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A Very Erroneous Chart in the Economic Report of the President

A Very Erroneous Chart in the Economic Report of the President

Menzie Chinn has been reading the latest Economic Report of the President and finds a very erroneous and misleading chart, which is figure 1-6 from this this document (see page 45), which states:

Equipment investment, in particular, exhibited a pronounced spike in the fourth quarter of 2017, as both the House and Senate versions of the TCJA bill, which were respectively introduced on November 2 and November 9, stipulated that full expensing for new equipment investment would be retroactive to September 2017. This created a strong financial incentive for companies to shift their equipment investment to the fourth quarter of 2017, so as to deduct new equipment investment at the old 35 percent statutory corporate income tax rate. After the initial spike in the rate of growth in fixed investment, standard neoclassical growth models would predict a return of the rate of growth to its pre-TCJA trend, but from a higher, post-TCJA level, with the capital-to-output ratio thereby asymptotically approaching its new, higher steady-state level.

Earlier on page 43 we see:

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A Tariff Laffer Curve?

A Tariff Laffer Curve?

Douglas Irwin is a very good economist. Let’s highlight his Historical Perspectives on U.S. Trade Policy:

The Civil War marked the beginning of a long period of high U.S. tariffs. These tariffs served the dual purpose of raising revenue for the federal government and keeping out foreign goods, ostensibly for the protection of U.S. labor and business. After the war, tariffs (which generated roughly half of government revenue) remained high to service the enormous debt burden that resulted from the war. Yet by the mid-1880s a curious problem had arisen: though much of the debt had been paid off, federal revenues were outstripping expenditures by as much as 50 percent. Republican and Democratic politicians agreed that the fiscal surplus should be reduced, but they proposed exactly the opposite policies for achieving this objective. Democrats advocated cutting tariff rates in an effort to reduce revenue. Arguing that this would simply encourage imports and raise even more revenue, Republicans proposed higher tariff rates to reduce fiscal revenue. This debate over the tariff “Laffer curve” essentially hinged on whether existing tariffs were above or below the revenue-maximizing rate, which in turn depended on the height of the tariff and the price elasticity of import demand.

Irwin examined this issue in his Higher Tariffs, Lower Revenues? Analyzing the Fiscal Aspects of the “Great Tariff Debate of 1888”:

This paper examines this debate and attempts to determine the revenue effects of the proposed tariff changes. The results indicate that the tariff and the price elasticity of U.S. import demand during the 1880s below the maximum revenue rate, and therefore a tariff reduction would have reduce customs revenue.

Irwin also contrasts the other policy agendas of the two parties.

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Art Laffer is Not an Economist

Art Laffer is Not an Economist

 Can The Hill be more wrong?

President Trump will award the Presidential Medal of Freedom, the nation’s highest civilian honor, to economist Arthur Laffer, the White House announced Friday. The president will honor Laffer on June 19 for his contributions to economic policy. The White House described Laffer as “one of the most influential economists in American history” in announcing the award.

OK the Idiot-in-Chief did say that but repeat after me – Art Laffer is not an economist. Why did Trump debase the Presidential Medal of Freedom and the entire economics profession?

Laffer co-wrote a book published last year titled “Trumponomics: Inside the America First Plan to Revive Our Economy.” His co-author was Stephen Moore, who earlier this year was nominated to serve on the Federal Reserve Board of Governors but withdrew amid bipartisan opposition from senators.

Well at least The Hill got this right. But this?

Laffer championed supply-side economics and gained prominence serving as a top adviser to then-President Reagan. He established what is known as the “Laffer Curve,” which showed that increases in tax rates will eventually cause government revenue to decrease at a certain point. The model has been cited to argue for the benefits of tax cuts. Critics of supply-side economics argue that it has contributed to inequality and disproportionately benefits the wealthy.

The inequality critique is not the only issue with tax cuts that reduce national savings. Couldn’t The Hill note that the 1981 tax cut lowered investment via higher real interest rates as well as appreciated the dollar leading to large trade deficits? Enough with this weak account as Slate got this right!

Trump Gives World’s Worst Economist the Presidential Medal of Freedom

A better read and if you are going to dub Laffer as an economist please note he is a very poor economist. But at least he lavished Trump with praise.

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Trump’s Latest Mexican Tariff Tirade Irks Senator Grassley

Trump’s Latest Mexican Tariff Tirade Irks Senator Grassley

Senator Grassley rebukes the latest idiocy from the White House:

President Trump dropped a trade war bomb on Thursday when he announced his intent to put in place new and harsh tariffs on goods from Mexico until the “illegal Immigration problem is remedied.” And among the many worried, negative reactions was one from Senate Finance Committee Chair Chuck Grassley, in a strongly worded statement. “Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent,” the statement begins. “Following through on this threat would seriously jeopardize passage USMCA, a central campaign pledge of President Trump’s and what could be a big victory for the country.” Putting this in the context of harming Trump’s own signature USMCA (the replacement for NAFTA) is a smart frame, an effort to show that the tariffs are in conflict with the administration’s own trade goals.

First Tramp thinks NAFTA is the worst trade deal ever but NAFTA 1.1 is beautiful. But now Trump wants to start a new trade war with Mexico because he did not get his racist wall? OK! Of course Trump is not the only one with a twitter account and Paul Krugman has joined Senator Grassley with lines like:

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Conservative Economists Discover the Baumol Cost Disease

Conservative Economists Discover the Baumol Cost Disease

A little over a year ago Mark Perry wrote this nonsense:

The chart above (thanks to Olivier Ballou) is an update of a chart we produced last year about this time, and shows the percent changes since January 1997 in the prices of selected consumer goods and services, along with the increase in average hourly earnings in this version … Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.

To which I reminded him of the Baumol cost disease and followed up with this. It is good to see that Alex Tabarrok has been thinking about this issue as has John Cochrane. Read their posts as there is a lot of great discussion but permit me to cite just this:

I assumed that regulation, bloat and bureaucracy, monopoly power and the Baumol effect would each explain some of what is going on. After looking at this in depth, however, my conclusion is that it’s almost all Baumol effect.

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Trump Claims Obstruction of Justice is an Official Duty of the White House

Trump Claims Obstruction of Justice is an Official Duty of the White House

Tierney Sneed reports on Trump’s latest obstruction of justice:

The Justice Department on Monday issued a legal opinion claiming that Congress could not compel former White House Counsel Don McGahn to testify about special counsel Robert Mueller’s report. The opinion was released not long after reports that the White House was planning to instruct McGahn to not comply with a House subpoena that he testify at a Judiciary Committee hearing Tuesday.

The legal opinion can be found here and states in part:

Congress may not constitutionally compel the President’s senior advisors to testify about their official duties … This testimonial immunity is rooted in the constitutional separation of powers and derives from the President’s independence from Congress.

What an incredibly arrogant canard! McGahn is being asked to testify to Congress about what is clearly obstruction of justice – a crime. How is that an official duty of the White House? Oh wait – the Trump White House is nothing but a den of organized crime so maybe he sees committing crimes as one of his official duties!

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Panetta and Trump: Who are You Calling Chumps?

Panetta and Trump: Who are You Calling Chumps?

Leon Panetta:

Trump treats Americans like we’re chumps

Check out the entire interview as it was excellent. But I had to look up this old fashion word:

a person who is easily tricked : a stupid or foolish person

OK – Trump supporters are easily tricked. But Trump wants to pretend he is a young vigorous man! Chris Matthews did talk about young people who are more likely to check out Urban Dictionary than the old fashion Merriam-Webster dictionary:

Someone who does not understand the basics of life on earth. Confused easily.

Actually this is the perfect description for Trump supporters. There are more definitions at Urban Dictionary that I would submit also apply!

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USMCA, the International Trade Commission, and Kevin Hassett

USMCA, the International Trade Commission, and Kevin Hassett

Tracey Samuelson of Market Place writes:

USMCA would slightly boost U.S. economy, says ITC report – On Thursday, the International Trade Commission released its assessment of the projected economic impact of USMCA, President Trump’s proposed replacement for NAFTA. The report shows the new deal is projected to boost the U.S. economy by .35% when fully implemented.

I will to read this report after I get over laughing at the latest from Menzie Chinn who quotes Kevin Hassett:

Two-thirds of U.S. CFO’s expect a recession by summer of next year, but White House Council of Economic Advisers Chair Kevin Hassett believes the economy shows no signs of slowing down. “There’s so much momentum right now,” he told FOX Business Stuart Varney on Friday. “It just seems almost impossible that there would be a recession by the summer of next year.”

You should watch what turned out to be a really stupid interview on Fox Business covering not only on the alleged impossibility of a recession and how Hassett fluffed off Trump pressuring the FED to lower interest rates. Hey Kevin – if it is impossible for there to be a recession, why lower interest rates? Never mind that for now and listen to how Hassett declared USMCA to be the best trade deal and how it would increase GDP by $100 billion in the first year. Did the ITC really say that? Update: The report can be found here. It does say on page 37:

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Is Stephen Moore a Gold Bug?

Is Stephen Moore a Gold Bug?

A lot of the criticisms of putting the twin village idiots known as Herman Cain and Stephen Moore on the FED assert that they are gold bugs. Kate Riga watched CNN when Erin Burnett interviewed Stephen Moore on this allegation:

Stephen Moore tries to flip-flop on the gold standard — but Erin Burnett is prepared and armed with a montage of his past statements

Watch and enjoy! Now Moore did say he would prefer targeting an index of commodity prices, which led me to FRED and its Global Price Index of All Commodities. Moore has not be all that specific how his commodity price target would work but let’s speculate his index would be a lot like this one. Suppose the FED targeted commodity prices to be where they were in 2005 since this index is based where it would equal 100 in 2005. Just imagine how a Moore monetary policy would have worked say during the booming 1990’s. Commodity prices were low so his policy prescription would have been massively expansionary during a booming economy. For much of the period from 2007 to 2014, we would have had a contractionary monetary policy even as U.S. aggregate demand was often incredibly weak. In other words, his commodity price based monetary policy would be about as destabilizing as was monetary policy under the gold standard.

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Elizabeth Warren Wants to Collect More in Corporate Profits Taxes

Elizabeth Warren Wants to Collect More in Corporate Profits Taxes

John Harwood reports:

Democratic presidential candidate Elizabeth Warren proposes raising $1 trillion in government revenue from a new tax on profits of the largest corporations. The proposed surtax would prevent Amazon and other companies with profits exceeding $100 million from wiping out their tax liabilities altogether. Instead of taxable corporate income as defined by the IRS, the 7% surtax would apply to profits companies report to their investors.

A lot to like. Look – I hated that 2017 tax scam, which we were told would clean up how corporations are allowed to shield income by all sorts of tricks including transfer pricing manipulation. Alas, its complexity was a boondoggle for shifty tax attorneys rather than simplification and closing loopholes. So proposals to “repeal and replace” this awful tax deform are highly welcomed. But this part of Harwood’s reporting was dreadful:

Warren cited two high-profile examples: Amazon has reported $10 billion in 2018 profits but zero in U.S. corporate taxes; Occidental Petroleum has reported $4.1 billion in profits and also paid zero.

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