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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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Trump’s Trade War, Stranded Assets, and Wilbur Ross’s Shipping Company

Trump’s Trade War, Stranded Assets, and Wilbur Ross’s Shipping Company

Paul Krugman relates declines in stock valuations to the insanity of trade policy from Donald Trump and taught me a new expression – stranded asset:

An asset that is worth less on the market than it is on a balance sheet due to the fact that it has become obsolete in advance of complete depreciation.

Paul notes:

Yet there is a reason why stock prices might overshoot the overall economic costs of a trade war. For a trade war that “deglobalized” the U.S. economy would require a big reallocation of resources, including capital. Yet you go to trade war with the capital you have, not the capital you’re eventually going to want – and stocks are claims on the capital we have now, not the capital we’ll need if America goes all in on Trumponomics. Or to put it another way, a trade war would produce a lot of stranded assets … But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets. Since about 1990 corporate America has bet heavily on hyperglobalization – on the continuance of an open-market regime that has encouraged complex value chains that sprawl across borders. The notebook on which I’m writing this was designed in California, but probably assembled in China, with many of the components coming from South Korea and Japan. Apple could produce it entirely in North America, and probably would in the face of 30 percent tariffs. But the factories it would take to do that don’t (yet) exist. Meanwhile, the factories that do exist were built to serve globalized production – and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock. Of course, it wouldn’t just be factories left stranded by a trade war. A lot of people would be stranded too.

Companies in the export sector have already seen their stock valuations take a hit from the upcoming trade war. But why am I focusing on Wilbur Ross as an owner of a shipping company?

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Our Depleted National Defense Budget?

Our Depleted National Defense Budget?

Our title is perhaps the most obnoxious line in the Hoover Five oped per some of the appropriately harsh comments to Cochrane’s post, which alas I did not cover here. Before I do so, let me turn the microphone over to Jonathan Chait:

It is a foundational belief of Republican Party doctrine that tax cuts cannot have any adverse impact on the national debt. Indeed, Republicans have invented a new language in which budget deficit does not actually mean the difference between revenue and outlay at all. It is a term used exclusively to express panic over social spending. Economists and intellectuals associated with the party are therefore required to, in essence, keep two different sets of books when discussing fiscal policy in public. In November, a group of Republican luminaries, including Michael J. Boskin, John H. Cochrane, John F. Cogan, George P. Shultz, and John B. Taylor co-authored an op-ed cheering on the Trump tax cuts. Isn’t it a little dangerous to permanently increase the deficit, especially during the peak of an economic expansion? Nonsense, they argued. The effect on interest rates of higher debt “is likely to be modest, given that the United States operates in an international capital market, which means that the impact of changes in interest rates resulting from greater investment demand and government borrowing are likely to be relatively small.” No need to worry your pretty little heads about interest rates, since international capital markets will supply as many buyers of Treasury bills as needed, forever. Party on! Now that the Trump tax cuts have passed, though, they have pivoted to a message of deep concern about rising debt. Boskin, Cochrane, Cogan, Shultz, and John B. Taylor have written another oped. It applauds the tax cuts and calls for more. Yet it warns that the failure to cut social spending will lead to catastrophe. Including higher interest rates

Well said! Now to defense spending. I could go all nominal like the Hoover Five and note that nominal defense spending rose by 90% from 2000 to 2017 but then nominal GDP rose by 88.5% over the same period. So we have updated the graph provided by Jeffrey Miron:

Figure 6 Defense Spending as a Percentage of GDP

 

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Why “Entitlement” Cuts and Not Tax Increases Again?

Why “Entitlement” Cuts and Not Tax Increases Again?

John Cochrane has to remind us that he co-authored a really bizarre oped:

Unless Congress acts to reduce federal budget deficits, the outstanding public debt will reach $20 trillion a scant five years from now, up from its current level of $15 trillion. That amounts to almost a quarter of million dollars for a family of four, more than twice the median household wealth. This string of perpetually rising trillion-dollar-plus deficits is unprecedented in U.S. history.

Oh good grief! Can one say relative to GDP? We are also about to see a $20 trillion per year level of national income – “unprecedented in U.S. history”. But yea – they did begin with mocking this Trump nonsense:

President Trump’s recently released budget is a wake-up call. It projects that this year, a year of relatively strong economic growth, low unemployment and continued historically low interest rates, the deficit will reach $870 billion, 30 percent greater than last year.

Relatively strong economic growth is not exactly the same as Kudlow’s forecast of 5% growth is it? Oh wait – Cochrane and company have been touting strong growth effects from the Trump tax cuts. Never mind. Back to Cochrane the new found deficit alarmist:

In recent months, we have seen an inevitable rise in interest rates from their low levels of recent years. Rising interest rates and increasing deficits threaten to build upon each other to send public debt spiraling upward even faster. When treasury debt holders start to doubt our government’s ability to repay, or to attract future lenders, they will demand higher interest rates to compensate for the risk. If current spending and tax policy continue unaltered, higher interest costs will have to be financed by even more debt. More borrowing puts more upward pressure on interest rates, and the spiral continues. If, for example, interest rates were to rise to 5 percent, instead of the Trump administration’s prediction of just under 3.5 percent, the interest cost alone on the projected $20 trillion of public debt would total $1 trillion per year. More than half of all personal income taxes would be needed to pay bondholders. Such high interest payments would crowd out financing of needed expenditures to restore our depleted national defense budget, our domestic infrastructure and other critical government activities. Unchecked, such a debt spiral raises the specter of a crisis. Some may think that such concerns are overblown, as there is no current evidence in financial futures markets that a crisis is on the horizon.

Let’s stop right there and note that the interest rate on 30-year government bonds is only 3% not 5%. But of course Cochrane knows so much more than the market knows – I guess. But yea there is a long-run government budget constraint so let’s get to the policy prescription:

To address the debt problem, Congress must reform and restrain the growth of entitlement programs and adopt further pro-growth tax and regulatory policies. The recently enacted corporate-tax-reform plan is a good first step, as it sharply increases the incentive to invest and grow businesses, which will increase incomes. The revenue loss, which amounts to about 0.4 percent of gross-domestic product in 2025, is not by itself a budget buster, considering both the offsetting revenue reflow from higher incomes and the far larger long-run entitlement explosion.

Yea – that Laffer curve! Kudlow is a genius! PLEASE! Their message is that tax cuts for the rich as fine and dandy but we cannot afford to honor your Social Security benefits. Didn’t we cover this alreadyAddendumOf course I should turn the microphone over to the two Justins! Justin Fox is right: Beware of Economists Crying ‘Entitlement Explosion’- Our inability to speak frankly about the nation’s fiscal situation has real consequences. He is criticizing the same oped as he provides a much more detailed and honest discussion of the issues. Meanwhile Justin Wolfers does a nice job of debunking the supply-side silliness:

Corporate tax cuts will put billions of dollars back in the hands of businesses this year. Naturally, people want to know how those businesses will spend it. But the answer doesn’t really matter, at least not for understanding whether the tax cuts were a good idea. That’s because the economic case for corporate tax cuts has almost nothing to do with what corporations do with the extra cash. Economists generally recognize that corporate tax cuts have two quite distinct effects. First, a tax cut increases the incentive to invest… This incentive effect drives most economic models of investment, and few economists debate its underlying logic, although there’s considerable debate as to whether it will yield a large or small increase. Second, a tax cut showers extra cash on companies. That cash largely comes from companies that are suddenly paying a lower tax rate on profits earned from past investments. This windfall has a big effect on the distribution of income, with billions of dollars going to owners of capital at the expense of taxpayers. But few economists believe that this cash transfusion will do much to bolster future investment, because the profitability of a new capital project depends on future revenues and expenses, not on how much cash a company has lying around.

Most models of investment also note that a higher cost of capital discourages investment. Cochrane et al. are worried about higher interest rates but then they ignore this effect on investment as they hype the incentive effects. It is entirely plausible that the extra consumption from rich people getting showered with the Trump tax cuts will actually crowd out investment and reduce long-term growth. So what we will get is mainly a higher deficit. When Cochrane calls this a good first step – one has to wonder what the real agenda is.

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Trump on Our Trade Surplus/Deficit With Canada

Trump on Our Trade Surplus/Deficit With Canada

Menzie Chinn listens to the latest from Donald Trump so we don’t have to:

And by the way, Canada? They negotiate tougher than Mexico. Trudeau came to see me, he’s a good man, he said we have no trade deficit with you, we have none. Donald, please. Nice guy, good looking guy. Comes in. Donald we have no trade deficit. He’s very tough. Everyone else, getting killed or whatever. But he’s tough. I said, well Justin, you do. I didn’t even know. Josh, I had no idea. I just said you’re wrong. You’re wrong. It was so stupid. [LAUGHTER]. I thought it was fine. I said, you’re wrong Justin. He said, nope we have no trade deficit. I said, well in that case I feel differently. I said but I don’t believe it. I sent one of our guys out. His guy, my guy. They said check because I can’t believe it. Well, sir you’re actually right, we have no deficit but that doesn’t include energy and timber. [LAUGHTER]. Well you don’t have timber, and when you do we’ll lost $17 billion. It’s incredible.

Menzie provides this source on our 2016 bilateral trade surplus with Canada:

U.S. goods and services trade with Canada totaled an estimated $627.8 billion in 2016. Exports were $320.1 billion; imports were $307.6 billion. The U.S. goods and services trade surplus with Canada was $12.5 billion in 2016.

OK we had a trade surplus when measuring both goods and services. But wait:

Goods exports totaled $266.0 billion; goods imports totaled $278.1 billion. The U.S. goods trade deficit with Canada was $12.1 billion in 2016. Trade in services with Canada (exports and imports) totaled an estimated $ 83.7 billion in 2016. Services exports were $54.2 billion; services imports were $ 26.9 billion. The U.S. services trade surplus with Canada was $24.6 billion in 2016.

Trump has a propensity to ignore our service surpluses focusing on our goods deficit, which was $12.1 billion in 2016. Census notes for 2017, we exported $282 billion to Canada and imported almost $300 billion from Canada so we continue to have a modest goods trade deficit, which is likely what Trump was referring to. I submitted two comments at Menzie’s place with this one making it to his blog:

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Kudlow Predicts An Investment Boom

Kudlow Predicts An Investment Boom

Kudlow channels his inner Gerald Friedman:

Larry Kudlow, picked to be President Trump’s new economic adviser, has privately told the White House that the nation’s economy is on the verge of 4 percent to 5 percent growth, or more than double the last decade. In a recent gathering with Trump, he said that many firms held back investing until the tax reform package passed and “some of that is already showing up.” What’s more, he told the president, “We’re on the front end of the biggest investment boom in probably 30 to 40 years.” The president responded, “Well, I couldn’t have said it any better.”

OK – I get that Friedman was looking at a progressive fiscal agenda whereas Kudlow supports Starving the Beast to pay for more tax cuts for rich people. My point is that both of them take a cavalier modeling of potential GDP. And when Friedman’s supporters try to argue that potential output has been growing by 3.5% per year since 2000, I noted that his is also Kudlow’s approach:

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