Interest Rates Since December 16

Yesterday Ben Bernanke offered a thoughtful discussion of fiscal policy that opens with:

Markets have responded strongly to Donald Trump’s election victory, pushing up equities, longer-term interest rates, and the dollar. While many factors influence asset prices, expectations of a much more expansionary fiscal policy under the new administration—higher spending, lower taxes, and larger deficits—appear to be an important driver of the recent market moves.

FRED provides the data on 10-year government bonds both in terms of nominal rates and real rates. Between the election and December 16, nominal rates rose by 80 basis points, while real rates rose by 60 basis points. This increase was indeed attributed to an expectation of fiscal stimulus from Team Trump. But notice over the past four weeks, interest rates have started coming back down. Why? Paul Krugman follows up on Bernanke’s post with this:

Let me be less gentle: there will be no significant public investment program, for two reasons. First, Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top; they aren’t even talking about public investment, and would probably drag their feet even if Trump came forward with a detailed plan and made it a priority. But this then raises the obvious question: who really believes that this crew is going to come up with a serious plan? Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program. So investors betting on a big infrastructure push are almost surely deluding themselves.

It seems the initial market euphoria over a Trump fiscal stimulus has started to fade as we watch the clowns that Trump is appointing as his key economic advisors.

Minimum Wages and Productivity

I had a chuckle reading a report in today’s New York Times that describes a pair of papers on the minimum wage presented at the recently-concluded economics meetings in Chicago, especially the first, an experimental study by John Horton of NYU.  Horton set up an online matching system between employers and workers, where each made wage offers for a variety of tasks that could be performed remotely.  The design allowed him to measure the actual productivity of workers in these tasks if they successfully concluded a deal with the employers.  Then he imposed a minimum wage to see what would happen.  The result was that employers sought out the most productive workers when they had to pay higher wages to everyone.  (They could estimate productivity differences from information on workers’ prior wages.)

There was lots of back and forth in the article about whether this result would generalize to a minimum wage established over all employers within a region rather than just a few (who could better pick and choose), but for me the irony is that this is exactly what proponents of the minimum wage hope it will achieve.  That is, one of the main purposes of setting a floor under wages is to generate incentives for firms to increase productivity.

Note that it is the firm that is expected to do this.  Economists for some reason tend to assume that productivity is essentially a worker attribute, like how tall you are or whether you’re left-handed.  No doubt workers differ greatly according to their potential productivity, but most actual, realized productivity is the result of the way the work is set up—whether the output is of lesser or greater value, how much and what kind of equipment the worker has available to work with, what kinds of skills the work develops and makes use of, and how much opportunity the worker herself has to tinker with the job to make it go better.  These are employer choices.  In a world of low wages employers have less incentive to invest in the productivity of work, so they don’t.

This argument will hardly come as earth-shattering news to development economists and economic historians.  One of the arguments why the industrial revolution first occurred in Europe rather than China, for instance, is that the possibility of emigration prevented European labor from being as abundant as Chinese, with correspondingly higher wage costs.  A major factor in the explosive rise of the US as an industrial power in the nineteenth century was the availability of cheap land, which put an even higher floor under wage rates.  This is not to say that workers had it easy, of course, just that they were significantly less destitute in some regions than others.

If increasing labor productivity is a major social goal—and it should be—then making labor more expensive is a good thing, all else being equal.  The only trick is to see that, in the modern, mechanized interdependent world, it’s the quality of the job that turns the worker’s potential productivity into the real thing.

The World Bank on Trump’s Fiscal Stimulus

Did this news account properly capture what the World Bank said? If so, I have some quibbles with it. First up a line that makes sense but needs further comment:

President-elect Donald Trump’s tax cuts and spending plans could deliver a shot in the arm to the U.S. economy, lifting growth around the world, although uncertainty about his trade policies adds to the risks, according to the World Bank.

As the U.S. economy grows, the story is that we import more from abroad. If this also leads to dollar appreciation, then net exports further turn negative which means the rest of the world enjoys increases in net exports. Assuming the U.S. economy is still below full employment – which I believe – this is good news for us even as we see a higher trade deficit. And it would certainly be good news for Europe. But now to the second paragraph of this story:

The Trump administration could squander the economic gains of fiscal stimulus if it imposes new trade barriers that provoke retaliation by other countries, the Washington-based development lender said Tuesday in the latest update to its global economic outlook.

I’m sorry but this is just bad writing. Squander for who? Trade protection allegedly shifts aggregate demand away from the rest of the world towards the U.S. So yea- it would squander the gains for Europe but it would increase even further aggregate demand for the U.S. Of course one could argue that Europe needs aggregate demand expansion even more than we do. The better argument is that a trade war might end up being net export neutral. The same might hold if the Trump trade protection led to dollar appreciation. But this is not the same thing as saying the fiscal stimulus would be squandered.

Why Did Bernie Sanders Lose The African-American Vote? The Death of Roy Innis

OK, weird juxtaposition, especially three quarters of an hour before Barack Obama delivers his farewell address in the McCormick Center in Chicago, not too far south of where the ASSA/AEA meetings were just held. But the death at age 82 of Roy Innis, the leader since 1968 of the Congress of Racial  Equality (CORE) has pushed me to this, especially as I have no doubt there is nobody else out there who is making these connections.

The immediate relevance of Roy Innis is that Bernie Sanders's very authentic role in the US civil rights movement was his very serious participation in CORE activities in Chicago during 1962-64, give or take a year on either end.  He was a local leader out front in numerous demonstrations, appearing in the local media, and so on.  He was about as solid and sincere an activist in support of CORE in Chicago as one could find fine, a very hard place then as well as now.

So, why did he lose his poltical standing with African-Americans?  I mean arguably they gave the Dem nomination to Hillary, especially southern female African-Americans, who then, unfortunately, were unable to deliver their states for her in the general election. In early spring, 2016, youth went for Bernie 2 to 1, but African Americans went for her 2 to 1, even if they did not turn out sufficiently in Philadelphia to offset the rural and Erie/Scranton white vote that gave PA to Trump, despite her spending lots of time and effort there, including on the closing night of her campaign.

Well, I do not think anybody can seriously diss the loyalty of older southern African-American women to Hillary over Bernie, but maybe it is too bad, especially given what is coming down on us soon after Barack Obama exits the White House.  A lot of it has to do with Bernie's specifically overt activism on this front was a long time ago, more than a half century, and he ended up in very white Vermont with white millennials supporting him. The southern African-Americans dumped Hillary for Obama in 08, although with a lag, despite their long support for her husband, "America's first black president," but they came home for her.  So it is.

Regarding CORE, it was founded in 1942 by the late James Farmer, who still led it in the early 60s, the most activist of the four major civil rights orgs of that day, NAACP, Urban League, SCLC, and CORE, with Martin Luther King specifically associated with the SCLC.  They all agreed on equal treatment between races and all people and nonviolence, although CORE pushed the envelope harder than the others.

It was after the death of MLK, Jr. in 1968 that Roy Innis came to the leadership of CORE.  He moved it towards black nationalism and violence, as well as a "conservative/libetarian" political economic perspective.  As near as I can tell it never played a significant role in national politics under his long leadership, lasting until now, near as I can tell. The most dramatic event of this many decades period was a showdown he had at one point with Al Sharpton over something, a showdown between two people between whom I am not sure which I view with less respect, frankly.

I note the odd detail that slightly overlapping with Bernie, around 1963-65, I was involved with CORE in Madison, Wisconsin, when I was in high school.  I was not nearly as active or as important as Bernie, but I did participate in some demos against Sears for discriminatory hiring.  For this I earned my first entry in the FBI lists, as I was informed by my well-too-well-informed late Old Man.

And now I shall send this off so I can hear Barack Hussein Obama give his farewell address, for better or worse.

Barkley Rosser

Tim Worstall on Trade Policy: Reductio ad Absurdum

Tim Worstall makes some bizarre arguments including this one which sort of cracked me up:

As we know the President-elect, Donald Trump, tweeted that he was most unhappy that Toyota announced an investment in and expansion of a plant in Mexico. Instead, cars should be built in the US--with the idea that if not perhaps a large border tax, a trade import tariff, should or would be considered. To which we've had the answer from Toyota--they have agreed to increase the US trade deficit by $10 billion over 5 years. Obviously, that's not quite what they've said, instead, they've pointed out that they're going to invest $10 billion in the US over the next 5 years, as they did in the past 5 years. Left unsaid is the point that obviously they've not decided to do this because of a soon to be President's tweet.

Alas his explanation was nothing more than some balance of payments identities which should draw the fire of Peter Dorman. How might I have made the point instead?

With a national savings rate of only 1.75%, we should not repeat the mistake of 1981 giving the rich another massive tax break which would further reduce national savings and make the trade deficit worse. We should instead think in terms of how to get investment demand – be it public infrastructure or private investment – higher. As Brad notes, lower interest rates and infrastructure investment would be good policy.

If the shareholders of Toyota want to build more U.S. automobile plants and sell their cars to Latin America, that would be a great thing even if it is partially offset by a modest dollar appreciation. So yea Worstall made me laugh as there is way too much internet and Twitter stupidity on this topic even if his own poking fun at it involved exploiting an identity rather thinking this issue through.

Disney’s Transfer Pricing and the Destination Based Cash Flow Tax

Neil Irwin adequately addressed the trade policy debate over the Destination Based Cash Flow Tax (DBCFT) but his discussion of the transfer pricing angle leaves me cold:

Two prime examples are transferring intellectual property to overseas holding companies and engaging in corporate inversions that move a company’s legal headquarters to a country with lower taxes.

Corporation inversions do not impact transfer pricing as all they do is to allow a multinational to have a territorial system which many already effectively do. But I need to update my discussion to focus on intellectual property (IP) as this goes to the heart of my beef with what Auerbach has proposed. In my Trump Toaster Ovens example (Canadian production with U.S. distribution), I noted:

Total profits are $25 per oven with 80% going to the Canadian affiliate if the intercompany price is $100. US tax rates are now 35% and Canadian tax rates are close to 25% so with no repatriation tax involved (Canada is a territorial system), the effective tax rate is 27%. While currently Tiffany might want to raise the intercompany price – she knows the IRS could object. Of course Auerbach’s DBCFT would change her incentives as she might want to lower this price to only $80 to eliminate the Canadian income tax – assuming the Canadian Revenue Agency does not object. What’s going on here?

What’s going on per multinationals is that the U.S. becomes the tax haven per income taxation but also imposes sales taxes on imported goods. I know many U.S. centric transfer pricing types think all IP is created here but companies like the Japanese automobile manufacturers, Novartis, Adidas, Jimmy Choo, and Zara created IP abroad. DBCFT would be bad news for them as their IP faces sales taxes here as we consume their products but also face income taxes abroad. Let’s toss in Ikea even if Tim Worstall struggles to understand what an arm’s length royalty rate is. Of course we generate more IP income that most nations and DBCFT makes any IP income involved when foreigners consume our products tax free. Ricardo Hausmann and Federico Sturzenegger illustrated their “Dark Matter” idea with this:

Imagine the construction of EuroDisney at the cost of 100 million (the numbers are imaginary). Imagine also, for the sake of the argument that these resources were borrowed abroad at, say, a 5% rate of return. Once EuroDisney is in operation it yields 20 cents on the dollar. The investment generates a net income flow of 15 cents on the dollar but the BEA would say that the net foreign assets position would be equal to zero. We would say that EuroDisney in reality is not worth 100 million (what BEA would value it) but four times that (the capitalized value at our 5% rate of the 20 million per year that it earns). BEA is missing this and therefore grossly understates net assets. Why can EuroDisney earn such a return? Because the investment comes with a substantial amount of know-how, brand recognition, expertise, research and development and also with our good friends Mickey and Donald. This know-how is a source of dark matter.

In its latest fiscal year, Disney sourced over 94% of its worldwide income in the U.S. as its foreign affiliate pay the U.S. parent for the value of Mickey and Donald. While Starbucks has received some weird attention with respect to its transfer pricing, the 6% royalty rates paid by its foreign affiliate to the U.S. parent are consistent with what third parties pay and hence are arm’s length. In its latest fiscal year, over 84% of its worldwide income was sourced to the U.S. as a result. Both of these U.S. based multinationals are currently sourcing their IP income in the U.S. A switch to DBCFT would change that significantly reducing U.S. tax collections. Now you might ask what about those accused of Base Erosion and Profit Shifting such as Caterpillar? In her defense of their transfer pricing, Julie Lagacy noted that their Swiss affiliate paid the U.S. parent a 6% royalty rate for the use of Caterpillar’s technology but then other witnesses noted:

“I think the I.R.S. should have attacked this transaction on economic substance grounds,” said the other tax professor, Reuven S. Avi-Yonah, of the University of Michigan. To make the transaction bona fide, he said, the I.R.S. should have applied a 1986 law requiring the subsidiary to pay a “super-royalty” to its parent. That would have brought the profits back to the United States where Caterpillar’s higher rate, around 29 percent, would apply. Its negotiated rate in Switzerland was less than 6 percent. “There are all these opportunities that the I.R.S. had to go after this transaction, and unfortunately it didn’t,” he said.

The 29% percent effective tax rate was due to the fact that around 45% of Caterpillar’s income was U.S. sourced whereas only 30% of its sales were in the U.S. Again DBCFT would have meant even less U.S. taxes given the fact that a lot of the foreign generated IP income already was coming back to the U.S. This “super-royalty” would have the royalty rate raised from 6% to 9% as if the U.S. owned all worldwide intangibles, which strikes me as a very aggressive IRS view on this issue. In other words, one can make the case that the 6% royalty rate was arm’s length. If the IRS wants to disagree and pursue a transfer pricing challenge, then let it. But if we passed the DBCFT, then we would simply give up on taxing U.S. generated IP income when it is consumed abroad. This strikes me a very bad retreat from trying to enforce the transfer pricing rules.

Heterodox Session at ASSA: Marx, Rawls,Sraffa, and... Acemoglu

Yesterday morning I attended an URPE session at ASSA in Chicago titled,, "Marx, Rawls, and Sraffa, and the Limits of Mainstream Economics."  The Rawls person did not appear, but there was a paper on recent J.B. Clark award winners as reps of mainstream econ.  Lots of attention on Daron Acemoglu, with people arguing about whether what he is doing is good or not.  Wisecrack I heard was that "MIT economists are rediscovering insights of Marx, Kalecki, and Steindl, but not citing them."  This paper was presented by Robert Chenomas of U. of Manitoba.

The main debates came from presntations by Robin Hahnel and Michael Perelman.  The big whoop is that the archives of Piero Sraffa are now being made available.  This is engendering a massive search into his long secret writings with various proposed reinterpretations going on. A big issue is his relationship with Marx, with Hahnel claiming an FST vs an FMT, a Fundamental Sraffa Theorem vs a Fundamental Marx Theorem. The argument is that in a proper input-output Sraffa type system any commodity can be the "source of value," with the Marx argument being that it must be labor.  Well, all hell broke loose, and I shall not leak who was carrying on more than whom.

What is clear is that we are going to be hearing more  about this now that those long held archives have been opened.

Barkley Rosser

Ikea Transfer Pricing: The EU Green Party v. Tim Worstall

I may be late to the party but I started researching Ikea’s European transfer pricing after Ikea lost a Norwegian Supreme Court decision regarding intercompany interest deduction case. Tim Worstall attacked the EU Green Party for the Green Party’s claims that Ikea has been doing some old fashion income shifting. The title is a bit rough:

The Green Party Doesn't Grasp EU Tax Laws Concerning IKEA

Look – I’ll admit that the Green Party often says any transfer pricing that moves income from a high tax jurisdiction to a low tax jurisdiction is per se transfer pricing manipulation even before they have thought about what the appropriate transfer pricing should be. But as I recount Worstall’s account, it should be clear that he certainly is not proving that Ikea’s transfer pricing policies are consistent with the arm’s length standard:

Here's how bad their assumptions are. They're complaining about the non-taxation of royalties and interest flowing from one EU based company to another. And yet EU Single Market law specifically states that it is illegal for anyone to try to tax royalties and interest flowing from one EU company to another.

Worstall starts off by assuming that these intercompany payments are per se arm’s length, which is a bit premature. To be fair, Worstall does continue with this:

Here's the gist of the complaint. At the top of Ikea there're two tax free foundations. Tax free foundations do not, as the name implies, pay tax. One owns the operation of the stores and network, the other owns the trademark. The one that owns the trademark charges 3% to the other for the use. Those royalties flow around Europe and then into that tax free foundation. Much the same happens with interest payments on the fee that was paid to buy that trademark. And that's pretty much it, there's no more real complexity than this….Which is that we do have transfer pricing laws, laws to make sure that people don't just strip every amount of profit out of a country and stick it where there's no tax to pay. And those transfer pricing rules insist that inter-company transactions must be made at arms length prices. That is, related companies must charge each other an amount of money at least comparable to what they would charge an entirely independent company.

But there are two serious problems with this 3% trademark royalty. One is simply that the tax foundation was not likely the entity that created the trademark value in the first place. Did the tax foundation pay fair market value for any transferred intangibles? Worstall does not even address this. And how would one justify a 3% royalty rate as opposed to only 1%. Worstall’s defense is:

And 3% is actually fairly low by the standards of these things. Starbucks, an unrelated EU investigation found, charges itself 4% and this is considered just fine.

Actually Starbucks charges 3rd parties 6% royalty rates for its entire suit of intangible assets. To presume that this 3rd party royalty rate is a comparable for the Ikea name is beyond absurd. Here is a hint for multinationals that must defend their intercompany pricing – do not hire Worstall as this defense is beyond clueless. While Worstall does not address the intercompany interest rate issue, my understanding is that no one is questioning whether the interest rates are arm’s length but they are questioning whether another affiliate is actually receiving intercompany interest income. It is precisely this kind of debt versus equity hybrid mismatches that the OECD’s Action Plan 2 on Base Erosion and Profit Shifting addresses. May I suggest Mr. Worstall read this document before writing such an utterly embarrassing blog post. Update: While Worstall’s link to the EU report - this should work. Page 23 describes “the notional interest deduction in Belgium”:

Belgium belongs to the list of European countries having a strong tradition of treasury locations (together with Luxembourg, Ireland and Switzerland). The Notional Interest Deduction regime has been conceived as a replacement for the coordination centre measure, deemed illegal according to European competition law by the European Commission in 2003. This new measure, entered into force in 2007, allows Belgian subsidiaries of multinational companies to offset income derived from providing loans or services to affiliated companies around the world, while those affiliates can deduct the expense of these loans or services from their taxable income in their respective countries. This is a classic way for big companies to shift profits to low or no tax jurisdictions at minimal cost. And in cases where the source country imposes withholding tax on interest payments to Belgium, the Belgian entity can generally offset that expense with a foreign tax credit.

Page 21 notes how this works in Luxembourg:

PwC proposed, and Luxembourg accepted, an arrangement which guaranteed that an Inter IKEA Group subsidiary (now called Inter Finance SA) domiciled in Luxembourg would pay almost no tax on an estimated €6 billion in loans funded by subsidiaries in Curacao and Cyprus and funnelled to affiliates through a newly established Swiss branch of Inter Finance SA. In 2014, Inter Finance SA posted a profit of €13.6 million, and paid tax at an effective rate of just 2.4%, as compared with the Luxembourg statutory rate of 29.2%.

But enough about the intercompany loans – what about those trademark royalties? Table 3 on page 16 shows selected income statement information for a few European affiliates such as France. After paying its 3% intercompany royalty, the French profits were only 1.65% of sales. In other words, the trademark royalty captured almost 65% of consolidated profits in France. I’m sorry but that sounds a bit excessive to me.

Trump And The Wrigley Building

So, I am in Chicago for the ASSA/AEA meetings, which I missed last year because a year ago today I was having (successful) open heart surgery.  Anyway, on my way to get program and registration at the Hyatt Regency earlier this evening, I saw the iconic Wrigley Building, and then next to it a Trump hotel or whatever, with his name in seriously Yuge letters on it next door to the Wrigley building, and I mean like a couple of stories of the building worth of TRUMP.  Really, worse than you can imagine.

So, there is an irony here given all the controversies over possible Russian hacking of the US election to help Trump win (which ultimately in my view had to do with her multiple weaknesses as a candidate plus the Comey intervervention in the last two weeks). It is that the most of the largest buildings in Moscow are 7 so-called "Stalin Gothic" style, which include the Foreign Ministry building, but others of a variety of functions, including hotels and apartment builidings.  They have long provided the high points of the visual landscape of Moscow.

So, the big joke is that they are all modeled on Chicago's Wrigley building. They are all a bit bigger than it, but there is no question: it is their model.  As it is, this looks like some sort of ironic Gen-X fantasy, that the incoming president of the US, an apparent total pawn/sycophant of the current Russian leader, has a big building with his name big time emblazoned on it, right next door to the model for the dominant buildings in the capital city of the country whom he is  now widely viewed as falling all over himself to please.

Barkley Rosser 

Trump and the Chevy Cruze

Trump attacks GM:

President-elect Donald Trump on Tuesday attacked General Motors in a tweet, claiming the auto giant is making a Chevy Cruze model in Mexico and then sending them to U.S. dealers tax free. "General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!" Trump said on Twitter.

GM and Ford sell around $150 billion worth of cars per year to consumers around the world. Their production is also global. My understanding is that this Cruze was more of a hit among Asian consumers but yes a few are sold in the US. GM’s response?

GM later responded to Trump's tweet, saying it makes most of its Chevy Cruze models in the United States and sells only a "small number" of one model made in Mexico in the U.S. "General Motors manufactures the Chevrolet Cruze sedan in Lordstown, Ohio. All Chevrolet Cruze sedans sold in the U.S. are built in GM's assembly plant in Lordstown, Ohio. GM builds the Chevrolet Cruze hatchback for global markets in Mexico, with a small number sold in the U.S," the company said in a statement. GM told CNBC that it sold about 190,000 Cruzes in the U.S. in 2016. About 4,500 of those, or 2.4 percent, were hatchbacks made in Mexico.

Bloomberg BNA adds more context to this dust up:

General Motors CoBy Ben Brody and David Welch President-elect Donald Trump criticized General Motors Co. for building a version of the Chevrolet Cruze compact in Mexico, saying the largest U.S. automaker should build the car at home or face a hefty tariff. “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border,” Trump tweeted Tuesday. “Make in U.S.A. or pay big border tax!” Every Cruze sedan is built in Ohio and most of GM’s Mexican-made hatchbacks are exported to global markets,said Tony Cervone, a company spokesman. He declined to comment on whether the company planned to talk to Trump. Trump’s tweet is the latest example of interventionist behavior toward U.S. companies that have included Boeing Co., Lockheed Martin Corp. and United Technologies Corp. His threats against Mexican-built vehicles have the potential to impact the nine global carmakers, including Toyota Motor Corp. and Nissan Motor Co.,that have announced more than $24 billion in Mexico investments since 2010. Volkswagen AG’s Audi, BMW AG and Daimler AG each build or plan to assemble luxury vehicles, engines or heavy trucks in the country. GM said in November it planned to cut a shift at its Cruze plant in Ohio and furlough 1,200 workers there due to weak demand for small cars.

Got that – Mexico makes for foreign markets and the US purchased cars are made here. Trump is an idiot.

Confirm Merrick Garland

The details are complicated, but there has been a meme batting about off and on that this Tuesday,  January 3, when the new Congress starts, there will be an odd moment when the Senate will have a majority of Democrats due to people leaving and arriving.  At that moment, apparenty, Vice President Biden as President of the Senate could make certain motions turning the chair over to the Dem Leader, who could then introduce the nomination of Merrick Garland for the Supreme Court, and they could just pass it. It may be that there is some flaw in this plan and that has been realized.  But if there is not and the only thing holding Biden and Schumer and other Senate Dems back  from doing this is  some sort of sense of propriety and not doing things unusual, I would say to  heck with that.  The Republicans have broken nearly every rule in the book, including their refusal the whole last year to consider Garland's nomination, which was already unprecedented and effectively breaking the rules.

So, given that this  may be the only and last chance to hold off Trump from giving control of SCOTUS to conservatives, and it would be morally justified in that Obama had his right to appoint his pick, I think they should do it if they can.  But I have heard nearly no talk in the last few days about this, which makes me suspect that either there is some flaw in the plan or that they are just plain too chicken to do it.  If the latter is the case, then no wonder the GOP is just taking over everything.  But, who knows, maybe they are plotting it and keeping that quiet and will  do it.  At least I can hope so  for the next two days or so.

Barkley Rosser

Trumpshit: Correcting The Definition

www.urbandictionary.com/define.php?term=trumpshitWell, folks, it turns out that I did not coin the term, "Trumpshit."  It has been in the Urban Dictionary since at least August 5, 2016 (h.t Lones Smith), and it even has a twitter account.. I guess I have been trumpshitted.

In fact, there are four definitions at Urban Dictionary, two nouns, one interjection, and one verb.  The first is simply a synonym of "bullshit."  The second is a systemic belief in something for which there is overwhelming evidence that it is not true (e.g. "fake news").  The interjection is simply obvious.  And it can be a verb. One can trumpshit or engage in "trumpshitting," such as "You've got to be Trumpshitting."  Which suggests a noun that is probably closest to my not very good attempted definition that made it into  a person, a Trumpshitter, one who hands out Trumpshit.

Barkley Rosser

T. Rex: Engineering Fantasy

Global warming? "It's an engineering problem, and it has engineering solutions."

According to Rex Tillerson, Donald Trump's choice for Secretary of State, adapting to climate change is an engineering problem that has an engineering solution. A soundbite from a Council on Foreign Relations presentation by Tillerson has been widely reported. But it is worthwhile to consider his full answer and its context.

Trumpshit: A Definition

Trumpshit: A Definition

A person is a piece of Trumpshit if they are a Trump supporter who aggressively spreads fake news in various media and especially on the internet in the course of attacking and criticizing other people.  Of course, there are some individuals who have been Trumpshit for quite a long time, well before Trump appeared to run for president, with Rush Limbaugh and Sean Hannity obvious examples.

I note that this very derogatory term may apply to people who are in many ways in their private lives estimable and admirable. They may love their families and be nice personally to those around them, as well as contributing positively to their communities through various civic activities, including official, religious, or informal.  Some of them may be simply ignorant suckers who have been led astray by the broader purveyors of fake news, but like those who are overly religiously enthusiastic think that they must "spread the good news" of the fake news they have come to believe to others, even people they do not know. 

The recent phenomenon of people who are friends of friends of friends on Facebook commenting on sites they are at best peripherally connected to has led to more of this as somebody nobody knows on a particular FB site will suddenly turn up denouncing people there in unpleasant terms while spewing all kinds of pro-Trump fake news.  This has gotten worse recently, and seems to be gaining as the Trumpshit are unhappy that he lost the popular vote and are trying to get those who did not vote for their hero to "get over it" and behave differently from how Republicans behaved after Obama won in 2008, although he won the popular vote solidly.  Even Putin has gotten into this game, another prime example of Trumpshit on a global level.

Oh, and as for those pieces of Trumpshit who are highly religious and doing this stuff, especially if you actually do know that you are spreading lies, you have a worse problem than others.  You are putting your immortal soul in danger.  So, being called "Trumpshit" is the least of your problems.  Really.

In the meantime, happy new year, everybody, and I shall be in Chicago for the ASSA/AEA meetings, so hope to see some of you there where we can commiserate and all that.

Barkley Rosser

Paul Krugman on Protectionism and Trade Balances: Wonkish and Wrong

Fighting off a Trump-induced melancholy, Krugman has posted a brief analysis of the expected effect of a potential across-the-board tariff.  After a few sensible observations about why a VAT is not protectionist, he continues with:

The starting point for a simple analysis of trade balances is the accounting identity, 

Current account + Capital account = 0 

where the current account is the trade balance broadly defined to include services and income from investments. The standard story then runs as follows: the capital account is determined by international differences in savings and investment opportunities, with capital inflows to countries that offer good returns. The real exchange rate then adjusts to ensure that the trade balance offsets these desired capital flows.

The rest of his argument can be distilled into these further claims:

1. The first-level effect is that, if the trade balance is fixed, a tariff will have to be offset by appreciation, restoring the pre-existing balance at a lower level of both imports and exports.

2. But reduced openness will make US financial assets less attractive, reducing net capital inflows.

3. This will put downward pressure on exchange rates, reducing the trade deficit and eventually moving the account into surplus.

4. But this would happen anyway without protectionism, since the attractiveness of a country’s capital assets depends on its expected future exports.  A trade deficit (insufficient export) requires an ever-weaker currency to attract investment (cheapening domestic assets), which sooner or later turns it into a surplus.

Says Paul, summing up: “.... trade deficits are always a temporary phenomenon, to be followed eventually by surpluses, and vice versa.”

5. The net effect of achieving the inevitable trade turnaround by protectionism rather than letting nature take its course is that it will require a greater depreciation to produce a given shift in flows under reduced openness.

Before jumping on this extraordinarily mistaken analysis, I should say in all fairness that PK himself is not to blame for it.  He is presenting in his usual limpid way the mainstream view of international macro, one you would find in almost any textbook.  He is transmitting error, not creating it.  Still, the error is there.

The starting point, as you would expect if you’ve read my previous posts (or my textbook, for that matter) is that the equation Krugman begins with is not an equation at all, but an identity.  It is not that some causal process (like exchange rate adjustment) makes the current account equal (with opposite signs) to the capital account; they are two ways of measuring the same thing.  Let’s put it in the terms Krugman does:

A trade deficit, assuming it is reflected as a current account deficit, is an inflow of savings.  If I buy a bottle of wine produced in the US, I spend a sum of money for it, and that same sum is received by other people in the US as income.  (I’m putting aside the possibility that some payments may leave the country, for instance if the winery is foreign-owned.)  Individually, I’m doing the spending and someone else is getting the revenue, but when you add it up at the national level, the expenditure from my purchase is exactly the same as the income from it.  Again, this is an identity, not an equality.  There is no process that causes one to equal the other; they are two different measures of the same transaction.

Now, suppose I go for a foreign wine instead.  Let’s say I buy it on a trip abroad, so I bypass domestic retailers.  Now an expenditure is recorded for “people in the US” but no corresponding income, just as income is recorded in the selling country but no corresponding expenditure.  There’s still an identity at the world level, but not nationally.  The immediate effect of my purchase in the US is that there has been an increase in spending without an increase in income: that is a reduction in savings, identically.  Abroad there is the opposite, an increase in savings, identically.  This is what the balance of payments identity, current account ≡ - capital account, is telling us.

What’s the point of harping on the identity?  First, an identity is instantaneous, true at each moment in time.  If A≡B it doesn’t mean that first A is what it is and then, some time later, B changes to match it.  Second, there is no process that causes B to equal A.  Processes could fail, after all, but identities can’t.  All the reasoning Krugman provides for how the current account should adjust to a balance on the capital account is not simply superfluous but wrong.  No process occurring over time can relate the two.

So to be specific:

Krugman’s premise is wrong.  The current account balance is not passively determined by the capital account balance, any more than vice versa.  They are two measures of the same thing.  The balance of payments position of a country is the outcome of all the forces acting on the choices people make that cause this balance to be what it is.  That includes micro-level decisions about what products, domestic or foreign, to purchase, portfolio decisions about which assets to hold, speculative pressures in foreign exchange markets—everything.  If I develop a taste for foreign wine, that has a tiny but nonzero effect on the US balance of payments, including the capital account position, just as if I become convinced that another country’s assets are a better investment than domestic ones.  Once you understand what an identity means you can’t claim one kind of factor is determinate at the BOP level, while the other is the outcome of some causal process resulting from the first.

Therefore claim (1) is false.  The trade balance is not fixed.  If protectionist policies (including likely responses by other countries) induce expenditure-shifting, that should influence the payments position.  Of course, insofar as protectionist measures may also alter desired international capital flows, the outcome may be difficult to predict in advance.

Claim (2), although Krugman doesn’t state it, is the result of a limit assumption.  Foreign capital inflows are attracted by the promise of repatriated earnings and capital gains.  A country with a current account deficit/capital account surplus cannot continue to sustain this position indefinitely; at some point depreciation must occur to reverse it, but expected future depreciation makes foreign earnings less attractive.  If you also assume rational expectations or its near-equivalent, the anticipation of BOP reversal moves its date forward to the near-present.  (The role of the limit assumption makes BOP reversal structurally the same as Ricardian Equivalence.)  Whether the global economy obeys limit-cycle dynamics in this fashion is really an empirical question, however.

Is it actually true that countries cycle back and forth between external surpluses and deficits?  The view of international political economy, which I share, is no.  There is tremendous serial correlation.  (Check it out.)  For extended periods of time, countries sort themselves into chronic surplus or deficit entities, characterized by various policies and institutions that are conducive to one or the other.  (In my macro book I loosely characterize three types of surplus countries—resource exporters, followers of the east Asian development model, and social democratic collective competitors—and four types of deficit countries—less dynamic developing countries, former members of the Soviet Bloc, English-speaking developed countries, and peripheral Europe.)  Incidentally, the factors that tend to consign countries to one side of the ledger or the other are both micro (“competitiveness”) and macro (mobilization of savings).

What enables countries to run external surpluses and deficits for extended periods of time?  We don’t have a clear answer, in my opinion.  First of all, we don’t have long enough time series to draw conclusions, given that the world economy is punctuated by cataclysms (wars) that cause immense discontinuities in capital stocks, financial obligations and trade flows.  There are also periodic crises at the national level that cause an economic reset.  Perhaps the eruption of crisis is the form that sustainability limits take in a world of limited foresight.

In any case, the textbook (wrong textbook) analysis Krugman applies to a possible Trump tariff tells us almost nothing about the effects such a policy would have on the economy.