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Trade intervention is good or bad??

Michael Pettis reminds us part of the political conversation is pretty much missing from the election cycles of the last fifteen years except in the rather lightly noted passage of ‘trade treaties’. (Another post is needed for the most recent three examples…).

Last week’s Senate bill on Chinese currency intervention predictably enough brought out all the same old arguments about international trade, and just as predictably has hardened the opposing positions in the debate. Unfortunately the difference between a good outcome, intelligently negotiated, and a bad outcome, is pretty large, but with each side hardening its position the likelihood of a good outcome is declining.

The biggest problem with the debate, I think, is the muddled thinking and half-baked arguments….

(Dan here…both sides of the rhetoric is what he means I believe, since it is not a debate. Go to his post for more complete coverage.)

I will highlight the criticism that current imports (lower cost?) are almost always a good thing. (Bolding is mine). The quote Michael is responding to is at the end of the post.*

For their first point, we should be clear. Tariffs will hurt the pocketbooks of American households as consumers, but not as workers. If there is a positive impact on employment, under conditions of high unemployment households are likely to be better off, not worse off, if there is a resulting contraction in the trade deficit, even if the cost of consumption rises. This is just arithmetic.

So the key question is whether actions taken by the US can cause the trade deficit to contract and with it US unemployment. This is where their second point comes in. The USCBC says there will be no domestic employment impact – which also means that it will cause no contraction in the current account deficit – because any reduction in exports from China will merely shift the US trade imbalance to countries like Vietnam, Indonesia and Mexico.

Others make the same argument. David Pilling, for example, someone with whom I usually agree, in Thursday’s Financial Times says:

Even if Chinese exports do become less competitive, jobs are unlikely to flock to high-wage economies such as the US. Rather they will tend to go to other low-wage ones such as Bangladesh, Vietnam, Indonesia and Mexico.

But no. As I have pointed out many times, this argument is wrong for at least two reasons. The first reason is the implicit claim that there is no overlap between US production and Chinese production – it assumes that the US produces, or can produce, none of the things that China exports. This is clearly and demonstrably false.

The second, and much more important, reason is that this argument implicitly assumes that changes in trade flows only have first order impacts – in other words if a Chinese textile exporter loses his American client to a Mexican exporter, there will be no further economic impact on the US trade account. This, of course, is nonsense.

The US-China Business Council, for example, issued a release on October 12 that exemplifies one of the major misunderstandings on trade. I realize that the USCBC is primarily an advocacy group, and so their arguments are aimed at supporting a position rather than adding to the debate, but I wonder if making arguments that are so easily refuted helps their cause.

*************************************************************************************
*Here is what the USCBC said in their October 12 release.

USCBC believes that the currency legislation passed yesterday by the US Senate will do more harm than good. USCBC continues to advocate that China needs to move faster toward a market –determined exchange rate; passing tariff legislation on imports from China will not get us closer to this goal and will hit the pocketbooks of American households at a time they least can afford it. Limiting imports from China would not mean an increase in US employment or lower the trade deficit; we’ll just shift our imports to another overseas supplier. If this is intended to be a jobs bill, it is a jobs bill for Vietnam, Indonesia and Mexico.

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Three-Card Monte (Spring 2004)

Angry Bear archives reminds us of the longstanding strategies embedded in the current political debate, and trial balloons of possible current Super Committee proposals November 22, 2011. The Social Security surplus as a significant amount of money is recent, in the last fifteen years or so:

Tuesday, March 02, 2004

Three-Card Monte

Following up on Kash’s earlier post about Greenspan, Krugman’s op/ed also highlights a fairly bold bait and switch maneuver by Greenspan:

The payroll tax is regressive: it falls much more heavily on middle- and lower-income families than it does on the rich. In fact, according to Congressional Budget Office estimates, families near the middle of the income distribution pay almost twice as much in payroll taxes as in income taxes. Yet people were willing to accept a regressive tax increase to sustain Social Security.
Now the joke’s on them. Mr. Greenspan pushed through an increase in taxes on working Americans, generating a Social Security surplus. Then he used that surplus to argue for tax cuts that deliver very little relief to most people, but are worth a lot to those making more than $300,000 a year. And now that those tax cuts have contributed to a soaring deficit, he wants to cut Social Security benefits.

As you can see from this post last week, the 2004 deficit is only brought down to a mere $500,000,000,000 by starting with the non-trustfund deficit of $631,000,000,000 and subtracting from that the $154,000,000,000 surplus created by the payroll tax (money allegedly going into the trust fund/lockbox).
To summarize, here’s Greenspan’s 20+ year plan to roll back Social Security:

Step 1. Get appointed in early 1980s to committee to protect Social Security.

Step 2. Successfully propose substantial increases in regressive payroll taxes in order to save Social Security. Workers will pay higher payroll taxes but their retirement benefits will be assured.

Step 3. Wait 20 years; to pass the time, become Chairman of the Federal Reserve.

Step 4. Actively support large and regressive cuts in income taxes. Never mention payroll taxes.

Step 5. Repeat step 4.

Step 6. Observe that in 2004, steps 4 and 5 lead to a $631b shortfall; Step 2, however, created a $154b surplus.

Step 7. Reverse Steps 4 and 5.

Step 8. Just kidding about step 7. Seriously, the answer is clear: cut Social Security benefits.

AB

UPDATE: CalPundit had a post on Sunday, THREE CARD MONTE WITH ALAN GREENSPAN, which made the same observation and concluded, “A normal person would at least be embarrassed by all this. But Alan Greenspan has never been a mere mortal, has he?”

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Inequality–the facts speak for themselves (don’t listen to the apologists on the right)

by Linda Beale

Inequality–the facts speak for themselves (don’t listen to the apologists on the right)

Inequality is real, and it is growing. It is debilitating for democratic institutions, as the Supreme Court’s Citizens United case and its aftermath start to impact the federal elections and as the money from the Koch brothers, Walton heirs and others swings the debate with purchased sound bites designed to deceive and enable the “enrich the rich” winner-take-all economy created by right obstructionism (itself enabled by the relaxation of the filibuster rule that created a 60 vote requirement in the Senate and allowed an intransigent minority to prevent legislative enactments supported by a clear majority).

Tax policy matters to income inequality. For background on this, read The 30-year growth of income inequality, A Civil American Debate (Apr. 10, 2011) (providing two graphs showing the top tax rate over time the income inequality (the percentage of total income going to the top 10%), which shows that income inequality levels inversely track the top tax rate–as the rate increases, income inequality decreases). When top tax rates are lowered too much, they do not do their work in maintaining respectable limitations on income inequality. With the slide in economic fairness under reaganomics (privitization, deregulation, tax cuts–especially for the wealthy, and militarization), the US has now “two economies, a wealthy ‘top’ economy doing very well, and a ‘bottom’ economy for roughly the bottom 99% facing income stagnation, with dwindling wealth and resources.” The growth in income inequality shows that gains at the top dwarf, by any measure, those for everybody else.

Growth-in-income-inequality1

(Note: the most recent CBO report has slightly different numbers, but in the same range–close enough for our purposes.)

Even these solid income inequality facts are treated by the right as sound bites to be manipulated. An article in The New Republic debunks the American Enterprise Institute’s Jim Pethokoukis’s attempt to mask the facts. See Matt O’Brien, Is Income Inequality a ‘Myth’?, The New Republic (Oct. 31, 2011) (hat tip Mark Thoma) (discussing Jim Pethokoukis, 5 reasons why income inequality is a myth–and Occupy Wall Street is wrong, EnterpriseBlog, American Enterprise Institute (Oct. 18, 2011).

As O’Brien puts it, Pethokoukis’s article asserting that income inequality is a myth “suffers from the defect of having a tenuous relationship with reality.” Especially when, as Jared Bernstein noted, whatever the cuase for the increase in inequality (and there are several likely suspects), “the highest quality data that we have all show the same thing: significant increases in inequality.”

Petrhokoukis tries to suggest that the “move rightward toward a greater embrace of free-market capitalism” is proof that inequality hasn’t exploded in the reaganomics era because inequality should have led to “beleaguered workers unit[ing] and demand[ing] a vastly expanded safety net and sharply higher taxes on the rich.” He calls the “occupy wall street” protesters “radicals”–I guess because they are willing to sacrifice personal comfort to bring a non-violent message to the world through their signs and statements about the unfairness of today’s society with its gaping inequalities in income and wealth, resulting in an influential 1% that can arrange laws to suit them. He tries to argue that the very idea that “the rich are getting richer at the expense of the middle class and poor” is left-wing fantasy.

Of course, the dominance of the free-market mantra is actually proof of inequality, not evidence of some kind of notion of growing equality. The irrational adoption of Friedmania “free market” anti-factual policies has taken place due to the inordinate advantage enjoyed by the uberrich in promoting policies favorable to their own wealth and status in winner-take-all politics, enhanced by recent decisions granting state-created concessions (corporations) “free speech” rights to intervene in political campaigns in which corporations do not have a right to vote,

And the ability of the uberrich to buy policies that suit them means that legislation to re-empower unions as an antidote to plutarchy can’t get passed the “bought and paid for” legislatures. A majority of workers want to be able to unionize; a majority of Americans want higher taxes on the rich; a majority of Americans oppose the kinds of “bailout” policies for banks espoused by Bush where there was lots of taxpayer money and no accountability. The policies favored by the 99% aren’t enacted because of the power of money wielded by the 1%.

So what does Pethokoukis rely on to make his case? snips and snippets of the following:

  • Pethokoukis claims that income gains have been shared “fairly equally” among workers and managers.” While it is true that one piece of research suggests that the gap between productivity and wages may not be as high as commonly thought. Pethokoukis stretches (and abuses) that research in making his claim. There’s clearly a gap, it may be debatable what it’s exact size is, but there’s no debating the story of runaway wealth at the top of the income distribution.
  • Pethokoukis claims that after-inflation median incomes haven’t really stagnated in the last 30 years. He relies on a pair of Federal Reserve studies that use different numbers to jigger the after-inflation incomes produced by CBO. Voila–with these ‘adjustments’, the numbers don’t say what they appear to say. That’s not research–that’s fudging the numbers to get the desired result.
  • Pethokoukis asserts that better accounting for positive transfers (taxes, benefits, pensions, healthcare) and consumption would show there is no real inequality gap. While it is true that after-tax inequality is smaller than pre-tax inequality (thank goodness), it is not true that inequality is eliminated or even that as much inequality is eliminated as used to be. Taxes and benefits are less redistributive downwards than they used to be. and tax cuts have been primarily redistributive upwards. Even taking all benefits into account, inequality is increasing rapidly. As for consumption, the wealthy don’t have to consume as much of their income as the poor (increases inequality), and the poor and middle class had to borrow in order to maintain consumption (shows increases in inequality).
  • Pethokoukis claims that measuring inflation correctly shows inequality has been “roughly” unchanged. That’s ridiculous. Yeah, higher end goods show more inflation in price than the lower-end goods consumed by the growing class of poverty-striken Americans as Americans move from middle to lower middle and lower income groupings. The market can still function at the high end with price increases because the wealthy have more income to pay those inflated prices. The fact that the wealthy have more money to buy more inflated higher end goods doesn’t mean inequality hasn’t increased. Fewer middle class can shop regular goods and now have to shop for discounts. That’s more proof of inequality, not less (inequality still underlies the consumption patterns).
  • Petrokoukis asserts that the fact that most of the population has the ability to take advantage of technological advances (long-distance telephone calss, air condition, dishwashers, iPods, digital cameras and color TVs) means that inequality isn’t growing because “America is better off today.” Of course, this is a straw man argument. First, the growing numbers of American affordable gadgets doesn’t reduce the shame, humiliation and degradation of poverty for the growing numbers of Americans living in poverty. Every family will have some of those gadgets, just like poorer families after the advent of trains could enjoy faster transportation (on the few occasions they used it) by train than queens and kings had indulged in in the age of chariots. Doesn’t mean that inequality isn’t rampant, or that those technological benefits make up in any way for the substantial detriments of a highly unequal society where the benchmark norm is whatever everybody has access to and the relative comparison is in terms of what the wealthy have that others don’t have. What the wealthy have these days are not so much technological advantages (though those also exist in signficant degree and kind different from what the middle and poor classes enjoy) but advantages in terms of education, opportunity, jobs, access to power, access to influence, health care, travel, leisure, personal space, food, entertainment, etc. The suggestion that everybody has been so benefited by the gadget culture so that the huge problem of inequality should be ignored shows that somebody has lived on the “right” side of the tracks for so long that they cannot even comprehend what it is like to be on the losing side of the winner-take-all economy.

The concluding paragraph of the New Republic report sums it up.

Since 1979, incomes for the broader middle class increased 40 percent, while the top one percent shot up a staggering 275 percent. Conservatives can pretend otherwise, but the numbers won’t.

November 02, 2011 in Inequality of wealth or income, Right Wing Rhetoric |

originally published at ataxingmatter

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Baby Steps

By Rebecca Wilder

Baby Steps

In the FT today, Martin Wolf discusses the symbiotic relationship of global creditors and debtors. According to the September 2011 IMF World Economic Outlook, China ran the largest current account surplus in 2007, while the US ran the largest current account deficit (in $). Well, if this creditor-debtor relationship is to become more ‘balanced’, then evidence of success should stem from these two giants.

Progress has been made. The IMF forecasts China’s 2011 current account surplus will be broadly unchanged since 2007 (in levels $). In contrast, the 2011 US current account deficit is expected to have improved by 35% compared to 2007 levels. It’s baby steps toward a more balanced global capital market place. What’s driving this? Primarily the real exchange rate.

The chart below illustrates the real effective exchange rates for China and the US, as measured by a broad set of trading partners and relative inflation. The BIS releases this data. Notably, the Chinese economy experienced real appreciation coincident with US real depreciation (I chose the colors pink and blue for consistency with the ‘baby steps’ theme). Spanning the years 2005 – current, the Chinese yuan appreciated 25% in real and trade-weighted terms, while that of the US dollar depreciated 14%.

Progress is being made.

Filed under: China, Global Imbalances, Real Exchange Rates, USA

Originally published at The Wilder View…Economonitors

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Macro right, micro wrong?

Derek Thompson at The Atlantic had some thoughts on labor cost and economics taken from Henry Blodgett’s observation on declining wages for most wage earners. The second paragraph caught my eye as interesting for economists.

My response was that Blodget was macro-right — income inequality is a serious and growing problem — but micro-wrong, because this graph is measuring wages rather than full compensation. Total compensation — that’s wages plus benefits and taxes — hasn’t changed very much as a share of the economy since 1960, according to data from the National Institute of Pensions Administrators. What’s changed is that benefits and taxes have gone up, and wages have gone down.

(Wikepedia provides a short refresher of each term.)

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Beale debates Cato’s Edwards on the right’s "flat tax"–New Hampshire Public Radio

by Linda Beale

Beale debates Cato’s Edwards on the right’s “flat tax”–New Hampshire Public Radio

Last Wednesday (Oct. 26, 2011), I debated the Cato Institute’s tax policy guru Chris Edwards about the right’s various “flat tax” (FairTax, 9-9-9, USA Tax, consumption tax) proposals, on New Hampshire’s public radio station’s hour long program “The Exchange”, hosted by Laura Knoy. You can catch the program on the NHPR site, at “The Flat Tax is Back” (Oct. 26, 2011). (The live format is an initial discussion in response to the host’s directed questions, followed by call-ins from the public.)

I argued, as you might expect from my previous postings on this matter, that the various proposals for some form of VAT/consumption/wage-based/flat tax do not make sense at a time of inordinate income and wealth inequality in the United States. Consumption taxes are regressive, and most proposals from the right–including Herman Cain’s three step progress, with 9-9-9 as the midpoint, towards a national retail sales tax, and Rick Perry’s proposal for an ‘option’ of a 20% national sales tax–simply will make the rich richer and the poor poorer. They are terrible ideas at any time as a substitute for both the somewhat progressive income tax and the somewhat equalizing estate tax. They are especially terrible ideas in a period when inequality has returned roughly to the same level as it was in the Gilded Age and when plutarchy threatens to devour our democracy.

Edwards made some rather inconsistent statements–including acknowledging that all of these proposals call for elimination of tax on all income from capital and from all estates, and then a later statement that the flat tax would be fair because it would tax people alike on their total income! He also relied on straw man arguments–another favorite of the Cato Institute representatives that I have seen before, used to divert attention from the fact that they cannot really answer the real question at issues. Chris relied on the laughable Laffer-curve based argument of which Cato is inordinately fond and which has been adopted and repeated ad nauseum by the right, that tax cuts result in greater revenues to the rich that result in enhanced job growth. I reminded him and listeners that our greatest growth was from WWII to 1981 when we had very high tax rates, demonstrating clearly that high tax rates do not cause weak growth. (Of course, 1981 is the critical time, because the Reagan cuts ushered in the right’s reaganomics dominance with tax cuts, deregulation, militarization and privatization that led us to the current Great Recession–aided in part by the weak-kneed Democrats who went along rather than standing up for worker rights.) Chris’s response to the empirical evidence that tax cuts do not lead to broad-based growth or job creation was “we can’t ever go back to the high rates of the 1970s again.” Of course, that was a straw man argument. Nobody is arguing for 90% rates. I am arguing, however, that the flat tax–with its zero percent rate on most of the income of the uberrich and its very low rates on the rest of their income–will hurt the poor because it is distributionally unfair, and hurt the economy generally because it will lead to revenue shortfalls that will force spending cuts to programs that matter to the wellbeing of society.

Anyway, listen to the program. Your thoughts welcome in comments to the blog. (And sorry for miffing my chance at the “last word” at the end of the program. It was an instance of getting tangled up in what I wanted to say and ultimately failing to make the point with any power at all. What I was aiming for was something along the lines of the following:

Reagan passed the 1981 tax cuts, and then Congress realized what a problem the resulting deficits would be so was energized to pass increases in taxes. Problem was, most of the cuts favored the rich (were cuts in income taxes and in depreciation expenses providing cuts in income taxes, etc. ) and most of the increases disfavored the poor (i.e., were regressive payroll taxes). IN 1986, however, there was a broad process of Congressional review, resulting in the 1986 tax reform act that eliminated (for a very short time, as it turned out) the category distinction between capital gains and labor income. That was a major, good innovation that grew out of a sustained, measured, thoughtful though imperfect process. There is no indication that election of more hard right candidates will lead to any such similar reform process today. If elected, the hard right candidates are likely to push for, and may get, tax changes that continue to enrich the rich, like the flat tax or 9-9-9 tax plans being put forward by Perry and Cain.

originally published at ataxingmatter

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