Relevant and even prescient commentary on news, politics and the economy.

The Soybean Boom

The Soybean Boom

Via TalkingPointsMemo AP notes:

Private forecasters cautioned that the April-June pace is unsustainable because, they say, it stems from temporary factors, including a rush by exporters of soybeans and other products to get their shipments out before retaliatory tariffs took effect. They predicted the rest of the year is likely to see solid, but slower growth of around 3 percent. The transformation is also not as dramatic as Trump claims — and in many ways the 4.1 percent annualized growth during the second quarter is in line with an economic expansion that just entered its tenth year. During Barack Obama’s presidency, there were four quarters when annualized growth exceeded the level that Trump praised on Friday. And in 2015, full-year economic growth nearly reached the 3 percent level being targeted by the Trump administration this year when it hit 2.9 percent.

Is this “fake news” being peddled by those socialists at TPM? What do these private forecasters know anyway! Well AP does lead with what the White House wanted to emphasize:

President Donald Trump on Friday celebrated the release of new economic data, claiming the U.S. is now the “economic envy of the entire world.” Trump was responding to new growth numbers announced on Friday that show the U.S. economy surged in the April-June quarter to an annual growth rate of 4.1 percent — the fastest pace since 2014. “We’ve accomplished an economic turnaround of historic proportions,” Trump told reporters during hastily arranged remarks on the South Lawn of the White House, where he was joined by Vice President Mike Pence and flanked by members of his economic team. “Once again, we are the economic envy of the entire world,” Trump said, adding that “America is being respected again.”…Trump, who has repeatedly attacked the economic record of his predecessor’s administration, pledged during the 2016 campaign to double growth to 4 percent or better. And he has been tring to highlight economic gains ahead of the midterm elections. But Trump, ever the salesman, predicted even higher growth as he renegotiates the nation’s trade deals, saying, “We’re going to go a lot higher than these numbers.” And he insisted the economic numbers are “very sustainable” and not “a one-time shot.”

Now that’s telling it like Sean Hannity and Fox & Friends would do! OK – time to listen to an actual economist such as James Hamilton:

Growth in consumption, nonresidential fixed investment, and net exports helped produce the strong numbers. Higher oil prices stimulated a big boost in spending on mining exploration, shafts, and wells. That was one factor in higher investment spending; growing business confidence may have also played a role. Tax cuts likely contributed to the growth in both consumption and investment. Some of the export growth may have come in anticipation of coming tariffs. I count the contribution from exports as a soon-to-disappear plus, though it’s balanced by a big minus in inventory investment that’s also likely transient.

We’ll get back to the soybean boom which led to real exports growing by more than 9% per annum last quarter. While residential investment fell a wee bit, nonresidential fixed investment has been growing at a 9% per annum clip for the past two quarters. Is this due to temporary facts (see the Econobrowser comment section for more) or is it sustainable as Trump argued? We shall see but permit me to repeat what I said on this in the comment section:

Trump lies about everything. He correctly noted that real business fixed investment has been growing by 9% over the past two quarters but then we have not seen this for decades? Really? We had this rate of growth back over the 2011/2012 two year period. From 1995 to 2000, real business fixed investment grew by about 10% per year. We had double digit growth rates both during the 1976 to 1978 period and the 1964 to 1966 period. I guess it does not count if the President during these periods was a Democrat.

OK now that I got that out of my system, I want to turn to Trump’s argument that we can sustained high growth if we can get a large boost in net exports. Never mind the fact that the soybean boom will turn to a soybean bust now that China’s tariffs on our soybeans are in place. Of course there are other aspects to this stupid trade war but focusing on that may be missing the point that Menzie Chinn articulated last fall:

 

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How Much Do the NATO Members Spend on National Defense?

How Much Do the NATO Members Spend on National Defense?

Josh Marshall provides a nice discussion of the difference between how NATO is funded versus how much each of its members spends on national defense, which begins with:

As we move toward the NATO Summit and the Putin-Trump summit, I thought it made sense to review some of the details behind the President’s demands that NATO member countries pay up and stop doing what he regards as freeloading on the US taxpayer dime. Most people have a general sense that Trump doesn’t seem to grasp how an alliance works, that it’s not meant to function as a protection racket. But the actual details are both sillier and more significant than it may seem on the surface.

While I applaud his discussion, something is amiss here:

The vastly greater amount is the combined military budgets of all the member countries combined, which was $921 billion in 2017. The great majority of that is made up of the US military budget. In 2017 the US military budget was $610 billion. The coming fiscal year puts it at $700 billion. (That big run-up is significant and we’ll return to it.) Some of that difference is driven by the fact that the US economy is far larger than any individual NATO member state. But the US also spends much more on a per capita basis. Staying with the 2017 numbers, the US spends 3.61% of GDP on defense. The next major NATO member is the UK down at 2.36% while most other major NATO powers are significantly under 2%. (Examples: France, 1.79%; Germany, 1.2% Canada, 1.02%)

Actually, U.S. national defense spending was over $744 billion in 2017, which came to 3.8% according to this source. Call me a pacifist but maybe we should all be spending less on the ability to wage war.

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In Defense of the Francois-Baughman Analysis of the Trump Tariffs

In Defense of the Francois-Baughman Analysis of the Trump Tariffs

Dr. Joseph Francois and Laura M. Baughman are being criticized for writing:

This policy brief examines the potential net impacts on U.S. jobs across all industries of the proposed steel and aluminum tariffs applied to targeted steel and aluminum imports from all countries. It does not take into account any potential retaliation against U.S. exports; only of the tariffs themselves. We find that the tariffs would indeed have positive impacts on U.S. steel and aluminum producers, but negative impacts on producers who use steel and aluminum, both imported and domestically-produced. Those impacts, both positive and negative, would ripple through the economy. We find: The tariffs would increase U.S. iron and steel employment and non-ferrous metals (primarily aluminum) employment by 33,464 jobs, but cost 179,334 jobs throughout the rest of the economy, for a net loss of nearly 146,000 jobs ..

How did they arrive at this alarming conclusion?

We base our analysis on the Global Trade Analysis Project (GTAP) database. The GTAP database covers international trade and economy-wide inter-industry relationships and national income accounts, as well as tariffs, some nontariff barriers and other taxes. This includes value-chain related linkages across industries and borders. These data are included in a computer-based model of production and trade known as a “computable general equilibrium” (CGE) model. This is the same model used by the Commerce Department to arrive at the tariff rates it argues will yield increases in U.S. steel production sufficient to bring the industry to 80 percent capacity utilization… In addition to economy-wide impacts, we focused on the impacts of imposing the tariffs on the U.S. workforce. For the analysis conducted here, we treat wages as “sticky,” meaning changes in demand for labor (positive or negative) are first reflected in changes in employment rather than changes in wages. This is appropriate for an examination of the immediate impacts of the tariffs on workers.

In other words, they concede that these are short-term impacts and their model has Keynesian features. For some reason, this offends Robert Scott of the Economic Policy Institute (EPI):

This EPI report explains why the actual economic impact of the tariffs will be quite minor, and why Francois and Baughman’s 2018 study should be treated as an odd outlier in studies of tariffs, and not as a study to guide policy decisions. Our key findings are: The Francois and Baughman (2018) results are driven overwhelmingly by a nonstandard modeling assumption: that growth in the U.S. economy is constrained by aggregate demand. This is not how the vast majority of trade modeling analyses are done. Even with the assumption of demand-constrained growth, the Francois and Baughman (2018) results are totally implausible. There is no credible evidence that these tariffs could drag on growth in demand anywhere near enough to generate employment losses as large as the authors report…While Francois and Baughman (2018) look at the effects of raising tariffs on steel and aluminum, the textbook case for arguing that lowering tariffs will boost economic efficiency relies on the assumption that the economy operates at full employment, meaning that overall economic growth is constrained only by growth in the economy’s productive capacity and not by spending decisions made by households, businesses, and government. This means that economic growth is not constrained by too-slow growth in aggregate demand. This full employment assumption lies behind the vast majority of analyses of trade policy and is a necessary condition for many of the findings that lower tariffs boost economic efficiency. Such full employment modeling would imply extremely modest economic losses from the steel and aluminum tariffs. The standard rule-of-thumb for converting tariff increases into economic losses is: [0.5*(t/(1+t))^2*m*e]. Here, t is the percentage tariff, m is the share of imports in the nation’s gross domestic product (GDP), and e is the elasticity of demand for imports with respect to price.

First of all it would have been nice had this EPI discussion given Paul Krugman credit of this “standard rule-of-thumb”. But since when has the EPI embraced the New Classical macroeconomics model? To be fair, I have made similar arguments that trade policy has no net aggregate demand effects. For example, my post on Navarro’s Nonsense on Net Exports dusted off the Mundell-Fleming IS-LM-BP model:

My concern was that Navarro was all Keynesian with no consideration of where output was relative to potential GDP or the impacts on potential GDP. Navarro proposed using some sort of trade protection to raise net exports by $500 billion per year. That might have a big aggregate demand impact under the assumptions of fixed exchange rates and fixed interest rates, which of course is the most basic Keynesian model that Navarro both mocks and uses. One can wonder whether the output gap now is really that large. Of course, I have suggested that perhaps the output gap may indeed be as much as 5 percent but other economists suggest it is smaller. Scott is noting, however, the Trump wants to increase defense spending and massively cut taxes which push aggregate demand so high that the Federal Reserve would have to raise interest rates. We should also note how various policy positions work in a standard Mundell-Fleming model.

One of the implications of this model is that any expenditure-switching policy such as reducing imports will so appreciate the currency that export demand falls as much imports rise. Of course the EPI has often dismissed this conclusion on the grounds that we do not live in an idealized world of freely floating exchange rates. Then again – even Keynesian economists would argue that a well designed monetary policy could offset any negative aggregate demand effects – providing we do not hit that liquidity trap again. So yea – I have argued for a full employment modeling in the past. But what worries me is that Trump’s follies may match or rival the macroeconomic mess we had during the early years of the reign of St. Reagan. To suggest that in such an environment that we should ignore aggregate demand effects is something I would have never expected from the EPI.

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Immigrant Child Abuse Agency (ICAA)

Immigrant Child Abuse Agency (ICAA)

In my Take Back ICE, I wrote:

I would hope the leaders of ICE would speak up and strongly object to what the Demagogue in Chief has done with their agency but to date they seem to be intimated from doing what is right.

Some good news:

The political backlash against U.S. Immigration and Customs Enforcement has turned so intense that leaders of the agency’s criminal investigative division sent a letter last week to Homeland Security Secretary Kirstjen Nielsen urging an organizational split…Though ICE is primarily known for immigration enforcement, the agency has two distinct divisions: Enforcement and Removal Operations (ERO), a branch that carries out immigration arrests and deportations, and HSI, the transnational investigative branch with a broad focus on counterterrorism, narcotics enforcement, human trafficking and other crimes. The letter signed by 19 special agents in charge urges Nielsen to split HSI from ICE, because anger at ERO immigration practices is harming the entire agency’s reputation and undermining other law enforcement agencies’ willingness to cooperate, the agents told Nielsen.

The letter can be found hereMy mayor may be interested in this proposed split:

We should abolish ICE. We should create something better, something different. But in the way it’s developed, it has become a punitive, negative tool for division and it’s no longer acceptable.

Now if we transform ICE into HIS – what is to become of ERO? I’m sure Trump and Session will still want some agents to do their sick bidding. If so, I think we need a new name for this group. Truth in advertising could call this group ICAA. One side point – we are hearing a lot about how this abuse occurred even before Trump become President. Let’s be clear – abuse of immigrant rights is wrong. I’d hope former President Obama addresses this.

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Take Back ICE

Take Back ICE

U.S. Immigration and Customs Enforcement (ICE) was established 15 years ago:

ICE was granted a unique combination of civil and criminal authorities to better protect national security and public safety in answer to the tragic events on 9/11. Leveraging those authorities, ICE has become a powerful and sophisticated federal law enforcement agency.

My link was for a 2013 discussion of its laudable achievements during its first ten years. As a resident of New York City, I appreciated ICE. On this muggy day, several protesters are calling for something dear to my heart – Keep Families Together:

Hundreds of marches took place across the United States on Saturday as thousands of people demanded the Trump administration reunite families separated at the U.S.-Mexico border. The protests, marching under the banner “Families Belong Together,” are hoping to push the Trump administration to reunite thousands of immigrant children separated from their families after crossing into the United States.

Let’s be clear – the Demagogue in Chief high jacked ICE to push his poisonous agenda with over 2000 children separated from their immigrant parents. Rather than blaming Trump, some of the left has called for abolishing ICE. What to play into the Demagogue’s hands!

“The Democrats are making a strong push to abolish ICE, one of the smartest, toughest and most spirited law enforcement groups of men and women that I have ever seen. I have watched ICE liberate towns from the grasp of MS-13 & clean out the toughest of situations. They are great!” Trump tweeted. In a follow-up tweet, Trump urged the men and women of ICE not to worry about the ongoing calls to abolish the department. “You are doing a fantastic job of keeping us safe by eradicating the worst criminal elements. So brave! The radical left Dems want you out. Next it will be all police. Zero chance, It will never happen!” he wrote.

I know this Demagogue routinely lies but ICE was doing a fantastic job a few years ago. But even ICE has limited resources which this Demagogue has diverted from their true purpose. As such Trump is not only abusing the rights of these families, he is also making us less safe. I would hope the leaders of ICE would speak up and strongly object to what the Demagogue in Chief has done with their agency but to date they seem to be intimated from doing what is right. I would hope that Congress would hold hearings into this abuse of ICE and diversion of scarce resources away from securing our safety but these hearings are not going to happen as long as Mitch McConnell and Paul Ryan are in charge. But for God’s sake – could we on the left stop losing our minds over the rightful anger at the Demagogue in Chief so we can put forth a coherent message that taking back ICE not only ends the abuse of these immigrant families but gets this agency back to securing us as opposing as to serving the sick agenda of the Demagogue in Chief?

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Does Greg Mankiw Know the History of U.S. Trade Policy?

Does Greg Mankiw Know the History of U.S. Trade Policy?

Greg offers us a nice speech by Saint Reagan. While Ronald Reagan preached free trade, Jeffrey Frankel notes that his actual record was rather protectionist. The discussion is an excellent account of how Republicans have been protectionist since 1854. But the really weird thing in Reagan’s discussion was how he claimed the U.S. has been a free trade nation since 1776. Of course Congress passed the Tariff Act of 1789:

One of the major early actions of Congress was the passage of the Tariff Act of 1789, which was designed to: raise revenues for the new government by placing a tariff on the importation of foreign goods (averaging more than 8 percent); encourage domestic production in such industries as glass and pottery by taxing the importation of those products from foreign sources.

Someone at Harvard’s history department should visit Mankiw’s office.

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Intercompany Guarantee Fees and Trump’s Lido City Loan

Intercompany Guarantee Fees and Trump’s Lido City Loan

Matthew Yglesias notes:

Trump stands to gain from an Indonesian project that got a $500 million loan right before he flip-flopped on ZTE… But it also happened the same week a Chinese state-owned company came through with hundreds of millions of dollars in loans, some of which will go to facilitate the construction of Trump-branded properties in Indonesia.

Does anyone know what the interest rate will be on this loan? After all, it is highly unlikely that the lender has given Trump’s business an interest fee loan. Let’s speculate that the interest rate is 4% per annum so Trump’s business would be paying $20 million per year in interest expenses. But how would that compare to market rates? The yield on 10-year Chinese government bonds is just over 3.7% according to this source. If Trump’s business got a 4% interest rate on a ten-year loan denominated in RMB (to be fair I do not know the currency of denomination or the term either), then the lender was assuming a AAA credit rating for this business, which sounds incredible to me. Of course it is entirely possible that the lender was receiving some sort of guarantee from the Chinese government in case Trump’s business defaults. Some tax accountant defines intercompany guarantee fees as:

With guarantees between affiliated group companies, the question arises of whether a guarantee fee must be paid to the company giving the guarantee. The credit rating of the company receiving the guarantee is also important when answering this question.

What would be a reasonable credit rating on a standalone basis for Trump’s business? Let’s also speculate that this credit rate would be no better than BB, which would likely imply that a loan on a true arm’s length basis would command an interest rate closely to 7%. In that case, the value of the loan guarantee is 3% or $15 million per year in interest savings. OK – I admit this is all speculative guesses but it does pose a reasonable means for evaluating the extent of the kick back Trump’s business got from deal.

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Stock of Debt Held by US Public Has Tripled Over the Last Decade & Other Misleading Information

Stock of Debt Held by US Public Has Tripled Over the Last Decade & Other Misleading Information

My title was the heading of Figure 19 in something from Deutsche Bank that has John Cochrane all stressed out over a pending debt crisis again.

This graph is gorgeous. US deficits have, historically, been driven overwhelmingly by the state of the business cycle, and have very little to do with tax policies and spending decisions that dominate press coverage. In booms, income rises, so tax rate times income rises. In busts, the opposite, plus “automatic stabilizer” spending kicks in. Until now. There is a good reason past deficits did not really spook markets. They understood the deficit was a temporary phenomenon, due to temporary poor demand-side economic performance. We do not have that excuse now.

I’m wondering if Cochrane’s goal of late is to make his readers more stupid. First of all – looking at the nominal debt today compared to a decade ago is highly misleading. James Tobin once noted that the tripling of the Federal debt during the 1980’s was misleading as the real debt only doubled. He usually said that with his usual smile. OK – inflation today is a bit lower than it was during the 1980’s but the debt/GDP ratio only doubled over the last decade. Now we should admit that the fiscal stimulus since Trump took office is an alarming trend but it is very much like Reagan’s fiscal stimulus in 1981 in that both cut taxes for the rich and increased defense spending. Oh wait – Cochrane was all supportive of these fiscal moves last year but now he is sounding the alarm bells as Team Republican really does want to cut “entitlements”. To be fair – Cochrane did say:

I do think that roughly speaking we could pay for American social programs with European taxes. That is, 40% payroll taxes rather than our less than 20%; 50% income taxes, starting at very low levels; 20% VAT; various additional taxes like 100% vehicle taxes and gas that costs 3 times ours.

He said a whole lot more that one can take a look at. My only response is that he is echoing another Team Republican line – tax everyone except the rich. But let me directly challenge this nonsense that our deficits have been “overwhelmingly by the state of the business cycle, and have very little to do with tax policies and spending decisions”.

Yes – the recent run-up in the debt was due to the Great Recession and not some alleged Obama fiscal stimulus. We had only a temporary stimulus designed to counter the Great Recession. The run-up in the debt/GDP ratio under Reagan and Bush43 were due to tax and spending policies. Fortunately these supposed permanent tax cuts were not so permanent after all.

 

 

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Kudlow’s Trade Coalition of the Willing

Kudlow’s Trade Coalition of the Willing

Who knew when I posted this:

We could go back to 2002 and how the Authorization for Use of Military Force Against Iraq Resolution of 2002 was sold to people like Senator John Kerry and Senator Hillary Clinton. The Bush-Cheney White House sold this as a means to encourage Iraq to comply with certain UN resolutions and not necessarily a prelude to war. Of course the White House was lying as we knew by March 2003. Of course Bush-Cheney lied about a lot of things with respect to Iraq back then including its forecast that an invasion would be quick, low cost, and very effective in establishing a Western democracy in Iraq. How did that work out exactly? Kudlow helped the White House cheerlead for this invasion arguing it would lead to so much Iraqi oil production that oil prices would fall to $12 a day. How did that work out again?

I was reacting to Kudlow claiming we are not in a trade war. Just as I thought Kudlow had reached all heights of stupidity, he exceeds expectations:

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Are We in a Trade War?

Are We in a Trade War?

President Trump sent two of his minions out yesterday to lie about this question. Kudlow:

We are not in a trade war. What this is is an attempt to right some of the wrongs with respect to China.

Our Treasury Secretary said essentially the same thing:

Our objective is still not to be in a trade war with [China] … I’m cautiously optimistic that we will be able to work this out.”.

We could go back to 2002 and how the Authorization for Use of Military Force Against Iraq Resolution of 2002 was sold to people like Senator John Kerry and Senator Hillary Clinton. The Bush-Cheney White House sold this as a means to encourage Iraq to comply with certain UN resolutions and not necessarily a prelude to war. Of course the White House was lying as we knew by March 2003. Of course Bush-Cheney lied about a lot of things with respect to Iraq back then including its forecast that an invasion would be quick, low cost, and very effective in establishing a Western democracy in Iraq. How did that work out exactly? Kudlow helped the White House cheerlead for this invasion arguing it would lead to so much Iraqi oil production that oil prices would fall to $12 a day. How did that work out again? We should have listened to Anthony Zinni:

Former Centcom Chief General Anthony Zinni Calls Iraq War a Blunder

He was saying invading Iraq would be a blunder even back in 2002. Of course Trump says we will win the trade with China. On Trump’s absurd claim, perhaps we should listen to Luke Skywalker :

This Is Not Going To Go! The Way You Think

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