Friday, December 30, 2016

Trumpshit: Correcting The Definition, 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

Wednesday, December 28, 2016

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

Tuesday, December 27, 2016

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.

Sunday, December 25, 2016

Peak Robot: the Fragment on Machines

Martin Sklar's disaccumultion thesis is a restatement and reinterpretation of passages in Marx's Grundrisse that have come to be known as the "fragment on machines." Compare, for example, the following two key excerpts.

Marx: the degree that large industry develops, the creation of real wealth comes to depend less on labour time and on the amount of labour employed than on the power of the agencies set in motion during labour time, whose ‘powerful effectiveness’ is itself in turn out of all proportion to the direct labour time spent on their production, but depends rather on the general state of science and on the progress of technology, or the application of this science to production. ... Labour no longer appears so much to be included within the production process; rather, the human being comes to relate more as watchman and regulator to the production process itself. (What holds for machinery holds likewise for the combination of human activities and the development of human intercourse.)
In consequence [of the passage from the accumulation phase of capitalism to the "disaccumlation" phase], and increasingly, human labor (i.e. the exercise of living labor-power) recedes from the condition of serving as a ‘factor’ of goods production, and by the same token, the mode of goods-production progressively undergoes reversion to a condition comparable to a gratuitous ‘force of nature’: energy, harnessed and directed through technically sophisticated machinery, produces goods, as trees produce fruit, without the involvement of, or need for, human labor-time in the immediate production process itself. Living labor-power in goods-production devolves upon the quantitatively declining role of watching, regulating, and superintending.
The main difference between the two arguments is that for Marx, the growing contradiction between the forces of production and the social relations produce "the material conditions to blow this foundation sky-high." For Sklar, with the benefit of another century of observation, disaccumulation appears as simply another phase in the evolution of capitalism -- albeit with revolutionary potential. But also with reactionary potential in that the reduced dependence on labor power also suggests a reduced vulnerability to the withholding of labor power.

Saturday, December 24, 2016

The Accidental Conspiracy Theorist Redux

Kellyanne Conway, "The Microeconomic Effects of the Terrorist Attacks on September 11: Americans Helping Americans," 16 Notre Dame J.L. Ethics & Pub. Pol'y 101 (2002).
It took the slaughter of innocent people, the evisceration of the national economy, and the realization that all is not secure on the home front to reconnect with basics like faith and freedom, and to unify and marshal the public.  
A united and inspired America is no small feat. More than one year ago, the nation was deadlocked about a presidential contest "too close to call" that was not resolved some thirty-six days after Election Day.' For the third consecutive time, Americans elected a President with less than 50% of the popular vote.
Paging Paul Krugman...

Banana Republic and Auerbach’s Destination-Based Cash Flow Tax

I’m hoping Santa brings me a new winter coat but if he is comparison shopping between Old Navy and Banana Republic, note they are both owned by the GAP. Bruce Blonigen is right when he challenges this old canard:
Do large mergers benefit or harm consumers? Over the years, corporations and economists have argued that mergers benefit consumers by increasing efficiency, reducing production costs, and, in turn, lowering prices.
But the real reason I thought about shopping for apparel comes from CNBC:
It's a border-adjustment tax for goods that are imported. About 95 percent of clothing and shoes sold in the U.S. are manufactured overseas, which means imports make up a vast majority of many U.S. retailers' merchandise ... A retailer like the Gap buys a sweater from its overseas manufacturer for $80. Gap has an additional $15 in other expenses associated with that sweater (like transporting it). Gap sells the sweater to a shopper for $100. So tax is calculated by taking that $100 in revenue, subtracting the $80 cost of the good, subtracting the $15 other costs, leaving $5 in profit. If Gap pays a typical 35 percent tax rate on the $5 profit, its tax bill for that sweater is $1.75.
Hey, a $100 coat would be nice but I’ll question this example in a bit. The topic is the tax proposal from Alan Auerbach that I’ve been critiquing:
I think the real issue here is that this proposal smooshes together two very different ideas sort of like how shimmer was a floor wax and a dessert topping. Auerbach has been pushing a tax on economic profits instead of accounting profits for a long time. But typically profits taxes are sourced based not residence based. Now it is true that developing nations don’t like the idea of paying royalties to developed nations so they have favored residence based approaches but the OECD has favored sourced based approach to taxing income. Then again, a company like Apple neither declares its foreign based income in the US or in China but in places like Bermuda…we would repeal the corporate profits tax for multinationals but then give them a payroll subsidy. Whether this violates current WTO rules, it certainly is a distortion facing sourcing production in Detroit over Windsor. Maybe Trump might like this idea but this is precisely because he wants to use tax policy to shift production away from foreign sources and back to places like Michigan.
CNBC focus on the trade distortion. While Auerbach fires back with the notion that a dollar appreciation exactly offsets any trade distortion, CNBC’s discussion assumes a fixed exchange rate. The economists at Goldman Sachs take an intermediate view:
The “idealized version” is that standard proposition of the Mundell-Fleming model that trade protection under floating exchange rates would have no net effect on net exports. Of course the transfer pricing implications are a bonus for highly profitable US based multinationals who want to do massive income shifting and declare it all “perfectly legal”. This is a horrific idea which should not become law.
Let’s return to this transfer pricing in a bit but permit me to critique the CNBC example by noting what one would learn by looking at the financials for the GAP. Their operating profits are actually 15% of sales – not 5% - and their recorded operating expenses are 25% of sales not 15%. Cost of goods sold are only 60% of sales and that includes occupancy expenses, which are defined as:
Occupancy costs refer to expenditure required to occupy and maintain the physical space a business inhabits
Let’s assume that these represent 10% of sales. The cost to the GAP of that $100 coat I hope Santa gets me is only $50 – not $80. As Brad Setser thinks about the transfer pricing aspects of what may become Trump’s new tax and trade policy, he seems to be hoping Santa brings him a new iPhone:
The iPhone, famously, is designed in California and is assembled in China out of parts manufactured (mostly) in Asia .. No one questions that the iPhone is designed in the United States. And a lot of the software that makes an iPhone an iPhone is also created in the United States. And the export of intellectual property rights—the U.S. design and engineering embedded in a “designed in California” iPhone sold in Asia or Europe—should in theory enter into the balance of payments as a services export. I would think it should show up in the line item for the export of “charges for the use of intellectual property, computer software” though in practice it may enter as a payment for research and development services
Brad notes, however, that much of Apple’s profits end up offshore:
Apple here is really a metaphor. It is the most high profile case, but it is—judging from the size of reinvested earnings in the balance of payments and the cash balances various firms have built up abroad—far from unique. Certainly the profits that U.S. firms report in low-tax jurisdictions—Ireland, the Netherlands, Luxembourg, the Caribbean, Singapore—are now large relative to U.S. exports of software and research and development services.
Check out Brad’s comment section and they get into this Auerbach tax. I was wondering how much of GAP’s income is sourced offshore as apparel multinationals are notorious for such income shifting. It turns out, however, that GAP sources very little income offshore. So OK Santa – buy my coat there. Happy Holidays everyone!

Friday, December 23, 2016

PEAK ROBOT: Accumulation and its Dis-contents

Jared Bernstein is wrong. The "robots did it!" story DOES NOT require an acceleration in productivity growth, as conventionally measured. Dean Baker, who shares Jared's certainty about the relationship between robots and productivity measurement, is also wrong. Mike Beggs is wrong. James Livingston is wrong. And Larry Kudlow is wrong. Everyone is wrong!
Why are they all wrong? The answer is to be found in a portentous passage in an article by Martin J. Sklar, "On the Proletarian Revolution and the End of Political-Economic Society," published in 1969 in the SDS journal, Radical America:
In consequence [of the passage from the accumulation phase of capitalism to the "disaccumlation" phase], and increasingly, human labor (i.e. the exercise of living labor-power) recedes from the condition of serving as a ‘factor’ of goods production, and by the same token, the mode of goods-production progressively undergoes reversion to a condition comparable to a gratuitous ‘force of nature’: energy, harnessed and directed through technically sophisticated machinery, produces goods, as trees produce fruit, without the involvement of, or need for, human labor-time in the immediate production process itself. Living labor-power in goods-production devolves upon the quantitatively declining role of watching, regulating, and superintending.
Except, there is no "gratuitous" force of nature. Sklar's "gratuitous force of nature" did for his argument exactly what he criticized Herbert Marcuse of doing, naturalized the historical. Forces of nature were treated as gratuitous within a particular historical mode of production.

What does this have to do with Jared Bernstein -- or for that matter with Larry Kudlow? (Not to mention Mike Beggs, James Livingston and Dean Baker).

Let's start with Kudlow, an SDS activist at the University of Rochester in the late 1960s and favorite of Sklar, according to Livingston. For Kudlow, tax cuts function as a "gratuitous force of nature" -- or more precisely as the removal of fetters on a gratuitous entrepreneurial "energy" that will subsequently be "harnessed and directed through technically sophisticated machinery" etc. etc.

You can take the ex-SDS activist out of the Grundrisse but you can't take the Grundrisse out of the ex-activist. Or, to paraphrase Trotsky, Kudlow may have forgotten about disaccumulation but disaccumulation does not permit Kudlow to escape from its net.

So much for Kudlow, how does this criticism apply to Livingston, Beggs, Bernstein or Baker?

I'll take Livingston first, since his aversion to "full employment" is most compatible with my own view. Livingston advocates "detach[ing] the receipt of income from the production of goods." This is a sensible idea in that most income today is already detached from all but symbolic connection to the production of goods. Unlike Kudlow, Livingston explicitly ties this imperative to Sklar's disaccumulation thesis:
But the bottom line is this. Most jobs aren’t created by private, corporate investment, so raising taxes on corporate income won’t affect employment. You heard me right. Since the 1920s, economic growth has happened even though net private investment has atrophied.
Can you spot the gratuitous force of nature in Livingston's argument? "Since the 1920s, economic growth has happened even though..."

Mike Beggs takes issue with the sort of income detaching solution that Livingston advocates. Beggs challenges the underlying notion of technological unemployment with the age-old refrain that new jobs "always come along" to reabsorb the workers displaced by automation:
But the idea that machines are about to supplant workers is a trope as old as capitalism itself. It always looks plausible because so many particular tasks are always in the process of being automated, and new wonders are always just around the corner. And yet new jobs have always come along.
Beggs admits those new jobs are not always as remunerative as the old ones. "Almost all net job growth in the United States since 1990 has been in low-productivity growth sectors: construction, retail, hospitality, health care, education, government, and finance." For the last decade, you can leave out construction. Net job growth has been confined to "sectors with average hourly pay and weekly hours much lower than the economy-wide average."

"But," Beggs argues, "there is no technological reason that such jobs be low paid and insecure." To explain why not, Beggs digresses at length on the history of Milton Friedman's "natural rate of unemployment" and the "awful but more literal 'non-accelerating inflation rate of unemployment."

The upshot of all this is that liberal policies for full employment "are predicated on labor's weakness." The left "should be calling [the] liberals' bluff". Beggs doesn't specify exactly what full employment policies should be advocated by the left but he does cite Dean Baker's and Jared Bernstein's Getting Back to Full Employment.

Baker and Bernstein's prescriptions include improving the trade balance, public investment, public jobs and work sharing, all of which sound like good ideas. But here our old repressed nemesis, disaccumulation, returns in the form of denial that "robots and other new technologies will diminish the need for human labor in the years ahead." "History is littered with such predictions," B&B, recite, in a trope as old as capitalism itself, "and there are many aspects to today’s version that don’t hold up to scrutiny." Why doesn't today's version hold up to scrutiny? Because, they explain, job displacement by robots would "imply an acceleration of productivity growth in recent years, but that has not occurred." Is that so?

Let's go over that again because it is subtle. Beggs agrees with Baker and Bernstein that history is littered with the old trope about automation displacing workers. But Beggs's claim that net job growth since 1990 in the U.S. has been in low-productivity sectors contradicts Baker's and Bernstein's assertion that the displacement of workers  by automation would imply faster productivity growth economy wide. Why not faster productivity growth in sectors that are declining in relative importance being more than offset by the expansion of low-productivity sectors?

I would side with Beggs on that later point but argue further that this discrepancy between Beggs and Baker and Bernstein arises from a fundamental flaw in the claim that "new jobs have always come along." Where have those new jobs come along from? From the same place that "economic growth has happened even though." A gratuitous force of nature has produced new jobs and economic growth "as trees produce fruit."

Isn't it time that we gave a name to this allegedly gratuitous force of nature? In the late 17th century, that name was "African slaves." In the 19th century, it was "wage labor and coal." In the disaccumulation phase of capitalism, it is "fossil fuel."

A century and a half ago William Stanley Jevons linked the consumption of coal and the creation of jobs in a way that has been overlooked by most commentators on the infamous Jevons Paradox. "It is wholly a confusion of ideas," wrote Jevons in The Coal Question, "to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth." He went on to explain:
As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.
The new jobs have come along from the increased demand for the more efficient labor, which has been brought about by the introduction of new machinery, which has increased, rather than diminished the consumption of fuel.This is fundamentally different from what I will call the naïve Jevons Paradox,  the idea that fuel efficiency per se leads inevitably and directly to an increase in the consumption of fuel.

That is the good news.

The bad news is that the same reservation applies to the naïve, policy-induced resurrections of "Say's Law" in both its demand-side and supply-side variants. Those panaceas perform either a tacit or an overt denial of climate change and resource limits.

This is admittedly unfair to those proponents of a "green new deal" with its emphasis on eco-technological modernization. They are not so much tacitly denying climate change and resource limits as "watching for the card so high and wild that they'll never need to deal another." Just because such a breakthrough is conceivable, doesn't make it imminent, though -- or, for that matter immanent.

In practice, job creation requires increased fuel consumption. Robots require a fuel source. An unplugged robot neither liberates nor displaces workers.

Yes, Virginia, there is no gratuitous force of nature.

Thursday, December 22, 2016

Trump Goes To Hell On Nuclear Weapons Policy

OK, so maybe this is another thing we should ignore, but Trump coming out with his call for the US to increase its stockpile of nuclear weapons, as well as upgrading them, is seriously off the wall.  One reason I had no doubt about voting for Clinton, despite disliking both aspects of her positions and her personality, was his occasional wild remarks about nuclear weapons (e.g. "Why can't we just use them when we feel like it?" or something like that).  One would have hoped he would get past that after getting elected, but I see nothing good coming out of this at all, with not a nation on the planet supporting this, not even UK or Israel, and plenty disliking it and quite possibly setting off a new nuclear arms race, just what many past presidents have been carefully trying to undo.

Of course the Chinese will hate this, but an irony is that this might upend one of the few possible bright spots in foreign policy Trump has offered.  I have not been a fan of his ass kissing of Putin, but in fact I had begun to hope that maybe Putin might just behave better in some parts of the world, Baltics and Ukraine in particular, to please his new pet president.  But I seriously doubt that Vladdie is going to like this at all.  This particular honeymoon may be over before it even begins.  Time to bottle back up all that now drunk champagne in Moscow.

The only real question is if this is just Trump himself shooting off his mouth thoughtlessly yet again or whether this reflects advice from any of his new national security team.  Some of these people seem not entirely unreasonable, including the wildly named "Mad Dog" Mattis, incoming SecDef.  If indeed this is being pushed by an adviser, I suspect the conspiracy-minded NSC guy, Flynn.  If it is just Trump, however, maybe they can walk him back off this.

As it is, it  may be just as well that the late Tom Schelling did not liive to see this awfulness.

Addendum at 11:10 PM:  I have now learned that Putin put out an unpleasantly aggressive statement about enhancing the Russian nuclear weapons stockpile so  that it can penetrate various defenses in Europe shortly before Trump issued his tweet.  I am not sure if Trump's tweet was specifically a reply to that or not, but this does put a different spin on this, with it looking like the honeymoon was ended by Putin rather than Trump before Trump could even get in office.  Wow, what a sucker Trump was with all  that falling all over Putin, not to mention the reportedly 37% of Republicans who supposedly now think that Putin is just great since Trump has been saying so  many nice things about him.  Just gag all the way around.

Barkley Rosser

Wednesday, December 21, 2016

Did Obama Save The World From A Second Great Depression?

That is a claim made on Monday by Robert J. Samuelson in the Washington Post, who argues that while he "had plenty of help, including from his predecessor, George W. Bush, and from top officials at the Treasury  Department and Federal Reserve," his bailout of General Motors and Chrysler and his projecting "reason and calm when much of the nation was fearful and frazzled," and, oh so briefly, "He also championed a sizable budget 'stimulus'," not to mention his somehow generating a stock market boom were all crucial to the turnaround.  OK.

Now I am usually denouncing RJS on this site, but I am not going to do so too  much here today, even though I shall express some problems with this.  For better or worse, I am more going to pick on my old friend Dean Baker, who is all over RJS on this, just dumping on him like we both usually do.  But as RJS is a bit off, so is good old Dean, who spends most of his energy denouncing the TARP bank bailout, which RJS accurately notes was put in place by Bush, not Obama, so not relevant either way to a judgment on what Obama did or did not do (although he did not undo it, and did support it when Bush proposed it, so grant that to Dean).

Dean has long argued that TARP should not have been done and that instead we should have let the big banks fail, paying off depositers with FDIC funds, although those would have run out quickly.  But then he also says Obama could have run a much bigger fiscal stim than he did, even though most think he got about as big a one as he could given the political views in the Congress at the time, and letting FDIC go bust would need to have been undone by Congressional action, which may or may not have been forthcoming.  However, if depositers could have been paid, maybe we could have restructured the bankrupted parts of those big banks without too much turmoil or negative repercussions throughout the economy.  But that is not at all certain, and we shall never know.  After all, what happened in 1931 that turned an unpleasant recession into the Great Depression was indeed a massive financial collapse involving a global set of related bank failures, starting with the Creditanstalt in Austria in May and then spreading through Eastern Europe and then through Germany and France and Britain, finally to hit the US by the end of the summer, with the Fed doing nothing about it, and there also being no  FDIC to save the depositers who lost big when their banks failed.

As it is regarding Obama and the banks, probably what he did that stabilized the financial system, and was not a financial gimme to the banks as TARP was (although from the standpoint of the taxpayers, TARP was a money maker, just barely), was the stress tests that happened in March, 2009, and went well, and seem to have coincided with a turning around of many markets and a lowering of major risk spreads in the economy.  It is possible that this was at least as important as the fiscal  stimulus (which the expectation of it kicking in also hit about that time)  for helping to  turn around the economy, although Samuelson said nothing about those stress tests, even though they were probably more important than the auto company bailouts he makes a big fuss about.

So, if  neither RJS nor Dean really has it down as to what kept us out of a second Great Depression, and indeed that is what I am arguing, what was?  Oh, that would be the actions of  Ben Bernanke and his Fed colleagues at the precise instant of the Minsky Moment on the weekend of September 18, 2008, actions not widely known or recognized, but where indeed Bernanke showed his knowledge  of the events of 1931 and acted to avoid that outcome. As the crash unfolded over  the weekend, the most dangerous part of it came in Europe, where several of the biggest banks, including Deutsche Bank and BNP Paribas, were in danger of collapsing after the AIG branch in London went down.  The ECB was under pressure trying to  buy up their stuff made junk by the AIG collapse and was failing to do so as a crash of the euro began, with European (and other) money rushing into the safe haven of the US dollar (this involved similar events in some non-European nations as well).

The decision was made to put on the Fed balance sheet in swaps, where one can find this in the historical record with it labeled as such, about $600 billion of this (mostly) euro junk that the ECB was having trouble absorbing.  This action after that weekend stabilized the euro and ended the immediate crisis, which indeed threatened a full-scale global financial meltdown a la 1931.  These balances were then quietly rolled off and sent home after the crisis ended over about a six month period to be replaced by US mortgage-backed securities  (MBSs).  I  first heard of this from the inimitable Perry Mehrling, and one can find a pretty good account of it in Neil Irwin's The Alchemists, but very few people know about it, with most like Dean and RJS getting all worked up about such secondary matters as TARP and the fiscal stimulus.  Without that weekend save, these would have been flying against a much deeper crash and plunge into depression than they were.

BTW, it is even harder to separate out what was responsible for what as the ending of the rolling off the Fed balance sheet of all that eurojunk came about the same time in March,2009 as did the stress tests and the passing of the fiscal stimulus.  Good times would be coming one way or another, even if it would take a long time given the depth of the fall.

Why do so few people know about this?  Well, this was one of those deals involving confidence,  or the fear of losing it.  Folks at the Fed, who got very little sleep on the weekend of Sept. 18, 2008, did not want to aggravate the crisis coming out of Euorpe (which in turn was triggered by events in the US), so they wanted as little publicity as possible about the fact that there was such a serious world-economy-threatening crisis, as well as also not wanting to let people know that they were doing anything about it, with the extremely bad condition of the assets the Fed was putting on its balance sheet to be especially not made known, buried under the obscure label of "currency swaps."  And the fact that their actions were successful, arguably then reinforced later by various actions discussed by Samuelson and Baker, led to those assets becoming less toxic over the next few months and thus able to be quietly sent back to Europe where they came from.

Needless to say, neither Obama nor Bush had doodley-squat to do with those events or the decisions by the Fed that probably were more  important in saving the world from a second Great Depression than anything done later by them or anybody else.  Credit should be given where it is due on this.

Addendum, 1:30 PM, Dec. 21:

A couple of further remarks.  Much of what has Dean Baker and many others annoyed about TARP was that a bunch of bad guys got away with it.  He and many others, including many who supported Bernie over  Hillary and some who voted for Trump over her as well (even though Trump is dumping on them by appointing Goldman Sachs types and other billionaires to his cabinet), have been unhappy that TARP saved the behinds of these big CEOs, whose Big Four banks look now "too big to fail"and sitting very pretty.  (Probably the stupidest thing Hillary did  was giving those paid speeches to those Wall Street fat cats).  I see two related but separate issues here, none of them having to do with the Fed swap bailout of Europe,and a third further unmentioned but related issue also.

One is  this matter of punishment and retribution.  So, I regret indeed that Obama did not have the DOJ or somebody go after some of these high level CEOs.  Many of them clearly guillty guilty. guilty.  There was a danger this could have turned into an excessive witch hunt, but as it was a bunch of guilty people got off very scot-free, in some cases a lot richer than they started out as.

I suspect that the decision not to go after them was related to the decision not to break up those biggest banks.  That in turn reflected a policy coming from the Fed and predating the full crash, that it was preferable to have larger banks take over smaller failing ones rather than let those smaller one outright fail.  Some of this may have been a matter of trying to prop up confidence, e.g. Bear Stearns, although some of it may have also been wanting to avoid putting the limited FDIC funds in danger by having to deal with too  many bank failures.  Of course, this led to the increasing size of these  behemoths that bought up these banks,with some of them suffering as a result, still not fully digesting what they bought, with Bank of America especially sticking out on this.  There certainly is a case now for busting up some of these big banks, especially now that we are way out of the old danger zone. However, at the time, even Dean admits that there would have been a major decline if the banks had all been left to fail, not just Lehman, with his invoking a not-likely-to-happen World War II level fiscal stimulus to overcome the aftermath of that.

The third issue, not  mentioned by either Samuelson or Baker,although Dean has written about it in the past and is fully aware of it, is what to do about all the homeowners who ended up with underwater mortgages, at one point as many as about a quarter of all mortgage holders.  These people clearly took a big hit, and RJS vaguely mentioned them when he referred in his article to "asset value losses," which clearly went beyond the stock market.  This matter is still a hangover from the Great Recession, with many people still in this underwater condition, which is most depressing.  Their condition of course was related to the problems in the banks and financial markets more broadly, but has persisted even after the bank crisis settled down.  At times Obama and others made noises about doing something for  these people, but there was always political resistance and not just from Republicans.  Such moves were basically unpopular because of annoyance by mortgage holders who were not underwater, many of whom saw those in the underwater situation as being personally responsible for their own financial problems.  Why should the rest of us bail out these fools who took  out overblown mortgages on overly highly priced real estate?  I cannot answer that one,but I note that the failure to bail these people out, who arguably were more deserving than the big banks, has been a major drag on the recovery and still is.

Barkley Rosser

Sunday, December 18, 2016

Universal Basic Income: Two Corrections

The UBI must be gaining headway; it got a big writeup in today’s New York Times.  The article centers on an experiment underway in Finland, where a random sample of households is getting the benefit.  Here are two things you should know that the Times failed to report:

1. Despite the claims of the article, the case for UBI has next to nothing to do with fighting income inequality.  It moves some  money from the rest of the population to the bottom of the distribution but does nothing at all about the concentration taking place at the top.  At best it is about ameliorating the conditions at the bottom, period.

2. It so happens that we’ve been here before: the Seattle-Denver Income Maintenance Experiment of the 1970s.  The results were favorable from a labor supply standpoint, but lots of women saw the income guarantee as an off ramp from unsatisfactory relationships.  The program’s primary sponsor, Daniel Patrick Moynihan, gave up on it in the interest of “saving the family”:
in 1978....Senator Daniel Patrick Moynihan announced in a speech on the Senate floor that evidence of high rates of family dissolution among recipients in the Seattle-Denver experiment had caused him to question his earlier advocacy of a negative income tax.
How soon we forget.


There’s a nice chart in today’s New York Times, part of which I’m taking the liberty to reproduce here; it shows were Donald Trump stands in the ranks of elected presidents with respect to their share of the popular vote.  Only one president was selected by the electoral college with a greater deficit, Rutherford B. Hayes.  Aficionados of US history will recall that Hayes triumphed as a result of the Hayes-Tilden deal which ended Reconstruction, an event many regard as the greatest scandal in our nation’s political record.  Hayes, then Trump.

Note that Adams was selected by Congress; the rest were annointed by the electoral college.

Health Care “Reform” and Tax Cuts for the Rich

Kevin Drum spots a rare bit of honesty from Rich Lowry:
It’s easy to see things like the Carrier deal, the jawboning of the likes of Boeing, and the saber-rattling against China on trade being quite popular, at the same time the truly big things happening in Washington aren’t, such as Obamacare “repeal” without a replacement, a deficit-increasing traditional Republican “tax cut for the rich,” and even — although this is much less likely — Medicare reform.
Lowry not only admits that the GOP tax agenda is tax cuts for the rich but he also concedes that this may increase the deficit if not offset by things like “Medicare reform” which is not reform but repeal. Of course Lowry also penned something on repealing Obamacare. As Brian Faler notes:
The big winners in Republican plans to repeal Obamacare are likely to be the rich. Rescinding the Affordable Care Act means not only taking away health coverage from some 20 million Americans. It also means scrapping two big tax increases Democrats imposed on the wealthy to help pay for it all.
That is the entire GOP agenda – more tax cuts for the rich.

Saturday, December 17, 2016

The Accidental Conspiracy Theorist

All play and no work makes Paul Krugman a tinfoil hat conspiracy theorist.

What is Krugman's implicit assumption in the above tweet? That 9/11 was a false flag operation? That Donald J. Trump is not merely an untrustworthy demagogue but a ticking time-bomb? Can you see why implicit assumptions attributed to someone by somebody else are not valid?

Nearly 20 years ago, in an essay titled The Accidental Theorist, Krugman wrote:
Greider's theorizing is all the more speculative and simplistic because he is an accidental theorist, a theorist despite himself--because he and his unwary readers imagine that his conclusions simply emerge from the facts, unaware that they are driven by implicit assumptions that could not survive the light of day.
Greider's "accidental theory" was the infamous lump of labor fallacy -- the supposed implicit assumption that "there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs."

Thursday, December 15, 2016

The Current Account Deficit: Low National Savings Redux

I have been reading something Lawrence Summers wrote over 12 years ago. A lot of interesting comments but let me pick out one key segment:
Tautologously, a current account deficit is the difference between national savings and national investments; or, equivalently, between net national savings and net national investment, removing the effects of depreciation. It is natural to look at the U.S. current account deficit and ask whether its level and its deterioration is better attributed to increased investment or to reduced saving. In the last year, the net national savings rate of the United States has been between 1 and 2 percent.
Taking a look at this source and updating what Summers said for 2015, it seems net investment was only 5.5% of NNP. With the trade deficit running at about 3.75% of GDP, net national savings is still only 1.75% of NNP. As Brad DeLong notes:
Let me disagree a bit with Paul: although evidence does suggest that we are near full employment, we are not at full employment--and the suggestion that we are near full employment is a very weak one
Brad was responding to Paul Krugman who also noted:
Trump deficits won’t actually do much to boost growth, because rates will rise and there will be lots of crowding out. Also a strong dollar and bigger trade deficit, like Reagan’s morning after Morning in America.
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.

Wednesday, December 14, 2016

The Passing Of Thomas C. Schelling

Tom Schelling died yesterday at age 95. Serious people argue that by arguing behind the scenes for his Nobel-Prize-winning idea of a focal point that there be no first use of nuclear weapons he was more responsible than anybody else for the fact that we did not have a nuclear war during the Cold War, a period during which on several occasions we came much closer than most people realized.  Unfortunately it seems that with his death we seem to have moved into an era in which his old norm has broken down, and people ranging from some around the current president of Russia as well as his great fan, the president-elect of the Untied States, have taken to talking loosely about such use of nuclear weapons.  This is the greatest single worry I have about the near future, and I suspect that it was shared by the late Thomas C. Schelling.

I attach a link here to a post I made about him and this issue at much greater length back in August.  At that time I announced that he would be making a speech at James Madison University on September 14.  I believe he wanted to make that speech, and confirmed that he would a few weeks before it, only to have his wife send me a message a few hours later stating that he would be unable to due to health reasons. Clearly those health reasons were serious, and I deeply regret his passing.  He was a kind and humble as well as very wise man, for all his brilliance. The world will miss him.

Barkley Rosser

Slavery and Capitalism Redux

The Chronicle of Higher Ed has a piece on the ongoing tussle between quantitative economic historians and “historians of capitalism” over a recent spate of books claiming that slavery was crucial for the development of capitalism—especially The Half Has Never Been Told by Edward Baptist, but also Empire of Cotton by Sven Beckert.

First a disclaimer.  I read Empire of Cotton and found it wonderful.  Not every page convinced me, but the depth and sweep of the research was awe-inspiring, and the overall story (as I interpreted it, more on this in a moment) seemed right to me.  I put down The Half well before I had read half.  It was tendentiously written, with more concern for political performativity than argumentation, and it was obvious that Baptist was prone to error and exaggeration.  The last thing I’m looking for in a history treatise is an unreliable narrator.

The main point I want to make here, however, is that the Chronicle serves us a false dichotomy, either a history informed by culture that explains the inner logic of capitalist development or a reductionist, statistically-driven exercise in model-fitting that adheres to a rather narrow conception of science.  Either we infer from the sequence of events by which slavery in its later stages coevolved with capitalism the intrinsic necessity of that process, or we test counterfactuals to determine whether capitalism could have emerged in a hypothetical world in which slavery had never existed.

No and no.

The core problem here is reification, treating both slavery and capitalism as if they were discrete, homogeneous things instead of rather loose categories we assign to social and economic systems that differ across a multitude of dimensions.  Would some form of capitalism have developed in the US and other countries without the contributions of slavery?  Almost certainly.  Would it look and feel just like the capitalism we have today?  Almost certainly not.

From this perspective, Beckert’s superiority over Baptist is obvious.  Baptist does argue that slavery was essential to capitalist development, while Beckert, if you read him carefully, doesn’t.  In fact, Beckert’s story is one of constant improvisation and experimentation as the conditions for a global-scale market in textile inputs and outputs were painstakingly assembled.  It not only could have happened in other ways; it did.  And it is a mistake to read determinism into Beckert’s account of “war capitalism” (an unfortunate phrase), in which the use of imperial force and direct labor coercion were commingled with market formation, as if the entire history of trade embedded in force (the Vikings, anyone?) had never existed, and early modern capitalists could simply invent an economic order from scratch.

I’ll sign up as a loyal devotee of model-fitting and a student of the contingency of human history embedded in a cultural nexus.

Incidentally, I’m struck by the willingness of people who should know better to defend Baptist.  (The two examples of his methodological errors cited in the Chronicle piece are devastating.)  My hunch is that this is a product of the “good begets good” heuristic, or more precisely its “bad begets bad” corollary.  People have a tendency to think that if something is good it is good in all respects, and similarly if something is bad.  Slavery is bad.  Left historians want to argue that capitalism is bad.  Therefore, showing that slavery begot capitalism demonstrates that capitalism is bad.  Of course, logically it’s all nonsense: good can beget bad and bad can beget good, as they do all the time.  If the purpose is historical understanding, however, the issue is not good or bad, but how and why.

Sunday, December 11, 2016

Two Things to Keep in Mind about Allegations of Russian Interference in the US Election

This weekend we’re being treated to claims the CIA is convinced the Russian government used its hacking prowess to support Trump’s election this year, along with equally vehement claims that, in the absence of publicly provided evidence, we have every reason to be skeptical of US intelligence assertions.

Do I have any more access to the intelligence backstory than you do?  No.  But from what I do know, I suggest two starting points for making sense of this tangle.

1. To the extent they have evidence for their claims, US intelligence agencies are unable to reveal them.  The specifics of this evidence would make it clear what methods were used to obtain it, which would make those methods worthless from that point on.  Moreover, the techniques for acquiring defensive information on how US sites have been hacked are largely the same as those used for the US hacking of foreign sites.  If the disclosures were only defensive in nature, a stronger case could be made that it is in the interest of the intel folks to come clean, but they are unlikely to disavail themselves of offensive weapons.

2. Security breaches of the type exemplified by possible Russian hacking of the RNC, DNC and other sites are likely commonplace; they certainly occur much more often than reported.  (It is not in the interest of hacked entities to publicize this fact unless their hand is forced.  They may not even know it has happened.)  Before we bewail our victim status, however, we should note that the US government, and private and semi-private actors in the US, play this game like everyone else.  In the end, if the allegations about Russia are true, what we have experienced in this country is a PSYOP action not so dissimilar in intent and effect from similar actions launched from here.

I’d like to see a debate over whether aggressive exploitation of foreign cyber vulnerabilities by US agencies comes at the expense of domestic cybersecurity and the security of the overall transnational system.  The US has enjoyed first mover advantage in many areas of weaponized technology, but the long term consequence is, or will be, that these methods will eventually return to threaten us.

Saturday, December 10, 2016

Comic Book Hayek:The Planners Promise Utopia

In his neo-Confederate "Mein Kampf," Whither Solid South, Charles Wallace Collins quoted a full paragraph from Hayek's The Road to Serfdom regarding the emptying out of the meaning of words.

My instinct would be not to condemn Hayek for the politics of those who quote him. Even the Devil quotes Shakespeare.

But after taking another look at the Look magazine comic book edition of Hayek's tome, I realized that Collins's depiction of full employment as a sinister Stalinist plot was, after all, remarkably faithful to the comic-book version of Hayek's argument. With only a little digging, one can readily infer that what the comic book refers to as "The Plan" is a policy also known as full employment (or, if you want to get specific, William Beveridge's Full Employment in a Free Society). "Planners" translates as cartoon Hayek's alias for Keynesian economists and their political acolytes.

Friday, December 9, 2016

Goldman Sachs Economists Critique the Auerbach Tax Proposal

In my latest comments on Auerbach’s Destination-Based Cash Flow Tax, I noted how it was indeed trade distorting. It seems a lot of its proponents virtually concede this. It also seems that economists Goldman Sachs have drawn the appropriate conclusion:
Under an idealized version of the transition, the dollar would appreciate enough to offset the impact of the tax change, resulting in no impact on prices, margins, or trade flows. Even in this case, a large and abrupt change in exchange rates would deliver a sizeable hit to US residents’ foreign wealth and could create risks of dollar-denominated debt problems abroad. An alternative transition scenario featuring partial dollar appreciation, higher inflation, a hit to the profit margins of US net importers, and higher net exports appears more likely. Industries with low margins and high import shares such as apparel would be particularly vulnerable to the change.
The “idealized version” is that standard proposition of the Mundell-Fleming model that trade protection under floating exchange rates would have no net effect on net exports. Of course the transfer pricing implications are a bonus for highly profitable US based multinationals who want to do massive income shifting and declare it all “perfectly legal”. This is a horrific idea which should not become law.

Wednesday, December 7, 2016

Boeing, Trade Policy, and Trump Tweeting

Kevin Drum is not happy with Trump’s crony capitalism and he graphed the negative hit on Boeing’s stock price after one of his tweets. Apparently this story sent Trump tweeting as it covered some wise comments from the Boeing CEO:
we recognize the vital role IMA plays in reminding regulators, elected officials and the general public about the important—and indispensable—role American manufacturing has in sustaining the U.S. economy and exports, driving innovation and technology, and creating good jobs. This is a topic I’m particularly passionate about because I see it firsthand each day at Boeing, where more than 138,000 U.S.-based employees are hard at work, designing and building some of the world’s most advanced and innovative products—which are in turn sold to customers around the world….Today at Boeing, international sales represent a large and growing percentage of our business….As recently as 2000, only about 35 percent of our commercial backlog was from customers outside the United States. Today, that number is nearly 75 percent….These numbers are even more impressive when you consider that 90 percent of our total workforce and 80 percent of our suppliers are based here in the United States. International sales have helped Boeing become the country’s largest exporter and in turn help support more than 1.5 million American aerospace sector jobs. Admittedly, Boeing, by the very nature of what we do is more global than the average company, but the same trends apply across industries…In the same way that international sales continue to grow as a percentage of our business, so too will competition from abroad. I fully support competition because I believe that it makes us better. There’s no question that Boeing is a stronger, more efficient and innovative company because of fierce competition from our European rival Airbus. And we face increasingly stiff competition from other countries such as Canada, Brazil, China and Russia who are eager to secure a piece of the large and growing aerospace market. However, to compete and win globally we need government’s support to help ensure a level playing field.
He follows this account of his company with a plea not to pursue various policy positions that impact Boeing’s ability to compete abroad. First a brief review of Boeing’s 2015 10-K and then some of my own comments on the trade issues. Boeing’s revenues exceeded $96 billion with pretax income just over $7 billion. Note 21 provides revenues by region. Just over 40% of this revenue is from US customers with 27% of this revenue from Asian customers including China (almost half of the Asian total). Boeing also derives about 12.75 percent of its revenue from Europe and about 11.25 percent of it from the Middle East. Its effective tax rate was only 27.7 percent but that is because Boeing receives R&D and manufacturing tax credits. Only 4.6 percent of its income is sourced abroad. Boeing indeed a US manufacturer that has extensive foreign customers. I’m no fan of the Ex-Im bank, which strikes me as engaging in trade wars. I’m not also a fan of high defense spending. But we should all be wary of starting a trade war with nations like China lest their take their business to Airbus or even decide to start their own company making aircraft. Another thing that concerns me is the macroeconomic mix. If we repeat the mistakes during Reagan’s first term – higher defense spending and tax cuts for the rich combined with a monetary policy that drives up real interest rates – then the dollar will appreciate which will hurt the sales of companies like Boeing. Josh Marhsall covers Trump’s official excuse for the tweet:
This morning Donald Trump lashed out at Boeing claiming its budget for the successor to the current Air Force One is wildly overpriced….According to Politico, the current Pentagon budget for not one but two planes is $1.65 billion.
While $800,000 (thousand - thanks PeterK) for each 747 might seem expensive to some, is Trump suggesting we let the French build these planes? Or maybe he wants to let a new Chinese airline sector submit a bid.

Tuesday, December 6, 2016

The Auerbach Tax: Trade Distortion and Transfer Pricing

Alan Auerbach may be pulling a bait and switch here:
Unlike tariffs on imports or subsidies for exports, border adjustments are not trade policy. Instead, they are paired and equal adjustments that create a level tax playing field for domestic and overseas competition; Border adjustments do not distort trade, as exchange rates should react immediately to offset the initial impact of these adjustments. As a corollary, border adjustments do not distort the pattern of domestic sales and purchases
He is saying this in context of his Destination Based (DB) Cash Flow Tax (CFT). His claim on transfer pricing are getting some attention from the international tax law crowd:
Border adjustments eliminate the incentive to manipulate transfer prices in order to shift profits to lower-tax jurisdictions; and Border adjustments eliminate the incentive to shift profitable production activities abroad simply to take advantage of lower foreign tax rates.
I was bothered with this claim as was a November 18, 2016 discussion in BNA’s International Tax Monitor:
The new destination-based cash flow tax would likely change transfer pricing overnight, as incentives to shift high-cost intangibles overseas would be heavily negated. They would require a new look at U.S. tax treaties with permanent establishment clauses, and would cast new light on the OECD’s project to combat tax base erosion and profit shifting, as one of its key participants moves away from the arm’s-length principle and toward a system similar—though hardly identical—to formulary apportionment. The hybrid nature of the proposed tax has left many wondering if it will run afoul of World Trade Organization rules against border adjustments for income taxes—an issue the blueprint itself addresses, claiming that as a cash flow-through tax it wouldn’t apply... The simplicity of taxing income based on the location of sales is one reason why many critics of the current system look to the proposal with some wary optimism.
I think the real issue here is that this proposal smooshes together two very different ideas sort of like how shimmer was a floor wax and a dessert topping. Auerbach has been pushing a tax on economic profits instead of accounting profits for a long time. But typically profits taxes are sourced based not residence based. Now it is true that developing nations don’t like the idea of paying royalties to developed nations so they have favored residence based approaches but the OECD has favored sourced based approach to taxing income. Then again, a company like Apple neither declares its foreign based income in the US or in China but in places like Bermuda, which is why they make like Auerbach’s idea, which was my point here:
The House GOP proposal would effectively say we do not get to tax these profits. And yes I know that Apple has found a way to get all these profits sourced to Bermuda anyway. But this was the whole point of Senate hearings on May 21, 2013.
Sales taxes on the other hand are often DB although there may be exceptions. Excise taxes such as those on tobacco or medical devices are DB. And as I noted there may be transfer prices depending on how the excise tax is precisely administered. Auerbach can claim DB sales taxes do not distort trade but this does not hold for DB profits taxation. Permit me to expand upon this discussion:
Let’s take the Tax Foundation’s first example: “So if a business purchases $100 million in goods from a supplier overseas, the cost of those goods would not be deductible against the corporate income tax.” The foreign profits on those goods would be taxable so how do the proponents of this idea address the prospect of double taxation? Of course a Canadian manufacturer would be tempted to price their goods at production cost so as to have no Canadian taxable income. That would eliminate the double taxation but no sane person would think the Canadian Revenue Agency would accept this non-arm’s length transfer pricing.
Let’s do so by considering Trump Toaster Ovens (TTO) which are a hit in Michigan and are sold by Detroit Distributors but are manufactured in Canada by Windsor Warehouses –both of which are owned by a Toronto based holding company run by Tiffany Trump. TTOs sell for $125 a piece with the cost of production being $80. They are shipped across the Ambassador Bridge to Detroit Distributors which incurs $20 in operating expenses. 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? Auerbach admits:
System is equivalent to the combination of 1. A broad-based consumption tax (e.g. a retail sales tax or a VAT) 2. An equal rate subsidy to payroll
In effect, we would repeal the corporate profits tax for multinationals but then give them a payroll subsidy. Whether this violates current WTO rules, it certainly is a distortion facing sourcing production in Detroit over Windsor. Maybe Trump might like this idea but this is precisely because he wants to use tax policy to shift production away from foreign sources and back to places like Michigan.

Monday, December 5, 2016

From Full Employment To "Inclusive Growth"

This is the third of three posts on full employment. The unifying thread is that "full employment" has always been a political and not an economic problem. The first two posts were The Electoral College, White Supremacy and Full Employment as "Reign of Terror" and Full Employment and the Myth of the General Strike

Employing Sorel's distinction between myth and utopia, full employment has always been a utopia. But it is a utopia long abandoned by economists, who have substituted the totem of economic growth for the utopia of full employment.

The term "full employment" did not appear in the speech given today (December 5) by Mark Carney, Governor of the Bank of England. Instead, he mentioned the term "inclusive growth" six times.
"The cry for more inclusive growth starts with a crisis of growth itself."

Sunday, December 4, 2016

Noonan v. Cochrane on JFK’s 1962 Jawboning of Big Steel

When I was in graduate school, one of my favorite seminars featured Walter Heller telling us about his days at the Council of Economic Advisers during the Presidencies of John Kennedy and Lyndon Johnson. Every time I had to endure a course in business writing, I recalled a marvelous story from Dr. Heller who was very good as clear and concise writing. While Kennedy enjoyed chalk and talk discussions of the multiplier, LBJ was more of a CEO President who abhorred staples in memos as any memo that got to his desk was only one page long. It seems Treasury had a habit of writing 3 page memos which meant the chief of staff wanted the CEA to condense these memos. Heller at first was insulted at these requests but then realized that this put his team in an incredible position of controlling economic advice that the President received. Heller was my source for this:
The big Keynesian fiscal experiment was that 1964 tax cut, which did seem to work fairly well as the economy returned to full employment by late 1965. While Paul and I were both too young in 1965 to have been included in the discussions between the Council of Economic Advisors and President Johnson, I have had the pleasure of hearing from those who were what kind of macroeconomic advice the CEA gave the President during December 1965. Realizing that the economy was at full employment and seeing the triple whammy of tax cuts, proposed Great Society domestic spending, and the run-up in Defense Department spending from the Vietnam War, the CEA strongly urged the President to push for fiscal restraint lest the Federal Reserve would have to raise interest rates to choke off excessive demand. The President fired back that the Great Society was important to him and that he was not ready to pull out of Vietnam. The President also noted that getting a reversal of the 1964 tax cuts would be politically difficult. The Federal Reserve did raise interest rates in 1966 leading to the 1966 Credit Crunch, which held inflation at bay. However, the Federal Reserve later reversed course unfortunately. So we eventually got a delayed and lukewarm version of the fiscal restraint that the CEA recommended way back in late 1965 – as Paul noted. Too little and too late. For Schlaes to blame the run-up in inflation on the Keynesian economists that advised President Johnson only shows she has absolutely no clue.
I recount this because a couple of conservatives are getting the discussions of the 1960’s a bit wrong again. John Cochrane is not happy with the latest from Peggy Noonan. He notes the following from her WSJ op-ed:
It was 1961 and the new president, John F. Kennedy, had been trying to signal to big business that they could trust him.. His impulses were those of a moderate of his era: show budgetary constraint, keep costs and prices down, prevent inflation.....That September Kennedy asked the industry to forgo a price increase. He asked the steelworkers union for wage demands... Early in 1962 his labor secretary, Arthur Goldberg, put together a deal. In the spring the union and the steel companies accepted it. Everyone understood the industry would not raise prices. A few days later Roger Blough, chairman of the board of mighty U.S. Steel, asked to see the president. He handed him a four-page mimeographed statement announcing his company would raise steel prices $6 a ton. ...Soon Bethlehem Steel raised its prices. Other companies followed. Now Kennedy was enraged. Accepting Blough’s decision would undo all his wage-price guideposts. It would also constitute a blow to the prestige of the presidency. And labor would never trust him again.
He noted more of her op-ed to point out that Noonan claimed that Kennedy’s jawboning was good policy to which he argued:
No, Peggy. Crucially, he was wrong on the policy. No, we do not fight inflation by jawboning companies and unions not to raise prices. That does not "benefit the American people." This isn't fancy economics. Leaders from Emperor Diocletian to Nicolás Maduro have tried to quell inflation by muscling businesses -- sending police to terrorize businessmen in their homes -- not to raise prices, and it always ends with more muscle and more inflation -- as Kennedy's did. He may have "thought" he was right. His Keynesian advisers had also forgotten lessons of two thousand years of history and thought jawboning an excellent idea. But this is precisely why we have a rule of law -- so that leaders who "think" they are right about the proper level of steel prices cannot wreck the economy.
Alas, Dr. Heller’s seminar did not address this episode so we really do not know what the Council of Economic Advisers said about all of this but so let’s try this:
The Democrat, after just a year in office, was concerned about potentially rising inflation. His administration set an informal but well-publicized target of having wage increases and price hikes match productivity increases. Meanwhile, Steelworkers’ bargaining over a contract with the nation’s steel companies was getting nowhere. The administration intervened. It didn’t want a rerun of the 4-month steel strike of 1959 under GOP President Eisenhower. Labor Secretary Arthur Goldberg, a longtime union counsel, mediated the talks. The two sides reached agreement on March 31. The pact, with ten of the nation’s 11 steel companies, called for an increase in fringe benefits worth 10 cents an hour in 1962, but no wage hikes that year. Then-AFL-CIO President George Meany said that in the pact, the union “settled on a wage increase figure somewhat less than the Steelworkers thought they would get.” Kennedy praised the contract as “obviously non-inflationary” and said both the USW and the steel firms showed “industrial statesmanship of the highest order.” The agreement also implicitly said the companies would not raise prices, as that would be inflationary. But on April 10, Roger Blough, CEO of U.S. Steel, the largest of the firms, with 25% of the market, met Kennedy in the Oval Office and told him the company was immediately raising prices by $6 a ton – and that other steel companies would follow. Six did. The 3.5% hike enraged the president. What he said in public was biting – but he was even more caustic in private.
Arthur Goldberg was a labor lawyer representing the United Steelworkers of America before he became Kennedy’s labor secretary. So why did Ms. Noonan note that this episode was part of the negotiations of this union and big steel? Maybe Noonan does not want to bring up the issue of wage floors and monopsony power. I threw in my two cents but please read Noah Smith. It strikes me that the market for steel workers in the 1960’s was more akin to the monopsony model than perfect competition, which is why we needed a steel workers union.

Saturday, December 3, 2016

A Left-Right Convergence on More Child Labor

A few months back I reported on the movement of leftists to repeal or at least pare back child labor laws worldwide.  Hostility to child labor is understood by these people to be eurocentric, patriarchical and aligned with the labor market needs of modern capitalism—and therefore wrong.  Instead we are encouraged to support working children, and what these children tell us is they want to work.  So away with the restrictive laws.

But you don’t have to be on the left to endorse more child labor.  Here’s Joseph Sunde of the hard-conservative Acton Institute with a similar message.  Note the emphasis on the psychological benefits children are supposed to get from being productive; this is the same argument made by the left.  Similarly, the benefits of child work as a preparation for adult life figure strongly on both wings.

I’m reminded of the affection for Hayek shown by Foucault in his final years.

Border Adjustments and Transfer Pricing – the Case of iProducts

I promised to mull over the Auerbach and Holtz-Eaton claim that the House GOP’s Destination-Based Cash Flow Tax would eliminate the need to enforce transfer pricing and the answer is contained in the proposal under “border adjustments”. As the Tax Foundation notes:
In the context of a value-added tax, a border adjustment works by applying the tax to imports, but exempting exports from the tax. The GOP’s business tax is not a VAT, but the mechanism that makes it border adjustable is similar. In order to make the corporate tax border adjustable, the revenue from sales to nonresidents would not be taxable, and the cost of goods purchased from nonresidents would not be deductible.
This is an unbelievably bad proposal at some many levels. Let’s take the Tax Foundation’s first example:
So if a business purchases $100 million in goods from a supplier overseas, the cost of those goods would not be deductible against the corporate income tax.
The foreign profits on those goods would be taxable so how do the proponents of this idea address the prospect of double taxation? Of course a Canadian manufacturer would be tempted to price their goods at production cost so as to have no Canadian taxable income. That would eliminate the double taxation but no sane person would think the Canadian Revenue Agency would accept this non-arm’s length transfer pricing. But let’s have the Tax Foundation give the flip side:
if a business sells a good to a foreign person, the revenues attributed to that sale would not be added to taxable income.
The ultimate tax giveaway! Imagine some firm in Seattle that designs and distributes iProducts for sale here as well as abroad. Apple does not manufacture their products outsourcing production to Foxconn. Let’s assume that Foxconn sells the products for $200 while Apple sells them for $400 - $200 in value-added for Apple and its distribution affiliates. Before we get into the details of taxation, let’s note this early Trump failure:
One of those famed promises of Donald Trump's is that his policies, now that he's President-elect, will make Apple bring back their iPhone manufacturing to America…For all the expensive and really productive parts are already made in the U.S., with a little bit going to Japan. China has just the assembly--and that's such a trivial part of the process that it's simply not something worth worrying about at all.
Tim Worstall is right that Foxconn only assembles iPhones but I think most of the expensive parts are sourced from other Asian suppliers. But at the end of the day, the $200 is an arm’s length price with the income tax revenues going to the Chinese assembler and the Asian suppliers of components. So let’s focus on the $200 per product that goes to Apple. Let’s reasonably assume that the foreign distributors incur $40 per product in operating expense and deserve profits equal to $10 per product under arm’s length pricing. In our story - $150 per product represents the profits attributable to the intangible assets created in Seattle. The House GOP proposal would effectively say we do not get to tax these profits. And yes I know that Apple has found a way to get all these profits sourced to Bermuda anyway. But this was the whole point of Senate hearings on May 21, 2013. This proposal would entirely just give up on combatting Base Erosion and Profit Shifting. At times, I have suggested that certain Republicans in Congress really want to shut down enforcement of section 482. It seems I was correct. Did I say this was a horrible idea?

The Identity-Equals-Causation Fallacy, Yet Again

You’d think a trade deficit would be a trade deficit, but you’re wrong.  For many economists, a trade deficit is actually a capital account surplus in disguise.  Yes, US imports exceed exports, but according to this crowd it is not due to what the US does and doesn’t produce, or the cost or quality of our goods and services, or any other such factor, but simply reflects the net inflow of finance.  First we have policies that cause US financial assets to be more attractive, then we end up with a trade deficit.  This is the “insight” behind the view that bolstering national savings will fix the trade problem.

You can see this machinery at work in Gregory Mankiw’s latest opinion piece for the New York Times, which instructs us, “Don’t Worry About the Trade Deficit”.  It patiently explains that the money leaving the country on the current account (via trade) equals the money entering the country on the capital account (via financial flows), and that the latter drives the former.  The key paragraph reads:
The trade deficit is inextricably linked to this capital inflow.  When foreigners decide to move their assets into the United States, they have to convert their local currencies into American dollars.  As they supply foreign currencies and demand dollars in the markets for currency exchange, they cause the dollar to appreciate.  A stronger dollar makes American exports more expensive and imports cheapers, which in turn pushes the trade balance toward deficit.
So here we have a theory of the relationship between international capital flows and trade: a shift in net financial inflows causes an appreciation of the dollar, which then causes a greater trade deficit.  Where does this theory come from?

The ultimate source is the national income and product identity, augmented by the accounting relationship between savings and consumption.  From NIPA we have

Y ≡ C + I + G + NX

where Y is national income, C is consumption, I is private investment, G government spending (purchases of goods and services by government) and NX is the trade balance.  That “≡” sign means “is identical to”, which is subtly different from simple equality, “=”.  With equality, the stuff on the left hand side has the same value as the stuff on the right hand side.  With identity, the stuff on the left hand side is the same stuff as on the right hand side, just expressed differently.  If A = B, A and B could be different but for some reason aren’t.  If A ≡ B, A and B are two different ways of writing the same thing, so it is impossible for them to be different, even for an instant.

Now let’s add a second identity that represents the truism that all income is either consumed, publicly or privately, or saved or paid in taxes:

Y ≡ C + S + T

with S being savings and T being taxes.  Putting them together, we see that

C + I + G + NX ≡ C + S + T

Subtracting C from both sides and rearranging gives us

NX ≡ (S-I) + (T-G)

Read this as “the trade balance (net exports) is identical to the sum of net savings (savings minus investment) and the government’s budget surplus or deficit (taxes minus spending).”  This is not a theory of what causes what; it’s an identity, different ways of expressing the same “what”.

How can this be?  An important source of identity relationships in economics is the two-sided nature of economic transactions.  If I pay you $10 for something, this can be seen as $10 of spending (mine) as well as $10 of income (yours).  My spending is not equal to your income; it is your income: one transaction, two ways of recording it.  Add up these identities over a whole economy, subdivide income or spending into different categories, and you get a set of macroeconomic identities.

So now consider what an export or import means.  An export signifies the receipt of income by people in the exporting country but not the corresponding spending.  An import signifies spending without the corresponding income.  So a trade deficit has to take the form of national spending exceeding income, which means net borrowing.  This borrowing can occur either in the private sector (less saving relative to investment) or in the public sector (government borrowing).  And net borrowing on a national scale is what we mean by the capital account, so there we have it.

All of this is in the realm of identity.  There is no causation at work here.  Net exports does not cause net borrowing, nor is it the other way around; they are identical to one another, different ways of recording the same economic events.  Any measured discrepancy would be a problem of measurement, not a problem of whether the identity is true.  (This is an oversimplification, since it leaves out transfers, asset incomes and currency flows.  The main adjustment would be to add transfer payments and net asset income to the current account.  A further adjustment would need to be made for changes in holdings of currency, the reserve account, which is a non-borrowing method of finance.  That would add more algebraic symbols, but it wouldn’t alter the essential logic.)

So now reread the above paragraph from Mankiw.  This is telling a story of causation over time, not identity. First we have increased inflows of finance, then the dollar appreciates, then the trade deficit widens.  The first process could be virtually instantaneous, because currency markets are comprised of exactly these demands for and supplies of foreign exchange.  The second process, however, takes place over months, depending on the shape of the J-curve that depicts the change in trade balances over time in response to an exchange rate shock.  But we know from the identities that the trade balance is identitical to net borrowing at each moment; that’s what it means to be an identity.

The only valid theory of trade deficits and capital inflows would be one that looked at all the determinants of this identity simultaneously.  It would have to consider the factors that determine what goods a country produces, what it exports and imports, the terms of trade, differences in international growth rates and the demand and supply of financial assets.  One way of looking at the current account-capital account identity does not cause the other; the international position of the US economy, which can be measured either way, is caused by the balance of all the influences on trade and finance.  And yes, that includes the choices made by firms in the US to increase or offshore their productive capacity, along with everything else.  The relative importance of these factors is an empirical question, not a theoretical one.

The flaws in Mankiw’s analysis do not come from inaccurate data or a faulty assumption here or there, but a basic misunderstanding of Econ 101.  The guy needs to take an intro class.  Of course, if the textbook isn't very good it won't help him much.