It seems to me that everyone who has commented on Hillary Clinton’s remark to Wall Streeters about the need for private versus public positions has missed the point. She was being paid over $200,000 a speech; what value did she provide in return? Yes, some of the money can be regarded as an investment in “goodwill”, although the evidence suggests that Clinton-era policies that favored finance preceded these investments. Isn’t it obvious, however, that what they were paying for was precisely the private Hillary positions that the public doesn’t have access to? I can guarantee it wasn’t for her prowess at entertainment.
In effect, by consciously differentiating her public and private political intentions, Clinton has created a valuable commodity that can be sold at a price the market will bear—and not just once, but over and over, as each group of buyers receives a slightly different or updated version. And this is why Bernie Sanders, to mention just one political alternative, can’t cash in on the same circuit. It isn’t because he’s hostile to finance, but because, by not differentiating and withholding his private views, he has nothing to sell.
Sunday, October 9, 2016
Paul Ryan Does Not Have a Better Way
Now that Donald Trump has been thrown under his own bus, Paul Ryan has been seen holding up a little book called A Better Way. The National Review naturally applauds:
The plan focuses on eradicating poverty, bolstering national security, revitalizing America’s economy, creating a patient-centered health-care system, implementing pro-growth tax reform, and returning government to its constitutional parameters. Its stated goals should delight any conservative: Reward work; tailor benefits to people’s needs; improve skills and schools; plan and save for the future; and demand results.Those socialists at US News dissent:
We just knew that House Speaker Paul Ryan's latest tax reform proposal was going to be bad for working families. Year after year, after all, Ryan has been bringing forward – in the name of fiscal conservatism – some variation of a plan to take from the poor and give to the rich. Now we have Ryan's 2016 edition. Low and behold, this year's plan, adorned with the snazzy title "A Better Way," is ... simply terrible.They note that it is all warmed over rightwing excuses for slashing taxes on the rich and exploding the Federal deficit. But wait – there’s more:
Included in the agenda is awish list of deregulation legislation, including proposals to cut the teeth out of the Dodd-Frank Wall Street reform bill and the Clean Power Plan. With the BP oil spill of 2010 and Wall Street meltdown of 2008 barely in the rearview mirror – together the worst environmental and economic fiascos in recent history – one wonders, what's the worst that could happen? The new Ryan plan does, predictably, lack a few minor details – like what it would cost taxpayers.US News links to other critiques including an analysis from Citizens for Tax Justice, which caught that Navarro-Ross nonsense on value-added taxes:
The Ryan plan appears to propose a 20 percent tariff on goods and services imported into the United States and a tax exemption (or 20 percent tax credit) for goods and services exported to foreign countries. Although Ryan briefly argues that this scheme would not violate U.S. treaties with other countries, we do not agree. In making the case for his tariff and rebate proposal, Ryan suggests that his business tax is similar to a value-added tax (a.k.a. a national sales tax). But while there are some similarities, it is decidedly not a VAT. It might better be characterized as a value-added tax with a deduction for value added. That’s because, unlike typical VATs, Ryan’s plan would allow a tax deduction for wages (the source of most value added). In 2005, a tax panel set up by then-President George W. Bush made a similar proposal but concluded that it was unlikely to pass muster and excluded it from its analysis of its own plan. The panel’s report states: “given the uncertainty over whether border adjustments would be allowable under current trade rules, and the possibility of challenge from our trading partners, the Panel chose not to include any revenue that would be raised through border adjustments.” Most tax experts would agree that the plan would not pass muster.I don’t know about you but I’ve grown tired of listening about Donald Trump’s sick attitudes with respect to women. Paul Ryan wants us to focus on his little book and we should as it is just another excuse to shift the tax burden onto the little people.
Wednesday, October 5, 2016
The Poverty of Fallasophy
In an interview about his new book, The Wealth of Humans, Ryan Avent recommends coordinating reductions in working hours, "maybe from 40 hours working per week to 30 hours working per week..." But, he stammers somewhat apologetically, "that, that sounds a lot like we're sort of embracing the lump of labour fallacy." There is, of course, no such thing.
He tells his interviewer that he's "very conscious throughout the book that, you know, a lot of this seems kind of sacrilegious, in a way, to people who've taken economics." There is something profoundly wrong with economic teaching when it "seems kind of sacrilegious" to transgress a bogus fallacy claim that has no standing in economic theory and absolutely no supporting evidence. Excerpt from The Wealth of Humans: Work, Power and Status in the Twenty-First Century by Ryan Avent, St. Martins Press:
Oh, but never mind. "Economists,,, are generally of the opinion..." When Larry Summers was at M.I.T. in the 1960s,
He tells his interviewer that he's "very conscious throughout the book that, you know, a lot of this seems kind of sacrilegious, in a way, to people who've taken economics." There is something profoundly wrong with economic teaching when it "seems kind of sacrilegious" to transgress a bogus fallacy claim that has no standing in economic theory and absolutely no supporting evidence. Excerpt from The Wealth of Humans: Work, Power and Status in the Twenty-First Century by Ryan Avent, St. Martins Press:
To say that humanity has too many workers is to defy a basic tenet of economics. Labour is not supposed to work like that. When someone suggests that there are too many people around to do the work society needs done, he is said to be under the influence of the ‘lump of labour’ fallacy: the view that there is only so much work to go around — the lump. This view leads to policies such as those designed to lower the retirement age in order to create more work for the young. If we believe this basic theory, then we should certainly worry about the rise of machines.
Economists, however, are generally of the opinion that the economy works quite differently. They sometimes point to ‘Say’s Law’, the work of eighteenth-century French economist Jean-Baptiste Say, which is often summarized in the phrase ‘supply creates its own demand’. Thus, when older workers stay on the job longer, they earn more money, and when they spend that money they create demand for other goods and services, leading to jobs supporting those goods and services. As far as labour-saving technological change goes, economists believe that when a person loses a job to a machine, it results in savings for someone — to the owner of a firm, or to consumers in the form of lower prices. This, in turn, leaves more money to be spent elsewhere, and that spending ought to create jobs for the displaced workers.Say was indeed born in the eighteenth century and his so-called law originated in that century but Say didn't write about it until the early nineteenth century. According to John Kenneth Galbraith, the supposed law was supposed to have sank without trace after John Maynard Keynes -- and the Great Depression -- eviscerated it in the 1930s.
Oh, but never mind. "Economists,,, are generally of the opinion..." When Larry Summers was at M.I.T. in the 1960s,
...what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught.And just a few months ago, John Cochrane and Jennifer Rubin recycled the same pack of lies as if it was gospel truth. At long last, economists, have you people no decency? As Lionel Robbins -- even Lionel Robbins! -- wrote in 1929, on the eve of the Great Depression:
Deliberately to recommend an increase of hours when the conditions of demand are not elastic is either very ignorant or very Machiavellian.The same can be said of those who would counsel against a reduction of hours on the grounds that it would constitute a "lump-of-labour fallacy" to do so. They are either very ignorant or very Machiavellian.
I Am Seriously Worried
that Donald Trump will be elected President of the United States on November 8. I mean, the guy just had about as bad a week as one can imagine, but some polls have him only a few percents behind and ahead in such states as Ohio and Iowa. I do not think that the VP debate will make much difference in the end, but Kaine pathetically lost to Pence.
The polls say so. I know there are "pundits" and various commentators noting that far more of what Kaine said was accurate than what Pence said, but this does not matter. Indeed, if this debate affects the final outcome it will do so by making lots of completely accurate statements Kaine made not be taken seriously at all by swing voters in the rest of the campaign. Why? Kaine acted like Trump and interrupted Pence 72 times (compared to only 55 by Trump in first prez debate), most crucially right up front in early boilerplate speeches by Pence. Given that more than half the voters do not know who either of these guys are, Kaine, who is a nice guy, managed to paint himself as an interrupting Trump-like jerk, thereby discrediting pretty much everything else he said in the debate except of course for committed Pollyanna Hillary supporters. Pence even pulled off a trick Hillary did not do of moderately shaking his head with a smirk while Kaine reeled off completely accurate statements. Probably the ultimate was when Pence got away with saying that Kaine was part of an "insult-led campaign" after Kaine repeated a string of insulting Trump quotes. But then, the VP debate probably will not mean too much, with the next prez debate pushing it off the media once that happens. Nevertheless, too bad Kaine blew it with an utterly assinine strategy.
So, what has me really worried if it is not the VP debate? It is that there are now two votes that have happened this year where I got a gut feeling that the widely predicted outcome would not come about. One of those was the June 23 Brexit vote. Not going to link to it, but just before it I posted that it was dead even, although my gut said it was going to win. As of the morning of the vote, the forecasters had its defeat at 90%, well over what anybody is forecasting probability of a win by Clinton. But Brexit won, 52-48%. I am not interested in discussing the pros and cons of that issue and outcome, other than to note that it looks like a similar complacency was involved. Young people who wanted to Remain so they could get jobs in Europe in the future only turned out 30% while retired people in rural England who do not have to worry about getting jobs but worry about England losing its identity to all those immigrants, turned out at 65% or so. Well, duh. If maybe those silly millennials now all upset about the outcome had not been taking so seriously all those forecasts of a 90% probability of Brexit going down, maybe they would have turned out and voted.
The other is the much more recent vote in Colombia to reject a long-negotiated peace agreement between the Colombian government and FARC after a 52-year old civil war, that vote proposition losing by 0,45%, despite massive forecasts of it passing. It is true that there was a weather event that influenced things, massive tropical storm on the Caribbean coast including Baranquilla, where pro-agreement sentiment was strong. Nevertheless this is a shocking outcome, and again, I had a bad feeling ahead of time that it might lose, although I had less reasons to think that than my feelings about either the Brexit vote or the upcoming presidential election, where the intensity of the pro-Brexit and pro-Trump voters can obviously and easily overwhelm a complacent electorate that thinks they can just sit around and twiddle their thumbs and Trump will not get elected. These people are very foolish (and, sorry, I have no use whatsoever for anybody who wants to try to convince me that Trump is really a progressive, blah blah blah, forget it. Pay attention to what Bernie has said about this election repeatedly and unreservedly).
Barkley Rosser
The polls say so. I know there are "pundits" and various commentators noting that far more of what Kaine said was accurate than what Pence said, but this does not matter. Indeed, if this debate affects the final outcome it will do so by making lots of completely accurate statements Kaine made not be taken seriously at all by swing voters in the rest of the campaign. Why? Kaine acted like Trump and interrupted Pence 72 times (compared to only 55 by Trump in first prez debate), most crucially right up front in early boilerplate speeches by Pence. Given that more than half the voters do not know who either of these guys are, Kaine, who is a nice guy, managed to paint himself as an interrupting Trump-like jerk, thereby discrediting pretty much everything else he said in the debate except of course for committed Pollyanna Hillary supporters. Pence even pulled off a trick Hillary did not do of moderately shaking his head with a smirk while Kaine reeled off completely accurate statements. Probably the ultimate was when Pence got away with saying that Kaine was part of an "insult-led campaign" after Kaine repeated a string of insulting Trump quotes. But then, the VP debate probably will not mean too much, with the next prez debate pushing it off the media once that happens. Nevertheless, too bad Kaine blew it with an utterly assinine strategy.
So, what has me really worried if it is not the VP debate? It is that there are now two votes that have happened this year where I got a gut feeling that the widely predicted outcome would not come about. One of those was the June 23 Brexit vote. Not going to link to it, but just before it I posted that it was dead even, although my gut said it was going to win. As of the morning of the vote, the forecasters had its defeat at 90%, well over what anybody is forecasting probability of a win by Clinton. But Brexit won, 52-48%. I am not interested in discussing the pros and cons of that issue and outcome, other than to note that it looks like a similar complacency was involved. Young people who wanted to Remain so they could get jobs in Europe in the future only turned out 30% while retired people in rural England who do not have to worry about getting jobs but worry about England losing its identity to all those immigrants, turned out at 65% or so. Well, duh. If maybe those silly millennials now all upset about the outcome had not been taking so seriously all those forecasts of a 90% probability of Brexit going down, maybe they would have turned out and voted.
The other is the much more recent vote in Colombia to reject a long-negotiated peace agreement between the Colombian government and FARC after a 52-year old civil war, that vote proposition losing by 0,45%, despite massive forecasts of it passing. It is true that there was a weather event that influenced things, massive tropical storm on the Caribbean coast including Baranquilla, where pro-agreement sentiment was strong. Nevertheless this is a shocking outcome, and again, I had a bad feeling ahead of time that it might lose, although I had less reasons to think that than my feelings about either the Brexit vote or the upcoming presidential election, where the intensity of the pro-Brexit and pro-Trump voters can obviously and easily overwhelm a complacent electorate that thinks they can just sit around and twiddle their thumbs and Trump will not get elected. These people are very foolish (and, sorry, I have no use whatsoever for anybody who wants to try to convince me that Trump is really a progressive, blah blah blah, forget it. Pay attention to what Bernie has said about this election repeatedly and unreservedly).
Barkley Rosser
Rubin or Trump as the Strong Dollar Type
Gavyn Davies comes close to making a good point about the Trump policy proposals:
lower taxation and higher defense spending, combined with the abandonment of Bernanke/Yellen-style monetary policy, are fairly mainstream in Republican economic thinking…It is also not that far removed from the policy mix that has been pursued by some previous Republican Presidents, notably Ronald Reagan, George W. Bush and even Richard Nixon. The change in the policy mix under Reaganomics is particularly reminiscent of what might happen under a “respectable” version of Trump’s plan…Another important consequence, which would damage US equities, could be a further rise in the dollar. Under Reaganomics, the dollar started to rise almost immediately after the 1980 elections, and surged for four years until the Plaza Accord in 1985. Despite general dislike among international investors for a President Trump, the probable change in the US policy mix, and the rise in geopolitical risk globally, could cause a large capital inflow into the US.More on this in a bit but first permit me to express a frustration with an often seen claim that center left types want a strong dollar. I guess this goes back to the suggestion that Robert Rubin pushed a strong dollar in the 1990s. This strikes me as very wrong for reasons that I will note shortly but I will give credit to Tim Duy for this discussion:
The strong Dollar policy takes shape in 1995. At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests. This should have been more obvious at the time given that China was last named a currency manipulator in 1994, but the immensity of that decision was lost as the tech boom engulfed America.In other words, the U.S. would adhere to freely floating exchange rates even if other nations did not. If one thinks about the Clinton policy mix – fiscal restraint with easy monetary policy – it was the opposite of the Reagan policy mix. To the degree we lowered our interest rates relative to the rest of the world, one would expect ceteris paribus that the dollar would devalue increasing net exports. Of course the dollar appreciated and net exports fell but that was the result of the investment boom which led to a strong increase in real GDP, employment, and even real wages. When progressive critics complain that U.S. macroeconomic policy cost growth and jobs by letting net exports fall, they confuse cause and effect. We might also note this story from early 1997:
Treasury Secretary Robert E. Rubin, taking a little air out of the rapidly rising dollar, suggested today that the Administration had ended its two-year-long effort to drive up the dollar against the world's other major currencies…But it is unclear whether Mr. Rubin and the finance ministers of the other countries will be able to stem the rapid run-up in the dollar's value, a trend that reflects such fundamental forces as a healthy American economy, continued stagnation in Japan and increased nervousness about a unified European currency.Let’s also remember the history of our exchange rate. The dollar appreciation of the late 1990’s pales in comparison to the dollar appreciation of the first half of the 1980’s. This is what Davies alludes to. Let’s remember that the Reagan policy mix massively appreciated the U.S. dollar which led to a significant fall in net exports. This decline and the crowding-out of investment overwhelmed any aggregate demand benefits from fiscal stimulus leading to a massive recession. Trump’s advisers might argue that he wants to impose tariffs to raise net exports but this Navarro nonsense ignores the prospect that trade protection will only further appreciate the dollar especially if interest rates drift up. In fact, recent financial events where our interest rate have drifted higher than interest rates for many of our major trading partners have drifted up has led to the most recent dollar appreciation and decline in net exports. Center left economists do not advocate a strong dollar or current account deficits but we do understand the interplay between fiscal and monetary policy and how they impact the exchange rate and net exports.
Monday, October 3, 2016
Rudy Giuliani Should Not Do Securities Law
Meet the Press hosted the adulterous racist lying former mayor of my city. Rudy Giuliani’s task was to defend Trump’s 1995 tax return:
Yeah. I'm the right person to level this charge, because I've never made such a charge, and I've prosecuted people who've committed rape.He had already tossed out the name of Juanita Broaddrick but no prosecutor should ever bring charges based on false smears posted on right wing websites especially when the alleged victim declared no rape ever occurred. But I digressed into territory unrelated to the tax issue. Rudy did tell Chuck Todd:
And I think your bringing up my personal life really is kind of irrelevant to what Hillary Clinton did.Of course Rudy does not want to talk about how he has cheated on his former wives but there is zero evidence that Mrs. Clinton ever cheated on Bill. So let’s turn to the issue of the day by noting this from Chuck Todd:
Today's New York Times has a front-page exposé that Trump declared a loss of $916 million on his 1995 tax return, which means it could have allowed him to avoid paying federal income taxes on nearly a billion dollars' worth of income over an 18-year period, all legal, by the way. The losses came from mismanagement of three casinos, his airline, and the Plaza Hotel in New York. The Times received the 1995 documents in the mail anonymously with a return address of Trump Tower. And his former accountant, who's now retired, verified them.Was it “all legal”? John Hempton challenges this claim:
Donald Trump did not repay all the debt associated with those investments. Either the loss is a real loss and the Donald was really was out of pocket by $916 million (in which case he has legitimate NOLs) or the loss was passed on to someone else by The Donald defaulting on debt - in which case Donald Trump should be assessed for income from debt forgiveness. After all if the debt is forgiven it is not Donald Trump's loss. The loss is borne by the person who lent Donald money and did not get it back. That - clearly stated by example - is why most income tax systems assess debt forgiveness as income.He goes onto explain a scheme called “debt parking”. If this is not illegal, it certainly should be. But let’s return to Rudy:
And then somewhere around paragraph 18 they point out there was no wrongdoing. Now, people have a hard time understanding how taxes work. If Donald Trump hadn't taken those losses, he could have been sued by his investors. He could have been sued by his business partners..I mean the reality is he's a genius.Debt parking strikes me as wrongdoing but genius? This scheme is child’s play compared to what U.S. multinationals like Apple and Google pull off. Not only do they have to play games with transfer pricing but they also have to figure out how to avoid that repatriation tax. Now that’s genius but are we going to say Base Erosion and Profit Shifting is all “perfectly legal”? Even if one did, this notion that Trump’s shareholders could sue if he did not dodge taxes is wrong on so many levels. First of all – this was a personal tax return not the return of a corporation. Secondly, a lot of corporations do not engage in blatant income shifting and they will not be sued if they fulfill their obligations under FIN 48. What gets CEOs and CFOs sued is using dodgy tax gimmicks and not letting shareholders know that their low effective tax rate is at risk.
Sunday, October 2, 2016
Antisemitism and Anti-Zionism (Again)
A is antisemitism. B is anti-Zionism. You can be an A without being a B. (This describes a portion of the US evangelical movement.) You can be a B without being an A. (This describes me.) You can be both A and B. (Hamas.) You can be neither A nor B. (Anti-Defamation League.)
It’s really not that difficult, but public debate, not only in the US but also Europe and elsewhere, is constantly tripped up by it. I’m reacting to an op-ed in today’s New York Times in which a Jewish student at Brown just doesn’t get it. He denounces the left on his campus as antisemitic for refusing to include Jewish groups that support the Israeli government in its coalitions. He equates Zionism with “Jewish rights”, which means, for him, a position like mine is unthinkable. Unfortunately, a lot of anti-Zionists share his assumptions.
There are two complications that might lead a reasonable person to be unable to disentangle the A and B of this situation. One is that it arises in the context of coalition politics, which is always tricky. Progressive groups at Brown don’t want to share their coalitions with organizations that support Zionism. I can understand that. I can also understand a coalition based on the principle that its members disagree about fundamental things but have agreed to cooperate on a particular issue. It’s always a judgment call. It’s not essentially different from a coalition on, say, ending the death penalty deciding whether or not to include a religious group that is also actively against abortion rights. There are no universal principles to adhere to in these cases, and the costs of a decision don’t disappear just because the benefits seem to be more compelling.
The second complication is created by the government of Israel, which from the beginning has claimed to represent all Jews everywhere. That doesn’t justify antisemitism, but it encourages it. And then it leads to a circular logic in which Israeli leaders point to acts of antisemitism in other countries to justify their policies against Palestinians, which they defend by saying that if you oppose them you are antisemitic, and so on.
The acid test at Brown or anywhere else is whether organizations exclude individual Jews for simply being Jewish or Jewish organizations that are not pro-Zionist. If so, we are talking about plain vanilla antisemitism. Otherwise, it’s a political dispute about colonialism, nationalism and social justice: who has the rights to what.
It’s really not that difficult, but public debate, not only in the US but also Europe and elsewhere, is constantly tripped up by it. I’m reacting to an op-ed in today’s New York Times in which a Jewish student at Brown just doesn’t get it. He denounces the left on his campus as antisemitic for refusing to include Jewish groups that support the Israeli government in its coalitions. He equates Zionism with “Jewish rights”, which means, for him, a position like mine is unthinkable. Unfortunately, a lot of anti-Zionists share his assumptions.
There are two complications that might lead a reasonable person to be unable to disentangle the A and B of this situation. One is that it arises in the context of coalition politics, which is always tricky. Progressive groups at Brown don’t want to share their coalitions with organizations that support Zionism. I can understand that. I can also understand a coalition based on the principle that its members disagree about fundamental things but have agreed to cooperate on a particular issue. It’s always a judgment call. It’s not essentially different from a coalition on, say, ending the death penalty deciding whether or not to include a religious group that is also actively against abortion rights. There are no universal principles to adhere to in these cases, and the costs of a decision don’t disappear just because the benefits seem to be more compelling.
The second complication is created by the government of Israel, which from the beginning has claimed to represent all Jews everywhere. That doesn’t justify antisemitism, but it encourages it. And then it leads to a circular logic in which Israeli leaders point to acts of antisemitism in other countries to justify their policies against Palestinians, which they defend by saying that if you oppose them you are antisemitic, and so on.
The acid test at Brown or anywhere else is whether organizations exclude individual Jews for simply being Jewish or Jewish organizations that are not pro-Zionist. If so, we are talking about plain vanilla antisemitism. Otherwise, it’s a political dispute about colonialism, nationalism and social justice: who has the rights to what.
Saturday, October 1, 2016
Really really gross domestic product is produced in a 410 ppm CO2 world
How accurate can calculations of government revenue and expenditure be when, possibly, a full fifth of the value of human production may now be needed to counter (only the human) costs of our current global climate catastrophe? We're standing in the 'tomorrow' that we robbed yesterday. Are you ready for this?
“The test of a progressive policy is not private but public, not just rising income and consumption for individuals, but widening the opportunities and what Amartya Sen calls the 'capabilities' of all through collective action. But that means, it must mean, public non-profit initiative, even if only in redistributing private accumulation. Public decisions aimed at collective social improvement from which all human lives should gain. That is the basis of progressive policy—not maximising economic growth and personal incomes. Nowhere will this be more important than in tackling the greatest problem facing us this century, the environmental crisis. Whatever ideological logo we choose for it, it will mean a major shift away from the free market and towards public action, a bigger shift than the British government has yet envisaged. And, given the acuteness of the economic crisis, probably a fairly rapid shift. Time is not on our side.”
― Eric Hobsbawm
“The test of a progressive policy is not private but public, not just rising income and consumption for individuals, but widening the opportunities and what Amartya Sen calls the 'capabilities' of all through collective action. But that means, it must mean, public non-profit initiative, even if only in redistributing private accumulation. Public decisions aimed at collective social improvement from which all human lives should gain. That is the basis of progressive policy—not maximising economic growth and personal incomes. Nowhere will this be more important than in tackling the greatest problem facing us this century, the environmental crisis. Whatever ideological logo we choose for it, it will mean a major shift away from the free market and towards public action, a bigger shift than the British government has yet envisaged. And, given the acuteness of the economic crisis, probably a fairly rapid shift. Time is not on our side.”
― Eric Hobsbawm
The Unfortunate Effects Of The First Congressional Override Of An Obama Veto
The US Congress has just overwhelmingly (only one vote supporting him in the Senate) for the first time overridden a veto by President Obama. This was of the JASTA bill that ends sovereign immunity from lawsuits of governments of nations that are deemed by a court to have been supporting terrorism. This bill, now law I guess, is specifically directed at the Kingdom of Saudi Arabia (KSA), and is wildly popular, with families of those who died on 9/11 itching to sue the KSA government for its alleged involvement in the 9/11 terror attacks carried out by al Qaeda. This is a massively stupid and dangerous outcome that will have many unfortunate consequences.
Let me begin by linking to the highly informed Juan Cole, who is also appalled by this vote, and labels this awful bill JASTA. Here is a list of the lawsuits he says can be made based on this, some of which I have sympathy for, but I recognize that opening this door leads to seriously insane rabbit hole of too much money for lawyers for sure: Irish-Americans suing UK for people killed during the IRA conflicts with UK in the past; Palestinians suing Israel for squatters seizing their land in the West Bank; US Jews suing the PLO for terrorist attacks against American Jews in Israel; Ukrainian-Americans suing Russia for American-Ukrainians killed in Ukraine in recent years; old pro-Qaddafi Libyans suing UK and France for supporting terrorist groups overthrowing the Libyan government leading to Libyan-Americans getting killed there; Kenyan victims of British anti-Mau-Mau efforts suing UK for their dead; and abroad Saudi citizens suing the US over supporting Israel in its illegal settlements, Pakistanis suing the US over drone attacks in Waziristan, and on and on and on and on...
I will repeat Cole's views on the KSA and 9/11 while adding some of my own personal observations from my personal knowledge of these matters. So, for starters we have that part of why this vote was so overwhelming is that KSA is not so popular these days in the US. The Left does not like it because it is a reactionary Wah'habist regime that may suppress womens' rights more than any other legitimate government in the world (I think they are probably better than what is going on in the Islamic State, but that horrendous entity may be about to fall, and it has drawn on ideologies emanating from KSA). The Right does not like it because they have turned Islamophobic in this Age of Trump, and, well, KSA is home to the two most sacred sites of Islam, Mecca and Medina. And, of course, the leader of al Qaeda in 9/11, Osama bin Laden, was from KSA, and the vast majority of those who actually carried out the 9/11 attack were Saudi citizens, even if the immediate leader, Mohammed Atta, was Egyptian. On top of which it does appear that low level government officals and even members of the KSA royal family were at least aware of the plot and may have provided some support, although it is clear their superiors were unaware of doing so.
Let me add something about the Saudis involved in 9/11 that has been public information but that most Americans are unaware of or its implications, although it does not prove that the Saudi government was not behind the attack or actively supporting it. Almost all of the Saudis involved came from one province, Asir, in southwestern KSA, just north of Yemen. I have been there. The mountain Asiris (the highest mountains in KSA are there) are culturally and ethnically much more like the mountain Yemenis across the border than they are like other Saudis, although they are Sunnis, unlike the northern Yemenis who are mostly Zaydi Shia, the people behind the Houthis whom the Saudis are fighting against in Yemen. They are much looser about their religion and one sees their women in the fields without veils and in colorful dresses waving at you when you drive by. Like the Yemenis, the men all wear bullet belts and knives, unlike your regular Saudis. And although the region is poorer than most of KSA, despite being one of the few parts of the country where rain-fed agriculture can happen at 10,000 feet in the mountains, they are very proud, viewing themselves as the real pure Arabs in contrast to the lowland Saudis who over the centuries have heavily intermarried with their African slaves. Anyway, they are a somewhat isolated bunch having not much to do with other Saudis. Maybe they were recruited by some rogue Saudi higher up, but more likely it was that Egyptian Salafist, Mohammed Atta and his Egyptian superiors in al Qaeda.
So, this gets us to an important point: is the sovereign government of KSA guilty of supporting the 9/11 attack, which will be what gets tried for these family members who hope to get money out of the Saudis? Before answering that, let me note that it is not like these families have not received compensatory payments for their loss, with these amounting to an average of $1.8 million per family from the US government, far more than any other families of people dead from terrorism have ever received to my knowledge. So, it is not like these people out to sue the Saudis are exactly hurting from a lack of payment for their suffering.
As Cole notes, in fact the Saudi government was opposed to bin Laden and had been trying to capture him for a long time, although their efforts against his supporters in KSA would intensify later after al Qaeda carried out a series of major terror attacks in that country. Originally he was viewed highly favorably by both the US and KSA, a younger son of the much revered Yemeni construction magnate, Muhammed bin Laden, who rebuilt the Grand Mosque of Mecca after damage to it in 1979 when the Ikhwan seized it and damaged it in an uprising against the Saudi monarchy, a replay of a similar uprising a half century earlier. While most of the old man's sons came from Saudi mothers, Osama had a Syrian mother, and long before 9/11/01 he had become estranged from his family. However, he was selected in 1979 or thereabouts to lead the Mujahedeen in Pakistan against the Soviets who were controlling Afghanistan, this selection being made by the KSA intel chief, Emir Turki bin Faisal bin Abdulaziz al Sa'ud, who would lose his position after 9/11. The US CIA supported this appointment, which was partly based on Osama's ability then to draw on his old man's money to build tunnels and caves in the border region between Pakistan and Afghanistan, tunnels and caves that would allow him to escape when the US invaded Afghanistan after 9/11 to overthrow the Taliban regime, with the US getting distracted from pursuing him soon after by invading Iraq.
While the Saudis and the US initially supported Osama bin Laden, this would change after the US put troops into KSA during the 1990 war against Saddam Hussein after he invaded Kuwait, the First Gulf War. Osama opposed the presence of US troops in KSA, the home of the holy cities of Mecca and Medina,and this was his early rallying cry for building up al Qaeda, to rid KSA of the blasphemous US troops that included women driving jeeps and so on. He came to call for the overtrhow of the KSA monarchy, and they wihtdrew his passport in return. He fled to Sudan from where the Saudis attempted to extradite him, with the US also trying to bomb him. As it looked like the KSA government might succeed in their extradition efforts, bin Laden ran to Aftghanistan, and the rest is history. But the bottom line is that for a long time the Saudi government was his strong enemy. They would not remotely support any effort of his to attack the US, and those elements in that government would be strictly rogue elements, although I suspect that these already well-off victim families will be able to hire skillful lawyers who will be able to convince ignorant and biased judges in New York otherwise.
So there we have it. A bunch of thoroughly paid off families will sue the Saudi government by claiming that they actively supported the 9/11 attack, which they most definitely did not, however odious they are in many ways (and I am quite disgusted with their current shenanigans in Yemen). But far beyond this ridiculous travesty, the door is open for a mountain of lawsuits that should not be brought and that further down the road may damage American citizens as well as many innocent people all around the world.
Barkley Rosser
Let me begin by linking to the highly informed Juan Cole, who is also appalled by this vote, and labels this awful bill JASTA. Here is a list of the lawsuits he says can be made based on this, some of which I have sympathy for, but I recognize that opening this door leads to seriously insane rabbit hole of too much money for lawyers for sure: Irish-Americans suing UK for people killed during the IRA conflicts with UK in the past; Palestinians suing Israel for squatters seizing their land in the West Bank; US Jews suing the PLO for terrorist attacks against American Jews in Israel; Ukrainian-Americans suing Russia for American-Ukrainians killed in Ukraine in recent years; old pro-Qaddafi Libyans suing UK and France for supporting terrorist groups overthrowing the Libyan government leading to Libyan-Americans getting killed there; Kenyan victims of British anti-Mau-Mau efforts suing UK for their dead; and abroad Saudi citizens suing the US over supporting Israel in its illegal settlements, Pakistanis suing the US over drone attacks in Waziristan, and on and on and on and on...
I will repeat Cole's views on the KSA and 9/11 while adding some of my own personal observations from my personal knowledge of these matters. So, for starters we have that part of why this vote was so overwhelming is that KSA is not so popular these days in the US. The Left does not like it because it is a reactionary Wah'habist regime that may suppress womens' rights more than any other legitimate government in the world (I think they are probably better than what is going on in the Islamic State, but that horrendous entity may be about to fall, and it has drawn on ideologies emanating from KSA). The Right does not like it because they have turned Islamophobic in this Age of Trump, and, well, KSA is home to the two most sacred sites of Islam, Mecca and Medina. And, of course, the leader of al Qaeda in 9/11, Osama bin Laden, was from KSA, and the vast majority of those who actually carried out the 9/11 attack were Saudi citizens, even if the immediate leader, Mohammed Atta, was Egyptian. On top of which it does appear that low level government officals and even members of the KSA royal family were at least aware of the plot and may have provided some support, although it is clear their superiors were unaware of doing so.
Let me add something about the Saudis involved in 9/11 that has been public information but that most Americans are unaware of or its implications, although it does not prove that the Saudi government was not behind the attack or actively supporting it. Almost all of the Saudis involved came from one province, Asir, in southwestern KSA, just north of Yemen. I have been there. The mountain Asiris (the highest mountains in KSA are there) are culturally and ethnically much more like the mountain Yemenis across the border than they are like other Saudis, although they are Sunnis, unlike the northern Yemenis who are mostly Zaydi Shia, the people behind the Houthis whom the Saudis are fighting against in Yemen. They are much looser about their religion and one sees their women in the fields without veils and in colorful dresses waving at you when you drive by. Like the Yemenis, the men all wear bullet belts and knives, unlike your regular Saudis. And although the region is poorer than most of KSA, despite being one of the few parts of the country where rain-fed agriculture can happen at 10,000 feet in the mountains, they are very proud, viewing themselves as the real pure Arabs in contrast to the lowland Saudis who over the centuries have heavily intermarried with their African slaves. Anyway, they are a somewhat isolated bunch having not much to do with other Saudis. Maybe they were recruited by some rogue Saudi higher up, but more likely it was that Egyptian Salafist, Mohammed Atta and his Egyptian superiors in al Qaeda.
So, this gets us to an important point: is the sovereign government of KSA guilty of supporting the 9/11 attack, which will be what gets tried for these family members who hope to get money out of the Saudis? Before answering that, let me note that it is not like these families have not received compensatory payments for their loss, with these amounting to an average of $1.8 million per family from the US government, far more than any other families of people dead from terrorism have ever received to my knowledge. So, it is not like these people out to sue the Saudis are exactly hurting from a lack of payment for their suffering.
As Cole notes, in fact the Saudi government was opposed to bin Laden and had been trying to capture him for a long time, although their efforts against his supporters in KSA would intensify later after al Qaeda carried out a series of major terror attacks in that country. Originally he was viewed highly favorably by both the US and KSA, a younger son of the much revered Yemeni construction magnate, Muhammed bin Laden, who rebuilt the Grand Mosque of Mecca after damage to it in 1979 when the Ikhwan seized it and damaged it in an uprising against the Saudi monarchy, a replay of a similar uprising a half century earlier. While most of the old man's sons came from Saudi mothers, Osama had a Syrian mother, and long before 9/11/01 he had become estranged from his family. However, he was selected in 1979 or thereabouts to lead the Mujahedeen in Pakistan against the Soviets who were controlling Afghanistan, this selection being made by the KSA intel chief, Emir Turki bin Faisal bin Abdulaziz al Sa'ud, who would lose his position after 9/11. The US CIA supported this appointment, which was partly based on Osama's ability then to draw on his old man's money to build tunnels and caves in the border region between Pakistan and Afghanistan, tunnels and caves that would allow him to escape when the US invaded Afghanistan after 9/11 to overthrow the Taliban regime, with the US getting distracted from pursuing him soon after by invading Iraq.
While the Saudis and the US initially supported Osama bin Laden, this would change after the US put troops into KSA during the 1990 war against Saddam Hussein after he invaded Kuwait, the First Gulf War. Osama opposed the presence of US troops in KSA, the home of the holy cities of Mecca and Medina,and this was his early rallying cry for building up al Qaeda, to rid KSA of the blasphemous US troops that included women driving jeeps and so on. He came to call for the overtrhow of the KSA monarchy, and they wihtdrew his passport in return. He fled to Sudan from where the Saudis attempted to extradite him, with the US also trying to bomb him. As it looked like the KSA government might succeed in their extradition efforts, bin Laden ran to Aftghanistan, and the rest is history. But the bottom line is that for a long time the Saudi government was his strong enemy. They would not remotely support any effort of his to attack the US, and those elements in that government would be strictly rogue elements, although I suspect that these already well-off victim families will be able to hire skillful lawyers who will be able to convince ignorant and biased judges in New York otherwise.
So there we have it. A bunch of thoroughly paid off families will sue the Saudi government by claiming that they actively supported the 9/11 attack, which they most definitely did not, however odious they are in many ways (and I am quite disgusted with their current shenanigans in Yemen). But far beyond this ridiculous travesty, the door is open for a mountain of lawsuits that should not be brought and that further down the road may damage American citizens as well as many innocent people all around the world.
Barkley Rosser
Friday, September 30, 2016
Mankiw on Navarro – a Teachable Moment?
I’m not known to praise Greg Mankiw often but this post on the Navarro nonsense was worth the read:
Their analysis of trade deficits, starting on page 18, boils down to the following: We know that GDP=C+I+G+NX. NX is negative (the trade deficit). Therefore, if we somehow renegotiate trade deals and make NX rise to zero, GDP goes up! They calculate this will bring in $1.74 trillion in tax revenue over a decade. But of course you can't model an economy just using the national income accounts identity. Even a freshman at the end of ec 10 knows that trade deficits go hand in hand with capital inflows. So an end to the trade deficit means an end to the capital inflow, which would affect interest rates, which in turn influence consumption and investment. I suppose that their calculations might make sense in the simplest Keynesian Cross model, in which investment is exogenously fixed and consumption only depends on income. But that is surely not the right model for analyzing the impact of trade policy over the course of a decade.Let’s put forth a simple example of the Keynesian Cross model that brings in some reality ala Brad Setser. Consider an exogenous increase in the net export schedule equal to $500 billion in a fixed exchange rate, fixed interest rate Keynesian model where the marginal propensity to import is 0.15 and the domestic marginal propensity to spend is 0.65, which implies a multiplier equal to two. The model suggests a $1 trillion increase in GDP assuming we have sufficient economic slack – which was one of my concerns. The model would also predict that imports rise by $150 billion so the net improvement in the current account is only $350 billion. Of course they are a host of other implicit assumptions underlying this tale. Even if the dollar did not appreciate, our rise in net exports means less net exports for places like Europe. OK – maybe Team Trump does not care about the economic woes in Europe but it is a reasonable proposition that they might respond with trade protection against us. Here is where Brad comes in:
Foreign exchange intervention to limit appreciation isn’t as prevalent it once was. More big central banks are selling than are buying. But it also hasn’t entirely gone away. Korea has plenty of fiscal space. It could move toward a better equilibrium, one with more internal demand, less intervention and less dependence on exports.While Brad was noting that nations like the US having floating exchange rates, South Korea does peg its currency. Maybe the government fears an appreciation of the won would lower overall aggregate demand in Korea, but Brad’s recommendation is that South Korea allow appreciation and replace the lost net export demand with fiscal stimulus. Our second largest bilateral trade deficit was with Germany who likely should also follow Brad’s advice. The general point, however, is that policy makers should consider trade policy and exchange rates in a broader context that also considers monetary and fiscal policy. Alas, Trump seems to have disdain for Yellen because she is keeping interest rates low while he adores Merkel despite her fiscal austerity.
Compared to What? The Counterfactual to Sweatshops in Developing Countries
One of the most tiresome, useless debates in economic policy is over the merits of sweatshop employment in low income countries. On the one side we hear cries of Exploitation! which are certainly correct; these are highly exploitative operations, with rock-bottom wages and autocratic and dangerous working conditions. On the other we hear that this is the bottom rung on the grand ladder to riches, and the very fact that there is demand for these jobs shows they provide desperately needed income. Most economists line up in the second of these camps, since the default assumption is that anything people voluntarily agree to, even a sweatshop job, comes with a gain from trade.
The problem is that the question is wrongly posed. Once we accept that right and wrong depend on the consequences, it all hinges on the counterfactual: what are we comparing the sweatshops to? For economists, the implied alternative is nothing—no jobs at all.
But why should it be all or nothing? What about third options that bring economic opportunity but don’t crush the body and spirit? The histories of countries that are now developed have seen countless struggles for alternatives to love it or leave it, including government regulations, public support for unions and financing for cooperatives. Why shouldn’t the same alternatives be on the agenda in countries just entering into industrialization?
Finally we have a careful study using experimental methods that compares the outcomes of sweatshop employment to a plausible alternative, in this case a program that provides cash grants and training for entrepreneurship. (A summary is here.) The setting is Ethiopia, and the researchers persuaded five companies to use random selection to pick employees out of a larger pool of applicants. So there were three study groups, people who applied for a sweatshop job and got one, people who applied and got the alternative program, and people who applied and got nothing. They were all followed for about a year to see what happened.
The ones who got jobs were not better off than the ones who got nothing, perhaps because of spillover effects in the local area from the new factories. But the clear winners were the ones who got the alternative treatment; their income shot up by a third compared to the others. Meanwhile, the negative health consequences of sweatshop work were real and, from that standpoint, left the job-takers in the worst position of all. Incidentally, the fact that sweatshop jobs increased workers’ health risks without increasing their income violates the common economic assumption of compensating wage differentials, but that doesn’t come as a shock to me.
The moral of the story is not that no manufacturing companies should set up shop in poor countries or that entrepreneurship support is always the way to go, but simply that we need to consider a range of alternatives. And the economists’ assumed alternative to sweatshops, no new economic opportunities at all, is probably going to be the worst of them.
Incidentally, the header is intended to draw your attention to a long overdue remake of the classic antiwar party song “Compared to What?” by Terence Blanchard.
The problem is that the question is wrongly posed. Once we accept that right and wrong depend on the consequences, it all hinges on the counterfactual: what are we comparing the sweatshops to? For economists, the implied alternative is nothing—no jobs at all.
But why should it be all or nothing? What about third options that bring economic opportunity but don’t crush the body and spirit? The histories of countries that are now developed have seen countless struggles for alternatives to love it or leave it, including government regulations, public support for unions and financing for cooperatives. Why shouldn’t the same alternatives be on the agenda in countries just entering into industrialization?
Finally we have a careful study using experimental methods that compares the outcomes of sweatshop employment to a plausible alternative, in this case a program that provides cash grants and training for entrepreneurship. (A summary is here.) The setting is Ethiopia, and the researchers persuaded five companies to use random selection to pick employees out of a larger pool of applicants. So there were three study groups, people who applied for a sweatshop job and got one, people who applied and got the alternative program, and people who applied and got nothing. They were all followed for about a year to see what happened.
The ones who got jobs were not better off than the ones who got nothing, perhaps because of spillover effects in the local area from the new factories. But the clear winners were the ones who got the alternative treatment; their income shot up by a third compared to the others. Meanwhile, the negative health consequences of sweatshop work were real and, from that standpoint, left the job-takers in the worst position of all. Incidentally, the fact that sweatshop jobs increased workers’ health risks without increasing their income violates the common economic assumption of compensating wage differentials, but that doesn’t come as a shock to me.
The moral of the story is not that no manufacturing companies should set up shop in poor countries or that entrepreneurship support is always the way to go, but simply that we need to consider a range of alternatives. And the economists’ assumed alternative to sweatshops, no new economic opportunities at all, is probably going to be the worst of them.
Incidentally, the header is intended to draw your attention to a long overdue remake of the classic antiwar party song “Compared to What?” by Terence Blanchard.
Thursday, September 29, 2016
Navarro’s Nonsense on Net Exports
Paul Krugman and Scott Sumner focus on the trade balance discussion by Peter Navarro. After all – this part of his nonsensical writing was the big enchilada. Scott leads with:
This is a very basic error. International economists almost universally agree that a VAT is neutral with respect to trade. An across the board 10% import tax, combined with a 10% export subsidy, offset each other, leaving no net impact on trade. Instead they convert the tax from a production tax to a consumption tax. But it's a consumption tax that applies equally to all goods, whether made domestically, or imported. This is not even a tiny bit controversial.Paul agrees:
nobody thinks that sales taxes are an unfair trade practice. New York has fairly high sales taxes; Delaware has no such tax. Does anyone think that this gives New York an unfair advantage in interstate competition?AS I noted here, the medical device giants argued against their excise tax on precisely opposite reasoning, which was also absurd. I think the point here is that the WTO rightfully does not see sales taxes as interfering with free trade. Of course Team Trump likely cares little about the WTO. So why not put tariffs on Mexican goods. Of course our bilateral trade deficit with Mexico was only $58 billion in 2015 as compared to the $102 billion trade deficit with the EU (mostly) Germany. Europe does VAT so why did Trump not go after Merkel? Is he afraid of this woman? Of course our largest bilateral trade deficit is with China. Scott goes after the alleged Chinese manipulation of exchange rates with:
China is not intervening to lower the value of the yuan; they are intervening to raise its value. And no, textbook theory does not say that exchange rates should adjust in the long run to balance trade in goods and services, unless long run means 1,000,000,000 years, in present value terms. But in that case the current US deficit presents no puzzle; it hasn't lasted for a billion years. Textbooks say that exchange rates should adjust in the short run to balance trade in goods, services and assets. Trade deficits (actually current account deficits) are caused by imbalances between domestic saving and domestic investment. Those can persist indefinitely. And currency "manipulation" (which is a meaningless concept) is completely beside the point. A country can have a laissez faire policy towards its currency, and still run deficits or surpluses for centuries. Now let's think about the broader Trump economic plan, how would that impact the saving/investment relationship? To make my point more clearly, I'll compare his plan to Reagan's, which has some similarities:There is a lot of good reasoning here that I would like to expand upon. 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 $500 billion per year. That might have a big aggregate demand impact under the assumptions of fixed exchange rates and fixed interest rates, which of course is the most basic Keynesian model that Navarro both mocks and uses. One can wonder whether the output gap now is really that large. Of course, I have suggested that perhaps the output gap may indeed be as much as 5 percent but other economists suggest it is smaller. Scott is noting, however, the Trump wants to increase defense spending and massively cut taxes which push aggregate demand so high that the Federal Reserve would have to raise interest rates. We should also note how various policy positions work in a standard Mundell-Fleming model. Take monetary policy for example:
An expansionary monetary policy will shift the LM curve to LM’, which makes the equilibrium go from point E0 to E1. However, since now exchange rates are flexible, the balance of payments deficit will depreciate the domestic currency. This will increase net exports, shifting the IS curve to IS’. Also, since domestic assets are less expensive, the BP curve will shift to the right (to either BP’+ or BP’-). Therefore, with high capital mobility, final equilibrium will be at point E2. Monetary policy works well under these assumptions. It’s actually the more efficient the higher capital mobility is.Of course this is what the ECB has recently done. The US Federal Reserve alas has allowed our interest rates to drift up relative to interest rates in Europe which is why the US$ has appreciated lowering net exports. And yet Trump has criticized the Federal Reserve for allegedly pursuing too much monetary stimulus. Go figure. Another key implication of this Mundell-Fleming model is trade protection under floating exchange rates will only serve to further appreciate the US$ with no net impact on net exports or the economy.
Tuesday, September 27, 2016
Peter Navarro’s Scoring of Trump’s Economic Proposals
My inbox just received a weird hodgepodge of economic claims ala Peter Navarro:
Donald Trump’s economic plan proposes tax cuts, reduced regulation, lower energy costs, and eliminating America’s chronic trade deficit. Trump’s goal is to significantly increase America’s real GDP growth rate and thereby create millions of additional new jobs and trillions of dollars of additional income and tax revenues. Hillary Clinton’s economic plan will inhibit growth.Does Navarro have an actual model that supports these claims? I’m asking the econoblogosphere to check out this weird set of assertions lest I’m being unfair here. But this entire paper looks like some strange exercise in cutting and pasting that one might find from a high school student who did not know how to write an actual analysis. Let’s read on:
Separately from this report, the non-partisan Tax Foundation has released its analysis of the Trump tax plan. It dynamically scores a $2.6 trillion reduction1 in revenues relative to the current tax policy baseline as of the end of a 10-year budgeting horizon. However, as is the typical practice within the modeling community, the Tax Foundation does not score other elements of the Trump economic plan that are growth-inducing and therefore revenue-generating. This report fills this analytical gap. Specifically, we provide our own fully transparent scoring of the Trump economic plan in the areas of trade, regulatory, and energy policy reforms based on conservative assumptions. Along with tax reform, these areas represent the four main points of the Trump policy compass. Each works integratively and synergistically with the others and in conjunction with proposed spending cuts.Integratively and synergistically! Wow – this must be some incredible model. But as we read on, Navarro contradicts himself:
Donald Trump’s tax, trade, regulatory, and energy policy reforms deal with the root causes of this problem. Trump understands that our economic problems are long run and structural in nature and can only be addressed by fundamental structural reforms. This is a key distinction between Donald Trump and an Obama-Clinton strategy that has relied so heavily – and futilely – on repeated fiscal and monetary stimuli. All we have gotten from tilting at Keynesian windmills… The growth in any nation’s gross domestic product (GDP) – and therefore its ability to create jobs and generate additional income and tax revenues – is driven by four factors: consumption growth, the growth in government spending, investment growth, and net exports. When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.Navarro first mocks Keynesians and then basically tells us he is running a purely Keynesian exercise? I bet Gerald Friedman is screaming that he did that and he got hammered for it. As I read this latest exercise, I did not find a shred of consideration of things like potential GDP and how it might evolve over time in response to the Trump proposals. We do see this claim:
To score the benefits of eliminating trade deficit drag, we don’t need any complex computer model. We simply add up most (if not all) of the tax revenues and capital expenditures that would be gained if the trade deficit were eliminated. We have modeled only the impacts of implicit profits and wages, not any other economic aspect of the increased activity.I’m sorry but we do need to model out the supply side. If Navarro does not know this – he is not qualified to do the analysis.
Monday, September 26, 2016
The Mystic Labyrinth of Free Trade
It seems after all that the free-trade doctrine is just a more subtle form of mercantilism. -- Joan RobinsonIn The Wealth of Nations, Adam Smith built his case for his 'system of natural liberty,' in part, on a polemic against the alleged 'mercantile system.' Since the late 1930s historians have questioned the 'systematic' nature of the discourse labeled mercantilist. A. V. Judge wrote, in 1939, "Mercantilism never had a creed; nor was there a priesthood dedicated to its service." D. C. Coleman amplified those doubts two decades later, observing that, "as a label for economic policy," the term 'mercantilism':
...is not simply misleading but actively confusing, a red-herring of historiography. It serves to give a false unity to disparate events, to conceal the close-up reality of particular times and particular circumstances, to blot out the vital intermixture of ideas and preconceptions of interests and influences, political and economic, and of the personalities of men, which it is the historian's job to examine.A red herring is an "irrelevant diversion" but in this case the image of the red herring may itself be a red herring. The diversion is relevant, after all -- just not in the way it has usually been understood. Taking a cue from Robinson's witticism about the free-trade doctrine, a more apt metaphor for the diversion would be mirror maze, such as found in old amusement parks. Laissez faire caught a fleeting glimpse of itself stealing 'round the edge of a mirror and mistook it for a bête noire. The mercantile system was Smith's system of natural liberty's reflected double.
A funny thing happened on the long and twisting road from Smith's polemic to the neoclassical growth model: the return of the repressed. The mortal sin of the mercantile system, "this popular notion, that wealth consists in money or in gold and silver," snuck back in disguised as the 'aggregate value' of capital in the production function -- ectoplasmic leets! Leets are BETTER than money, though, because although they look and act just like money, they are not money because the neoclassicals call them 'capital'.
That's no red herring; it's a mystifying labyrinth. The gigantic puzzle that all are trying to solve. As great a puzzle as human ingenuity can provide. No amusement in the world like it. A high class, refined and elevating entertainment. Mysterious and laughable.
Sunday, September 25, 2016
The Case for Equilibrium: coinage, usury and bills of exchange
In my previous post, I discussed Joan Robinson's objection to the concept of equilibrium as precisely the habitual mode of thought from which Keynes had struggled to escape:
Raymond de Roover's Gresham on Foreign Exchange sought to contextualize the memorandum de Roover attributed to Thomas Gresham (probably incorrectly) in relation to early modern English monetary standards and foreign exchange mechanisms. That memorandum, written to inform the 1564 Royal Commission on the Exchange, subsequently became a much cited and plagiarized source for 17th century English debates about trade policy, which are now characterized as "mercantilist."
Metallic money minted into coins has two complicating characteristics that lead to further complications. Coins wear out and the mint charges seigniorage on the bullion that it buys from merchants. This means that older coins in circulation will eventually contain less silver or gold than new coins. At some point, people are tempted to hoard new coins or "clip" them. The mint may initially debase new coins as a countermeasure and subsequently as a source of revenue.
The price of silver or gold cannot fall below the seignorage price because the mint will buy it at that price. It also can't rise too high above the nominal value of the coins or people will melt down coins to sell as bullion. Thus there is a small but significant range within which the price of bullion can fluctuate.
These tiny perturbations are magnified in international trade. Meanwhile, piracy and bad weather create disincentives for shipping sacks of specie or stacks of bullion back and forth across the seas. Bills of exchange enable accounts to be settled on paper.
Bills of exchange also have another useful feature. They enable interest to be charged on loans without it being considered usury. That is because the banker's profit on a bill is uncertain due to fluctuations in the exchange rate between currencies. The exchange rate for a bill is determined by the par values of the two currencies, the terms of trade between the two countries and the supply of and demand for credit. The otherwise certain profit of usury is made uncertain by the other components of the exchange.
Needless to say, bankers almost always profited on these financial instruments. This led to suspicions of manipulation in the foreign exchange market and proposals for remedies for such suspected frauds. Although some sharp dealing inevitably took place, bankers didn't have to be manipulating the money market. They knew the money market. They monitored seasonal fluctuations in trade of different commodities. They observed the debasements and re-coinages of governments and estimated their effects.
Because of their unique characteristics, foreign exchange money markets did indeed usually tend toward equilibrium. But here is where I would like to suggest that what would appear to be a tendency toward equilibrium taking place in time was actually a movement in space. Bills of exchange had both a duration and a geographical element. A merchant would draw English money in London to be repaid, say, in Flemish money a month later in Antwerp. The fluctuations, over time, in the values of the respective currencies reflected the movements of commodities between locations as well as policies enacted by authorities in the two places.
Foreign exchange markets tended toward equilibrium only because of their unique characteristics. These characteristics are not shared by commodity markets in general. There is no "mint" that buys capital equipment at a mandated price to stamp it into other capital equipment. If there was, then Joan Robinson's satirical (and neoclassicism's implicit) leets would be a workable approximation of reality. Leets, that is to say, are just like money -- only better!
The concept of equilibrium is incompatible with history. It is a metaphor based on movements in space applied to processes taking place in time.I agree substantially with Robinson but I also would admit there is some compatibility between equilibrium and history. The case I am thinking of involves a direct correspondence between "movements in space" and "processes taking place in time."
Raymond de Roover's Gresham on Foreign Exchange sought to contextualize the memorandum de Roover attributed to Thomas Gresham (probably incorrectly) in relation to early modern English monetary standards and foreign exchange mechanisms. That memorandum, written to inform the 1564 Royal Commission on the Exchange, subsequently became a much cited and plagiarized source for 17th century English debates about trade policy, which are now characterized as "mercantilist."
Metallic money minted into coins has two complicating characteristics that lead to further complications. Coins wear out and the mint charges seigniorage on the bullion that it buys from merchants. This means that older coins in circulation will eventually contain less silver or gold than new coins. At some point, people are tempted to hoard new coins or "clip" them. The mint may initially debase new coins as a countermeasure and subsequently as a source of revenue.
The price of silver or gold cannot fall below the seignorage price because the mint will buy it at that price. It also can't rise too high above the nominal value of the coins or people will melt down coins to sell as bullion. Thus there is a small but significant range within which the price of bullion can fluctuate.
These tiny perturbations are magnified in international trade. Meanwhile, piracy and bad weather create disincentives for shipping sacks of specie or stacks of bullion back and forth across the seas. Bills of exchange enable accounts to be settled on paper.
Bills of exchange also have another useful feature. They enable interest to be charged on loans without it being considered usury. That is because the banker's profit on a bill is uncertain due to fluctuations in the exchange rate between currencies. The exchange rate for a bill is determined by the par values of the two currencies, the terms of trade between the two countries and the supply of and demand for credit. The otherwise certain profit of usury is made uncertain by the other components of the exchange.
Needless to say, bankers almost always profited on these financial instruments. This led to suspicions of manipulation in the foreign exchange market and proposals for remedies for such suspected frauds. Although some sharp dealing inevitably took place, bankers didn't have to be manipulating the money market. They knew the money market. They monitored seasonal fluctuations in trade of different commodities. They observed the debasements and re-coinages of governments and estimated their effects.
Because of their unique characteristics, foreign exchange money markets did indeed usually tend toward equilibrium. But here is where I would like to suggest that what would appear to be a tendency toward equilibrium taking place in time was actually a movement in space. Bills of exchange had both a duration and a geographical element. A merchant would draw English money in London to be repaid, say, in Flemish money a month later in Antwerp. The fluctuations, over time, in the values of the respective currencies reflected the movements of commodities between locations as well as policies enacted by authorities in the two places.
Foreign exchange markets tended toward equilibrium only because of their unique characteristics. These characteristics are not shared by commodity markets in general. There is no "mint" that buys capital equipment at a mandated price to stamp it into other capital equipment. If there was, then Joan Robinson's satirical (and neoclassicism's implicit) leets would be a workable approximation of reality. Leets, that is to say, are just like money -- only better!
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