aside the likelihood that progressive reductions of the hours of work could have accelerated productivity gains. Edward Denison estimated in the early 1960s that approximately ten percent of the productivity gains in the first half of the twentieth century could be attributed directly to the reduction of hours. So, adding in a ten percent productivity boost from work time reduction itself, a 32-hour workweek could have been achieved by 1984.

Why those reductions didn't materialize is a riddle that perhaps will never be completely solved. One element that must have contributed to that outcome, though, is the peculiarly ambivalent attitude of economists toward work time reduction. On the one hand, as the plethora of predictions suggests, economists were confident that reductions would occur virtually automatically. Many affirmed it would be a good thing, too. On the other hand, economists almost unanimously expressed misgivings or outright hostility to policy initiatives that would mandate shorter hours – whether through legislation or collective bargaining. Suspicion of shorter work time policy enjoyed a rare and unholy consensus among both interventionist liberals and laissez-faire conservatives.

Two significant facts are concealed by the economists' curious unanimity. First, that shorter working time is an unequivocally good thing for workers and second, that most employers tend to resist work time reductions like the plague, making the spontaneous reduction of working time highly unlikely and the imposition of shorter working time by policy an imperative for achieving reductions. These are not the opinions of radicals or crackpots but the conclusions of theory and empirical research conducted by economists of the first rank. 

In 1902, the report of the U.S. Industrial Commission concluded that "reduction of hours is the most substantial and permanent gain which labor can secure." It went on to explain that a wage increase "can readily be offset by secret agreements and evasions… but a reduction of hours is an open and visible gain and there can be no secret evasion." The report also observed that "strenuous objections and alarming predictions" have been the inevitable reactions to demands for shorter hours "but after a very brief period of trial these objections have disappeared." 

Thirty years later, John Hicks reiterated that historical experience offered "no ground for supposing that the reduction takes place at all easily." The reduction from the long hours worked during the industrial revolution had been achieved "mainly by State regulation and Trade Union Action" over the objections of employers, to most of whom it was inconceivable "that hours could be shortened and output maintained." 

By the 1930s, the case for shorter hours had been vindicated – at least among leading economists. Sydney Chapman's 1909 theory of the hours of labour was acknowledged as canonical by leading economists. It was no long necessary, assured Lionel Robbins in 1929, "to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it."

Up until 1957, labor economics textbooks concurred with Hicks's view that reductions in hours were gained by trade union pressure, either directly through collective bargaining or by legislation promoted by organized labor, as Stanford economist John Pencavel recently observed. Following publication in 1957 of an article by H. Gregg Lewis, "Hours of Work and Hours of Leisure," however, there was a "radical change in economists' thinking about working hours." Subsequent textbooks echoed Lewis's empirically-unsubstantiated hypothesis that workers freely choose their hours, based on their individual preferences for income or leisure.

On the final evening of the 1960 U.S. election, Nixon, then the Republican candidate for President was asked what his stand was on the 32-hour workweek. "Well," he replied, "the 32-hour workweek just isn't a possibility at the present time." Nixon continued:
I made a speech back in the 1956 campaign when I indicated that as we went into the period of automation, that it was inevitable that the workweek was going to be reduced, that we could look forward to the time in America when we might have a 4-day week, but we can't have it now. We can't have it now for the reason that we find, that as far as automation is concerned, both because of the practices of business and labor, we do not have the efficiency yet developed to the point that reducing the workweek would not result in a reduction of production
.There is a faint echo of 1930 Keynes in 1960 Nixon's "we can't have in now" deferral. A few paragraphs after making his prediction of a future 15-hour work week, the renowned economist cautioned:
But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.
Nearly ninety years later, must we still pretend that "fair is foul and foul is fair"? Are avarice and usury truly leading us "out of the tunnel… into daylight" or are they dragging us ever deeper into an abyss of debt, inequality and degradation?

Sunday, July 1, 2018

"The theory that wages depend entirely on the efficiency of labor, or on the product of industry, is a new form of the old doctrine of the wages-fund."

Excerpts from "The Effect of an Eight Hours' Day on Wages and the Unemployed" by  Charles Beardsley, Jr. (The Quarterly Journal of Economics, Vol. 9, No. 4 (Jul., 1895), pp. 450-459):

The argument of workingmen that the general adoption of an eight hours' day would raise wages and absorb the unemployed is well known. A reduction in hours of work would be equivalent to the withdrawal from the ranks of men now employed of a certain number of laborers. The gap thus made would be filled by the unemployed. It is the competition of the fringe of unemployed or intermittently employed (comprising 10 per cent. of the working classes in England in normal years, according to Mr. Tom Mann) that keeps down the wages of the employed. If the number of the unemployed were lessened, wages might rise.

The reply which has been made to this argument by Mr. John Rae in his valuable and entertaining book, Eight hours for Work (1894), and by other writers, does not appear to be conclusive. It is said that the demand for work comes from the product of work, and that commodities constitute the demand for commodities. If the output of commodities falls off, the demand for them, and therefore for labor, must fall off also. So that (it is said), if a general reduction of hours resulted in a diminished national dividend, wages, instead of rising, would fall. In Mr. Rae's words,
The only way to increase the demand for labor all round is to increase the production of labor all round, and a general or serious diminution of production always causes a general or serious decrease in the demand for labor.… 
But, if all trades together were to restrict their output in the hope of distributing the work better, they would find they had merely less work to distribute; and, instead of making work for the unemployed, they would have unmade the work of a considerable portion of those now employed.… 
The effect of shorter hours on the general wages of labor depends entirely on their effect on production. If they lessen production generally, they will lower wages generally.
Mr. Rae's position seems perfectly clear, but it depends on a half-truth. Ceteris paribus, wages vary with the productiveness of industry, but only ceteris paribus. The theory that wages depend entirely on the efficiency of labor, or on the product of industry, is a new form of the old doctrine of the wages-fund. The characteristic feature of the classical doctrine was the assumption that the wages-fund was an inelastic quantum of the total circulating capital. The error of the theory that wages are measured by amount of product is in the implication that the proportion of wages to the total product of industry is at any given time rigidly fixed. According to the theory that wages are limited by capital, wages might rise if capital increased. According to the doctrine that wages depend on product, wages may rise if the product increases. Both theories ignore the fact that a change in the volume of the national dividend may be accompanied by a readjustment of the relative proportions of the shares in distribution which will neutralize, or more than neutralize, the effect of the change in the national dividend so far as any particular one of those shares is concerned. If the national dividend is diminished, the wages-fund will be diminished, profits will fall, interest and rent will be diminished, provided only that the relative magnitudes of wages, profits, interest, and rent remain unaltered. It does not follow that if shorter hours lessen, or tend to lessen, the national dividend, they will necessarily lessen the wages-fund. For the wages-fund is the product of two factors: it is the national dividend multiplied by a ratio.

Now, shorter hours of work would give to large numbers of laborers, at present unorganized or imperfectly organized, an opportunity which they are far from possessing. These workers are now under the tyranny of competition. They keep down their own wages by bidding against each other, or rather the casually employed keep down their own wages by bidding against each other, and the wages of the regularly employed by bidding against them, and standing ready to take their places at wages-current. To whatever degree, by a redistribution of work, this cutthroat competition could be mitigated, it would become possible to control the supply of labor, and to exact a monopoly price for it. In order to reduce the severity of this competition, or practically destroy it altogether, it would probably be good policy for the employed to divide even the present wages-fund with the unemployed. With the unemployed out of the way, effective united action on the part of laborers would be possible, and considerable advances in wages obtained, especially by the lower grades of unskilled workers.

But it has been said that, while a single trade may increase wages by regulating the supply of labor, all trades together cannot. This amounts to saying that a general rise in wages (relatively to the other shares in distribution) is impossible. It amounts, as I have already pointed out, to a doctrine of a rigid wages-fund. For, unless wages can be raised by checking competition among workingmen, they can hardly (relatively speaking) be raised at all in the present social order. There is no assurance that the constant growth of the national dividend, under a regime of unchecked competition, is accompanied by a corresponding increase in wages.

Immigrant Child Abuse Agency (ICAA)

In my Take Back ICE, I wrote:
I would hope the leaders of ICE would speak up and strongly object to what the Demagogue in Chief has done with their agency but to date they seem to be intimated from doing what is right.
Some good news:
The political backlash against U.S. Immigration and Customs Enforcement has turned so intense that leaders of the agency’s criminal investigative division sent a letter last week to Homeland Security Secretary Kirstjen Nielsen urging an organizational split…Though ICE is primarily known for immigration enforcement, the agency has two distinct divisions: Enforcement and Removal Operations (ERO), a branch that carries out immigration arrests and deportations, and HSI, the transnational investigative branch with a broad focus on counterterrorism, narcotics enforcement, human trafficking and other crimes. The letter signed by 19 special agents in charge urges Nielsen to split HSI from ICE, because anger at ERO immigration practices is harming the entire agency’s reputation and undermining other law enforcement agencies’ willingness to cooperate, the agents told Nielsen.
The letter can be found here. My mayor may be interested in this proposed split:
We should abolish ICE. We should create something better, something different. But in the way it’s developed, it has become a punitive, negative tool for division and it’s no longer acceptable.
Now if we transform ICE into HIS – what is to become of ERO? I’m sure Trump and Session will still want some agents to do their sick bidding. If so, I think we need a new name for this group. Truth in advertising could call this group ICAA. One side point – we are hearing a lot about how this abuse occurred even before Trump become President. Let’s be clear – abuse of immigrant rights is wrong. I’d hope former President Obama addresses this.