Dani Rodrik on German Trade Surpluses and US Trade Deficits

John Judis interviews the very insightful Dani Rodrik:

So in the case of Germany, I do think Germany is the world’s greatest mercantilist power right now. It used to be China. China’s surplus has gone down in recent years, but Germany’s trade surplus is almost 9 percent of GDP. And they are essentially exporting deflation and unemployment to the rest of the world. I think the damage, though, is done to the rest of Europe and not the United States. In addition, it is not a trade problem. It is a macro-economic problem. The solution is to get German consumers to spend more and save less and the German state to spend more and to increase German wages. It is not the trade policies of the US or any other country that is going to be able to address this issue. It is similar to the way Trump has picked up grievances about how trade agreements have operated in the United States. These agreements have created loses, and grievances that have not been addressed, and I think there is a lot of truth to those kind of things, but I don’t think he has any realistic way of dealing with those things.

This was after Dani noted Trump’s complaints with respect to Germany’s trade surplus were “bonkers”. Now I wish I had said that. Dani next turns to the U.S. trade deficit in response to a question whether it is a problem:

Yes, but I don’t put it on the top of our concerns. There have been times when it is a bigger issue. The U.S. could use more aggregate demand and one of the places it could come from is smaller trade deficit. But you could get the same result more effectively through a more aggressive fiscal stance on the part of the federal government and the states, particularly through expenditure on infrastructure. I do think the low labor force participation is something we should try to bump up and I think there is a place for increasing demand. A lower trade deficit might contribute a little bit to raising it, but I don’t think it’s where the major action is.

I’m all for more infrastructure investment – in fact, a lot more. Of course there are couple of qualifiers here. One – if you got a lot more, we probably need to raise taxes to offset any excessive fiscal stimulus. But secondly – it seems this agenda has been put on hold unfortunately. But Dani generally is right – we need a bit more aggregate demand. Rather than use trade protection which will likely strengthen the U.S. dollar with the usual result that net export demand on net will not change, let’s try something novel. I’m talking about lowering U.S. interest rates. Yes – I know the Federal Reserve seems hell bent on doing the opposite but that is a mistake. The ECB has been pursuing an aggressively easy monetary policy which has devalued the Euro with respect to the dollar, which of course raises German net exports and lowers our net exports. If the Federal Reserve reverses course and lowers interest rates, we could get a much needed devaluation of the dollar.

Econospeak In The Top 100 Economics Blogs

So, Prateet Agarwal of The Intelligent Economist has issued his list of the top 100 economics blogs for 2017. Econospeak is on the list, which does not rank them but rather puts them into different categories, with us being in the financial economics category, for better or worse.  There are some oddities in our description, including the erroneous claim that Max Sawicky is at the Economic Policy Institute, which he once was quite some time ago.  It is also claimed that one needs "a strong economics background" to read Econospeak, which I think is a bit overdone.  Lots of other blogs are described as being well written and easy to  read, but, well, I haven't seen us bogging things down with lots of equations and theorems too much.  I think Agarwal must have showed up when Egmont was plying us with his axioms, :-). Anyway, we are there, for better or worse.

Oh, I note that Angry Bear is on the list also, categorized as a General Economics blog.  There is a lot of overlap between us and them, with Dan Crawford frequently reposting stuff we put up onto their blog.

Barkley Rosser

"One Hundred Percent" Fake News

No, uh-uh, false, wrong.

Trump: I'm '100 percent' willing to testify under oath -- The Hill-2 hours ago

Trump: I'm willing to testify under oath about Comey claims -- CNN-3 hours ago

Trump willing to testify to counter Comey under oath -- Talk Media News-35 minutes ago

Trump Says He'd Testify Under Oath About Comey -- Featured-The Atlantic-2 hours ago

Donald Trump did not say he was one hundred percent willing to testify under oath. He replied to a question about testifying with a word salad of obfuscation that contained the phrases "one hundred percent" and "under oath" but did not connect the two in any coherent way. Read the eff'in' transcript:

Trump's "one-hundred percent" is free floating. His two uses of the phrase "under oath" indicate that a misinterpretation or pretended misinterpretation of the question as being whether he asked Comey to pledge his loyalty under oath. So his "one hundred percent" is simply a one hundred percent denial that he demanded that Comey pledge allegiance to him under oath. There is no commitment in the exchange to testify under oath.

Of course, even if Trump had committed one hundred percent to testifying under oath, there would be no way to compel him to honor his commitment and he almost certainly would not do so.

Trump will not testify under oath and he will not release his tax returns.

A Personal Observation On Trump's "Infrastructure Week"

Yes, folks, you may have already forgotten it, but this has officially been Trump's "Infrastructure Week," highlighted by his proposal to privatize air traffic control in the US, and his trip to Cincinnati where he in general terms talked about the supposed virtues of privatizing highways, bridges, and airports, While he claims he wants to provide up to $200 billion in federal funding to draw forth a supposed $800 billion in private funding, the last time I checked his proposed budget supposedly cuts infrastructure funding.  So much for that big infrastructure boost!

As it is I want to comment on the proposal to privatize highways.  I shall briefly note that privatizing air traffic control might not be a bad thing, assuming that it is done properly.  Canada did so some years ago, and most reports have it that this has worked out pretty well.  Maybe it would in the US as well, although my confidence in Trump not to mess it up is pretty low.

Anyway, back to highways.  There has been some effort to do this in some states recently, with decidedly mixed results. But my observation is that over the longer haul it seems that outside of gated communities or private property, this does not work very well.  The historical record in the US is that if one goes back a few centuries, one finds many roads that were originally built and run by private companies.  Nearly all of these eventually reverted to some sort of government control at one level or another.  In particular in Virginia where I live, there were quite a few build in the 1700s, but during the 1800s they pretty much all reverted to some sort of government control. The private sector just did not do all that good of a job running them.

So, where is the personal angle in this?  Last weekend I learned that the street behind my house here in Harrisonburg, VA, Bruce Street, a minor street that is one way and in my block only has houses backing up to it, was once one of these privately owned highways that was later taken over by the city.  I learned this while visiting with my daughter Sasha the oldest building in Harrisonburg, the Thomas Harrison House, which was originally the private residence built probably in 1770 of the person for whom the city is named.  It is a small limestone structure that has not been previously opened to the public like this, but the city has taken ownership of it from the Methodist Church across the street that had owned it for a long time (it had been used as a law office most recently).  The city is planning on turning it into a museum, and they have had archaeologists from James Madison University excavating its basement, which was used as a kitchen during the days the structure was a house (up until the 1840s).  Anyway, they decided to open the basement up for the public to see as well as the many objects they have found there, including lots of animal bones.  So, visiting daughter and I made the visit to check it out.  The main archaeologist, Carole Nash, is a good friend and gave a most informative talk.

And that is where I learned about the history of Bruce Street, which is now only about 7 blocks long, cut off at one end by an elementary school and at the other by a public park.  Anyway, the Thomas Harrrison House is located just off the intersection of Bruce Street and Main Street, which also happens to be US 11, a highway that runs from Montreal to New Orleans, the old overland route of the French empire in North America (it is not called "US 11" on the other side of the Canadian border).  Now it happens to be the case that old timers here in the Shenandoah Valley call US 11, the "Valley Pike," short for turnpike. And indeed it was one of those highways that was originally built by a private company that collected tolls on it, until it was taken over by the federal government in the 1800s.  The word "turnpike" comes from the barrier at the toll booths back in those horse and buggy days.  A stick would would be stuck in the ground that could be turned and it would have another stick that would cross the road blocking it.  When people paid their toll, the toll keeper would turn the turnpike allowing them to proceed further.  Indeed, at least in Virginia one finds streets and roads that are actually called "turnpikes," and nearly all of them have this history of being once privately owned and run, but since taken over by some level of government, with Little River Turnpike in Northern Virginia being one such (I think in its case it is owned by the Commonwealth of Virginia, but not sure).

But I had never heard anybody talk about the not very long or impressive Bruce Street as being a "Pike."  But in fact as Carole informed us, in 1770, ten years prior to Harrisonburg being officially founded as Rocktown, that intersection was the main one in the area, the intersection of two major highways in the Valley, the Valley Pike, now US 11, running from southwest to northeast (or vice versa, if you prefer) and the road that was then called the Warm Springs Turnpike, indeed another privately owned and run highway, later taken over by the city and turned into the minor Bruce Street perpendicular to the now Main Street.   Carole indeed confirmed that this was its history, and it was clear that Mr. Harrison very consciously located his house near this intersection, where it also happens to sit on top of a spring, which we saw in the basement, houses back then usually being built that way so that they could withstand a siege by Native Americans (this was only a few years after the French and Indian War, the last battles of which took place in the Shenandoah Valley in 1764, the year after the war supposedly ended).

So, both the Valley Pike and the Warm Springs Turnpike in Harrisonburg are examples of highways once built and run privately, but since taken over by government.  The long term record is not all that favorable for privately owned highways that go any distance.

Barkley Rosser

Addendum on June 13:  I have done some further digging on the details of the history here, and some of the above is not quite accurate, although the general story of privately built roads in Virginia getting turned over to various units of government holds, indeed is pretty darned impressive.

So, there were no organized systems of road provision or maintenance in 1770 in the Shenandoah Valley when it appears the Thomas Harrison House was built. Nevertheless it was at the intersection of the two main trails that were being used at that time.  The establishment of private companies to build "plank roads" (out of wood) on these trails would occur in the 1830s, 1830 for the Warm Valley Turnpike Company, and in 1836 for the Valley Turnpike Company.  I do not have the date of the ending of the latter (although I can find it out), but the Warm Springs Turnpike Company ceased to exist in 1901, after which that road became owned by different levels of government for different parts of the turnpike.

As it was, the part of Bruce Street that goes behind my house one and a half blocks east of the intersection in question was never part of the turnpike. It turns out that the intersection was its northern most endpoint.  It headed west along Bruce Street but then turned southwest to follow what is now Virginia 42 for awhile and then other roads to finally end up in, big surprise, Warm Springs VA in Bath County, which is a site of bath houses, although Hot Springs a bit south of it is more famous as the site of the Homestead Resort, visited famously by Thomas Jefferson.

My source for all this is a Wikipedia entry on "Turnpikes in Virginia and West Virginia" that shows that during the 1800s there were well over 100 of these private companies formed to build or run turnpikes.  For the majority of them, there is no information on what they did or when they were founded or what happened to them, but for many there is considerable information on when and how and what current roads are what the built or run. The bottom line holds.  All of those many roads are now in the public sector, so the bottom line conclusion still holds, despite my having certain historical details a bit off.

Another Addendum, 6/15:  This is strictly amusingly personal, but yesterday there was a bear "lumbering" or "traipsing" or just plain "ambling" one block over from Bruce Street on Newman where Carole Nash lives, until animal  control  officers got it under control.  Big joke is that some people on FB claimed that maybe it was actually Carole's large and very furry brown Tibetan mastiff, Artemis, but Carole assured people that Artemis was inside at the time.  And anyway, the bear was black, not brown, :-).

Yet More, 6/17: I saw the arehaeologist, Carole Nash, this morning at our farmers' market, and she assured me that the bear was for real, apparently a young male, and that it ran up their street.  Apparently after it went into the historic Woodbine Cemetary, it crossed US 33 (aka Market Street) heading north. It was finally apprehended and stunned on Wolfe Street to be taken out of town somewhere.  And that I  think will be the final word on that, :-).

Trump Right For Once In A Tweet

Yes, I think so.  It was his tweet on Monday when he took credit for the move by Saudi Arabia and some other Arab nations to cut diplomatic relations with Qatar.  He claimed that it was his visit to Riyadh, his strong support for going after Iran, and supposedly his demand that these nations stop financing terrorists.  I think he is right.  I do not think these nations would have made this move without this strong support from Trump, who supported the move in his tweet as well, although we cannot be sure about this.  But Qatar had not done anything recently to newly aggravate the Saudis and others.  Indeed, most reports have that it provides no state support for terrorists and has made some moves to crack down on private citizens doing so, although perhaps not as much as some other Gulf states, but more so than Kuwait, which has not had its diplomatic relations cut.  And while the Saudis have claimed that Qatar is too friendly with Iran, in fact the Qataris have 1000 troops in Yemen helping the Saudis fight the Houthis, who are supposedly supported by Iran.

Of course more recently Trump has been offering to have this dispute settled or negotiated by one or another of his top national security officials, most of whom were in Australia when he made his tweet.  If they had had advance warning of his tweet, they might have pointed out to him that Qatar hosts the main US air base and CENTCOM in the Gulf, from which US planes combatting ISIS take off.  Probably they did get around to pointing this out, which may be why he is now offering to help negotiate a solution.  But I suspect that the Qataris are not too keen on using his good services for this.

I also think that his visit and statements triggered the killing of protesters in Bahrain right after the visit and also the arrest of several thousand people in Egypt. Both of these nations are among those joining Saudi Arabia in cutting diplomatic relations with Qatar.  What I am not sure of is whether his visit had any connection with the ISIS attack on Tehran, probably not, but who knows?  Of course his statement of "sympathy" to Iran has been outrageous and received as such by the Iranians.  And while Trump and the Saudis and the Israelis claim that Iran is the leading state sponsor of terrorism in the world, the most recent estimate has about 94% of terror attacks being carried out by Sunni Muslims, not Shia ones such as the majority of the population of Iran is. And, indeed, this ISIS attack on Tehran has been reportedly carried out by Iranian Sunnis.

Oh, another place where Trump may have had some influence is on the outcome of the British election.  He is very unpopular there, and while maybe the Tories would have lost anyway, May's strong identification with Trump certainly did not help her, especially with him also making an outrageous and inaccurate tweet attacking London Mayor Khan, and then doubling down on it.  It is not out of the question that this last shenanigan may have been the straw that broke the back of the failed Tory effort to retain their majority in Parliament.

Class Resentment and the Center-Left, or the Politics of "We Are the 80%"

I’ve just read the suitably downbeat piece by Thomas Edsall about the travails of the Democratic Party in today’s New York Times.  Edsall, citing a recent symposium of political strategists in The American Prospect and a report by Priorities USA, a DP polling outfit, describes the widespread abandonment of both the center and the left by a wide swath of the American working class.  As he says, it’s not just that working class (non-college) Trump voters have opted for “populism”; their political disposition radically excludes activist government programs, multiculturalism, and other principles that no one on the left could reasonably run against.

Evidence from public opinion polls depends on the questions pollsters take to the people.  Questions are framed in particular ways to test the suppositions in the pollsters’ minds, which means it’s difficult to find evidence for suppositions they aren’t considering.  That in turn means that those of us with different hypotheses can only speculate, at least until the stories we tell get enough traction that pollsters and focus group organizers decide to test them out.

A further caveat is that the population is extraordinarily diverse, and almost any hypothesis is going to be true for someone.  The question is not who is “right”, but how influential particular political trends are among various portions of the electorate, in combination with other trends.

So here is one approach, based on a quote Edsall culled from Nick Gourevitch, a contractor for Priorities USA:

So it may be that within economically distressed communities, the individuals who found Trump appealing (or who left Obama for Trump) were the ones where the cultural and racial piece was a strong part of the reason why they went in that direction. So I guess my take is that it’s probably not economics alone that did it. Nor is it racism/cultural alienation alone that did it. It’s probably that mixture.

How to think about this interaction?

When the left thinks about inequality and the legitimate grievances of the working class, its target is generally “Wall Street” or the “billionaire class”.  The pitchforks should be waved at the one percent of the one percent, the tycoons who wield inordinate influence over government and get policies that enhance their wealth and power at the expense of the rest of us.  But the “populist” vote in 2016 went for a billionaire (or someone who claims to be while hiding his tax records).  What gives?

I suspect most people upset with inequality tend to blame the class directly above them, the one they interact with most.  If so, consider a rough four-class model of the US.  On the bottom are the poor and the precariate, desperate to make ends meet month to month or even day to day.  Relatively few of them vote, and when they do they tend to go for Democrats because they know how much they depend on social programs.  They are driven less by ideological fervor than flat out necessity.  Above them is the main portion of the working class.  They are vulnerable to shocks like severe accidents or illnesses or regional economic downturns, but for the most part they don’t feel they have to vote for reasons of personal protection or benefit; they have the luxury of ideological voting.  They’ve gotten shafted for generations.  Going up the ladder, the next group we find is the upper-middle class, roughly the upper 20%.  They’ve had some periodic stress, but overall they’ve made out rather well.  Nearly all the economic growth we’ve experienced in this century has gone to them.  They tend to have economic views in line with their station and otherwise adopt a relatively cosmopolitan perspective, itself a reflection of their roles in the “new economy”.  And at the top is the capitalist class, those who own or control the bulk of society’s wealth.  While no cutoff is perfect in identifying them, they represent approximate the upper .01% of the income distribution.  They play the largest role in funding and positioning the two major political parties.

Now here’s the thing: what happens if classes blame the one above?  If you’re in the upper-middle class and you’re angry about how unequal this society has become, your target is the ultra-rich.  There’s no one else to blame unless you want to denounce yourself and your friends.  Hence “we are the 99%”.  But if you’re in the main portion of the working class, and you feel the country has become fundamentally unfair, you’re likely to take it out on the upper-middles.  These are your direct bosses, people in government offices that give you a hard time, teachers who send notes home with your kids, and media people who tell you how backward and misguided you are.  Those are the “liberals”, the ones who think more education and a cushier job gives them the right to ignore you.  Whenever the problems of lousy jobs or no jobs comes up, their one solution is to tell you to go back to school, get better grades this time, and be like them.  Resentment is not hard to come by.

My experience in the classroom is that few students from working class backgrounds even know there is a capitalist class or that it has influence.  They see the country being run by folks like me, and politics comes down to whether you think that’s good or bad.

So what about racism and nativism?  The dynamics are complicated, but I suspect an aggravating factor, and one that brings economics and bigotry together, is that the push for multiculturalism and cosmopolitanism is seen as coming from the upper middle class.  From a purely logical or empirical point of view, there’s not much basis for the notion that working class hardship is the result of affirmative action, immigration or even specific trade deals (with the possible exception of the accession of China to the WTO).  Most of it is about the evolution of capitalism, which has resulted from a range of political decisions and non-decisions under the guiding influence of the capitalists themselves.  But if economic protest takes the form of resenting the class one rung above, the fact that the upper middle class is strongly identified with liberal values and programs is how economics and culture come together for a large number of workers.*

Incidentally, the campaign of Hilary Clinton was disastrous from this perspective precisely because it combined an aggressive advocacy of cultural liberalism with an economic outlook oblivious to the problems faced by the majority of the population.  It was practically an advertisement for right wing populism.

Again, all of this is speculative.  I have no evidence to back up any of this, other than personal observation, and that may be wrong too—I might be misinterpreting what I hear.  But it would be interesting to do some opinion research to find out if there’s an element of truth.

*Note that I use the term “working class” and not “white working class”.  The Democrats have suffered an erosion of support across the working class, and it would be a mistake to assume that workers of color automatically favor government programs to aid people of color worse of than them or more liberal immigration policies—or at least that their advocacy is strong enough to convince them to cast a vote.

Reverse Yankee Bonds and Dornbusch Overshooting

Suppose you are the CFO of a U.S. company that needs to borrow $1 billion over the next 5 years for a planned expansion and you are receiving interest rate quotes near 4.75 percent. Why so high you ask since we are in the era of low interest rates. The banks explain that you have been given a BB credit rating by Standard & Poor’s so they have added 3% to the 1.75% interest rate on U.S. government bonds. This upsets you, however, as you have been hearing stories like this :

Apple announced in an SEC filing that it would issue €2.5 billion in euro bonds, the proceeds of which will be used to fund share buybacks and dividends to be paid in dollars. These bonds will come in two tranches: €1.25 billion of 8-year notes and €1.25 billion of 12-year notes, with coupon payments of 0.875% and 1.375% respectively.

They got to borrow at even longer terms and yet they received such low interest rates? Well part of this story relates to the fact that Apple has a better credit rating but much of it relates to the low interest rates on German government bonds from the expansionary ECB policies. While interest rates on 10-year U.S. government bonds have been near 2.25% lately, interest rates on 10-year German bonds closer to 0.25%. Our story is about “reverse Yankee bonds”, which represent U.S. companies borrowing Euro denominated corporate bonds:

Issuance of these “reverse Yankee” bonds – euro-denominated bonds issued by US companies – has surged because the cost of borrowing in the Eurozone has plunged to ludicrously low levels. Even for the riskiest non-investment-grade corporate debt – called junk bonds, for good reason – the average yield is currently 2.9%. This chart of the BofA Merrill Lynch Euro High Yield Index (data via FRED, St. Louis Fed) shows this Eurozone absurdity

The story also suggests that expected inflation in both the U.S. and Germany is near 2% so the Euro rates are negative in real terms:

they won’t even compensate investors for the loss of purchasing power based on the current rates of inflation: 2.2% in the US and 1.9% in the Eurozone.

Is this an absurdity or an opportunity? If you decide to borrow in Euros, you might negotiate an interest rate near 2.6% even with your BB credit rating as the interest rate on 5-year German bonds is approximately negative 0.5%. Great deal – right? Well Paul Krugman reminds us of the Dornbusch overshooting story:

Rudi asked what would happen if a central bank for some reason suddenly and permanently increased the money supply. In the long run, just about all economists agreed that this would lead to an equal proportional rise in the price level and depreciation of the currency. In the short run, however, prices are clearly sticky, and expansionary monetary policy reduces interest rates. So what happens to the currency? As Rudi pointed out, the fall in the interest rate would induce investors to move their money abroad unless they expected the currency to rise. And the only way that could happen was for the currency to depreciate past its long-run value – to overshoot – so that it could be expected to appreciate back to that value over time.

This describes what the ECB did, which lowered Euro based interest rates and led to a jump devaluation of the Euro. The interest rate differentials we have been describing may very well be the compensation for the expectation appreciation of the Euro with respect to the dollar. If so, the expected cost of borrowing in Euros is not lower than interest rates on bonds denominated in dollars.

Trump Blows Up The Gulf Cooperation Council (GCC)

Well, maybe it has blown itself up, but Trump's supposedly triumphant visit to Saudi Arabia looks to have exacerbated underlying tensions within the six-member Gulf Cooperation Council (GCC), whose members include Saudi Arabia (KSA), Kuwait,Qatar, Bahrain, the United Arab Emirates (UAE), and Oman. This was the part of Trump's overseas trip that most US media has accepted as being a nearly great performance without any goofups (the trip steadily going downhill after that), with him getting over $100 billion in arms sales to the Saudis, and, aside from theatrics like sword dancing and holding glowing globes, getting to lecture 50 Muslim Arab leaders about what to do about terrorism, while also supporting their Sunni animus against Iran, this last part being what has led to the most recent problems.  What has happened most recently, is reported by Francis Ghiles of OpenDemocracy as linked to by Juan Cole, with even more serious details reported by Washington Post reporter Kristen Coattes Ulrichesn (this link is to Marginal Revolution Monday assorted links, go to the one called "The cut-off that is Qatar," sorry original WaPo link not working for me).  This is also a followup to my earlier post here about Trump's Saudi visit.

According to Ghiles, the split has opened up dramatically thanks to Trump siding strongly with the most hawkishly anti-Iran members of the GCC.  Those nations happen to be Saudi Arabia and the UAE, both of which are actively involved in the disastrously bogged-down war in Yemen, where evidence is weak that Iran is even providing anything significant to the Houthis who currently control northern Yemen and the capital of Sana'a and are Zaydi Shia.  Many reports show a major humanitarian disaster unfolding in that nation, which appears to be in the process of splitting into at least three, if not four, failed pieces, with the UAE apparently supporting South Yemen secessionists who recently took control of the airport in Aden (not clear what Saudis think of that,; this last bit not in any of the linked posts).  The key players are Saudi Deputy Crown Prince, Mohammed bin Salman (MbS), and the Abu Dhabi Crown Sheikh Mohammed bin Zayed (Abu Dhabi one of the 7 emirates in the UAE), both of whom have gotten close to Jared Kushner.  Another nation more or less in their camp, if not quite as close to Kushner, is Bahrain, home to a US naval base, where the ruling minority Sunni monarchy killed a bunch of peacefully demonstrating Shia a few days after Trump left Riyadh, having promised not to "lecture" them about human rights (although he was prepared to lecture US allies in Europe about all sorts of things).

So the big news that Ulrichsen presents is a bizarre campaign in various social media and regular media, especially in KSA and UAE against Qatar, claiming that its Emir Tammim made a speech on May 23 to a graduating group of military cadets in which he supposedly said that Iran was a "stabilizing presence in the Gulf," that Hama was the legitimate ruler of Gaza, and complained about "tense" relations with the Trump administration..  Indeed, these claims were apparently made on Qatar TV on May 24, only to be retracted and taken down soon after.  The Qataris claim that this report was hacked into Qatar TV, and observers at Tammim's talk claim that he never said any of this.  But this report spread widely in the Arab world, being repeated in Egypt, Libya, and some other locations as well, and apparently both the Saudi and UAE media have continued to pound away with this story even as the Qataris are claiming it never happened and that they were hacked.  A serious irony is that to the extent this is all about Qatar being insufficiently anti-Iran, especially in Yemen, Qatar sent 1000 troops to Yemen in 2014 at the special request of Mohammed bin Zayed (MbZ), who apparently personally lobbied Tammim hard on this.

In any case, whether or not there is tension between the Trump administration and Tammim, he has not visited Washington, while MbS and MbZ have done so several times, and they clearly have the ears of Kushner and Trump, as well as Trump's hands on that glowing globe.  With his strongly anti-Iran talk in Riyadh, Trump has exacerbated the divisions within the GCC, where, apparently Qatar has been in open disagreement about the seriousness of the Iran threat with KSA, UAE, and Bahran for some time.

What about the other two GCC members not openly caught up in this?  Presumably they are somewhere in between these others, and apparently at least somewhat sympathetic to the Qatari view that Iran is not quite the big threat that KSA has been claiming, with the Saudis the big dogs in the GCC, which they have long viewed as their rump puppies who should do as they are told.  Indeed, there have been scattered reports that Kuwait in particular has been less keen on all the loud anti-Iran rhetoric, with them having some special credibility as they are the GCC nation second closest to Iran, so that if Iran is in fact contemplating some invasion as MbS has loudly claimed, Kuwait would be a likely target, if nothing else to be on the pathway for an army to get to KSA after briefly passing through Iraq where it borders the Persian Gulf (last time Iran invaded a neighbor was in the 1820s). 

Oh, which leaves the ever-so quiet sixth GCC member, Oman, which actually has a border with Iran and shares the strategically crucial Strait of Hormuz through which all the oil coming out by sea from the Persian Gulf passes through. They also neighbor Yemen as well as KSA and UAE.  They are not reported to have said anything, and almost certainly will not, and they have no troops in Yemen, where they are staying uninvolved.  But nobody wants to mess with them for at least two reasons.  One is the obvious matter of their sharing the crucial Strait of Hormuz with Iran. The other is that they do not share the Sunni sectarian biaz against Shia Iran.  They are the only nation in the world not to be led by a Muslim sect that is either Sunni or Shi'i, the Ibadi sect.  As a result, they prefer to stand back from this insane Sunni-Shia war, although, partly to keep the Saudis and UAE off their backs, they are formally in the GCC and regularly approve resolutions approved by its fellow members.  But Oman goes its own way, if ever so discretely.

Probably the most important sign of their willingness to act independently although also secretly, is that it was through their auspices that the initial contacts were made by the Obama administration when it began to approach Iran about engaging in the ultimately successful negotiations that led to the nuclear deal, a deal strongly opposed by both KSA and Israel on the surface, but amazingly enough not yet undone by Trump, despite his having denounced it during the campaign as "the worst deal ever made."  On that matter, Putin may have been a good influence, whose foreign minister, the ineffable Sergei Lavrov, played a crucial role in getting that deal done.  Paris agreement supported by all nations on the planet except Syria and Nicaragua?  Not a problem blowing it off.  But somebody has gotten to Trump to convince him to leave alone the Iran nuclear deal, even as he has ramped up anti-Iran rhetoric in a way that has apparently triggered or encouraged this blowup within the GCC, and let us hope that he continues to leave it alone. But Oman is having none of these wild anti-Iran shenanigans, and nobody is going to mess with them about it.

Barkley Rosser

Scott Pruitt Lies to Chuck Todd

DangItIowa and I both endured the Meet the Press interview with the EPA Director:

Scott Pruitt was on Meet the Press today and claimed that 70,000 “coal sector” jobs have been added in the US since 4th quarter of 2016, with 7,000 created in May 2017 alone. I don’t know Scott Pruitt’s definition of the “coal sector” but his claim was in response to Chuck Todd asking if President Trump had made an empty promise to coal miners about bringing back the coal industry. Here are the facts, from the Bureau of Labor Statistics, about the gain in US coal mining jobs since 4th quarter of 2016. There were 49,300 coal mining jobs at the end of September 2016 and there were 51,000 coal mining jobs at the end of May 2017 — that’s 1,700 jobs added. And only 400 of those jobs were created during May 2017.

This was not even his worse spinning in my view. Pruitt kept telling Chuck Todd how the U.S. was lowering carbon emissions whereas the Chinese will not be required to do so for years. Chuck Todd as usual was completely unprepared and never noted the fact that per capita CO2 emissions in 2016 were 16.4 metric tons for the U.S. but only 7.6 metric tons for China.

"It Depends on How We They Value Time"

Peter Dorman calls attention to a NYT Upshot column by Neil Irwin about the cost of climate change. For Irwin, the question can be framed as a matter of discounting, "A dollar today is worth more than a dollar tomorrow and a lot more than a dollar in 100 years. But what discount rate you set determines how much more."

As Irwin admits, the discount rate is a "business concept." His conclusion, then, follows exclusively from a business concept of "how, as a society, we count the value of time." Why are we compelled, as a society, to count the value of time in accordance with the business concept of discounting? Because there is no other concept of time? No, there are other concepts of time. More specifically, there is a concept of time directly opposed to and critical of the business concept of time. Labor time.

What discounting is to the business concept of time, alienation is to the labor concept of time. Alienation refers not to "feelings" of alienation but to the sale of one's own time -- and consequently autonomy -- to another.

For every human being -- as for the wage worker -- there are 24 hours in a day,  168 hours in a week, 8760 or 8784 hours in a year. These are fixed amounts. You can't put it in a bank and get it back in 20 years with interest. You can't take it with you and you can't convey it to your heirs in a will. Today is here today and gone tomorrow.

The discount rate concept has nothing to do with the qualitative experience of time by humans and everything to do with the quantitative accumulation of money by property owners. Framing the cost of climate change as a contest between different discount rates is totalitarian. We live in a totalitarian society in which the non-business concept of time is invisible. Neil Irwin sounds like a thoughtful person. It simply didn't occur to him that there was any other relevant concept of time than the business concept.

That is why the climate is changing. And that is why not enough will be done about it. Because it all depends on how capital values time.

Mankiw v. Mankiw on the 1981 Tax Cut

Greg Mankiw’s first macroeconomic textbook correctly noted that the mix of Volcker’s tight monetary policies and the 1981 tax cut led to a fall in national savings driving up real interest rates and crowding out investment and net export demand. Yes – there was some messy short-run Keynesian events but his early account captured the long-run effect of what was an anti-supply-side fiscal policy. But now Mankiw sings the Keynesian praises of the 1981 tax cut:

When Mr. Reagan moved into the Oval Office in January 1981, the economy had recently experienced a recession. The recovery was just six months old. Unemployment was still elevated at 7.5 percent. Worse yet, another downturn was on the horizon. Within six months, the economy would again be in recession. Unemployment rose to 10.8 percent at the end of 1982, its highest level since the Great Depression. In August 1981, Mr. Reagan signed into law a bill that phased in tax cuts over three years. These cuts helped usher in a robust recovery. By the end of 1988, as Mr. Reagan was leaving office, the unemployment rate had fallen to 5.3 percent.

Revisionist history or just plain intellectual garbage? Yes – Volcker engineered what was supposed to be a temporary recession in 1979 but was reversing his tight monetary policy even before Reagan took office. The reason we had the 1982 recession was that the FED overreacted to the ill-advised Reagan stimulus. The reason the economy later recovered was that the FED later reversed course. Volcker had kept asking the Reagan White House to end their toxic mix of tax cuts for the rich and offsetting monetary restraint. Greg Mankiw knows this all too well so why would he write this nonsense?

When George W. Bush became president in January 2001, he faced a situation that, in some ways, was similar to that of 1981. (Disclosure: I was one of his economic advisers from 2003 to 2005.) The economy was heading toward a recession, attributable largely to the bursting of the dot-com bubble. From March 2000 to April 2001, the tech-heavy Nasdaq composite average lost about two-thirds of its value. A recession officially began in March 2001. Unemployment rose from 3.9 percent at the end of 2000 to 6.3 percent by the middle of 2003. Without the tax cuts President Bush signed into law, unemployment would have probably gone higher.

That must be the reason but then his defense of the 2001 tax cut has a couple of problems. The FED recognized the same events and was actively lowering interest rates even before this tax cut. But OK – a little more consumption demand may have been in order. The real problem, however, is that the rest of Team Bush was selling this tax cut as a means for raising national savings but Mankiw insists it was designed to lower national savings. And we thought they had multiple and conflicting reasons for invading Iraq. But why write about this now?

Yet Mr. Trump faces a vastly different set of circumstances. The economy has not experienced a recent recession…The Federal Reserve is responding to these events by raising interest rates. It believes, correctly in my judgment, that incipient inflation is a greater risk than recession. Keynesian pump-priming is not what the economy needs now. The main macroeconomic problem the nation faces is slow productivity growth, which in turn leads to slow growth in average incomes. Increased budget deficits would only make this problem worse. They would cause the Fed to raise interest rates even faster than otherwise. Higher interest rates would discourage capital investments, further depressing productivity.

The old Greg Mankiw resurfaces! Of course some of us wonder if we are really at full employment and hence are critical of the recent increase in interest rates. Brad DeLong strikes the right tone:

today’s weak inflation outlook suggests that the Fed’s monetary policies, in combination with fiscal policies, are not providing sufficient stimulus for the US economy – as was the case in 2013. Unfortunately, the FOMC does not appear to be particularly concerned about this possibility. Among FOMC members, Neel Kashkari, the impressive president of the Federal Reserve Bank of Minneapolis, is the only one who has dissented, calling on the Fed to pursue more stimulative policies. The FOMC’s blind spot stems from the fact that it is relying more on its assessment of the labor market, which it considers to be at or above “full employment,” than on noisy month-to-month inflation data. But “full employment” is a rather tenuous and unreliable construct.

In lieu of more monetary stimulus, a little fiscal stimulus now might be a good thing. But if we go big on infrastructure investment then we would likely have all the fiscal stimulus we need for full employment and more. Mankiw’s title might suggest a tax cut would be nice but I would argue tax cuts for the rich would be the wrong form of fiscal stimulus.

The Cost of Climate Change: It’s Not About Psychology

You know there are problems with economics when things that are perfectly reasonable in the context of economic theory are clearly absurd once you step out of it.  Case in point: the claim in today’s New York Times piece by Neil Irwin that the economic cost of climate change vs the actions we’d need to mitigate it depends on “how, as a society, we count the value of time.”

In economics?  Yes.  The present value of climate and climate mitigation costs depends on the discount rate, the extent to which we devalue something a year from now because it’s a year away.  That’s how you do a cost-benefit analysis.  It really matters for climate policy because the costs tend to be upfront and the benefits decades or even centuries down the road.  Economists wrack their brains over how to select exactly the “right” discount rate to perform these calculations.

But think about it for a moment.  While there’s a “technical” aspect to time preference—investing today can result in measurable returns over time—the discount rate also depends on psychology: how present-oriented are we?  How much do we live in the here and now rather than looking down the road and preparing for tomorrow?  We all occupy different places on this classic grasshopper-ant continuum, and we usually shift our position over the course of our life cycle.  Yet how does this psychological characteristic, either individually or socially, affect the economic consequences of acting on climate change, or not?  It certainly affects the kinds of choices we’re likely to make, but the consequences?

The whole point of Aesop’s grasshopper-ant fable is that there’s a real world that both insects inhabit, with consequences that don’t depend on their psychology at a moment in time.  Grasshoppers are not better off because they follow the myopic dictates of their grasshopper brains.  This was obvious 2500 years ago, and it’s obvious today.  Economists’ obsession with identifying the “right” discount rate for cost-benefit calculations is a product of their own warped world (the logical and empirical craziness of welfare economics) and has nothing to do with rational decision-making about how to adapt to ecological constraints.

(Image source: smallkidshomework.com)

Trump’s Confusion Regarding Chinese Coal

Jonathan Chait listens to President Trump so we don’t have to:

China will be allowed to build hundreds of additional coal plants. So, we can’t build the plants, but they can, according to this agreement. India will be allowed to double its coal production by 2020. Think of it. India can double their coal production.

Trump seems worried that China will be stealing our coal jobs by exporting their coal to us. There are several problems with these claims. Brad Plumer notes:

Over the weekend, the Chinese government ordered 13 provinces to cancel 104 coal-fired projects in development, amounting to a whopping 120 gigawatts of capacity in all. To put that in perspective, the United States has about 305 gigawatts of coal capacity total. The projects that China just ordered halted are equal in size to one-third of the US coal fleet.

China produces a lot of coal because they consume a lot of coal. Their consumption of coal peaked in 2014 but has been falling since then:

Coal consumption fell by 4.7 percent year-on-year in 2016, and the share of coal in the country's energy mix slipped to 62.0 percent, down 2.0 percent year-on-year, the National Bureau of Statistics said in a report. Overall coal production also fell, dropping 9.0 percent to 3.41 billion tonnes in 2016. The data suggests that "coal consumption probably peaked around 2014," according to a statement from environmental group China Dialogue.

China actually imports coal but even those imports may be declining. The U.S. is a net exporter of coal as reported by Census. While we import about $3 billion per year of coal, coal exports soared to over $7 billion in 2012. These exports fell to just over $4 billion in 2016 but this decline was not due to China but rather the competition from natural gas. Since Trump is big on bilateral trade balances maybe he should note that we are a net exporter of coal to China. Of course if China decides to consume less coal over time, we will export less coal to them even as they cut back on their own production.

Mick Mulvaney Attacks the Credibility of the CBO

Tierney Steed notes that the OMB Director is not happy with how the CBO scored TrumpCare:

It’s become the knee-jerk reaction for Republicans, in light of an ugly Congressional Budget Office analysis of their Obamacare repeal bill, to point the finger at the non-partisan research agency instead.Office of Management and Budget Director Mick Mulvaney took it a step further this week, by questioning the abilities of Holly Harvey, the head of its health analysis division, to be non-partisan. “At some point, you’ve got to ask yourself, has the day of the CBO come and gone?”

So who should score these things? I wonder if Menzie Chinn will nominate Stephen Moore?

Pronoun Madness

I have been assiduously following my institution’s recommendations regarding preferred student pronouns.  Students announce their pronouns on the first day of class.  We all commit to remembering not only their names and faces (always a burden for me) but also their pronouns.  In class discussion we have little signs on our desks with name and pronoun identifiers.

I find this extremely annoying, but not because I’m bothered by the freedom of my students to define their gender as they choose.  Far from it.  What irks me is that we have to go through so much bother because of the shortcomings in our language.  Rather than spend so much energy on pronouns, why not change the language?

Simply eliminated gendered pronouns from English—poof.  We could all get along just fine with a generic, formerly plural they-them.  Less to remember and stress about.  This reform would be even more welcome in languages like French, German and Spanish that are gendered through and through and throw up so many more barriers to well-meaning language learners like myself.

And for reciprocity, and to make it a package deal, the US could switch to a metric system at the same time.

Peter Dorman (he/him)