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

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 already? AddendumOf 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.

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:

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:

John Cochrane recently noted:

Stock Buybacks Are Proof of Tax Reform’s Success… A short oped for the Wall Street Journal here on stock buybacks. As usual, they ask me not to post the whole thing for 30 days though you can find it ungated if you search.

I did search and found this. Does the Wall Street Journal get the fact that rebutting weak arguments against a policy are not exactly making an affirmative case for the policy? Permit me to note two places where Cochrane and I agree:

echoing illogical claims is not a contribution to that debate. Granted, Republicans invited the attack by trumpeting worker bonuses. But a bad argument for the cut does not redeem a worse counterargument.

Well thanks for that and now an argument from the left that is also weak:

To cast corporate tax cuts as a “scam” and redistribution to the wealthy, opponents have shifted their focus to the evils of stock buybacks and dividends…Share buybacks and dividends are great. They get cash out of companies that don’t have worthwhile ideas and into companies that do. An increase in buybacks is a sign the tax law and the economy are working. Buybacks do not automatically make shareholders wealthier. Suppose Company A has $100 cash and a factory worth $100. It has issued two shares, each worth $100. The company’s shareholders have $200 in wealth. Imagine the company uses its $100 in cash to buy back one share. Now its shareholders have one share worth $100, and $100 in cash. Their wealth remains the same.

When I read this argument over at Cochrane’s blog, I decided to provide this link:

I heard on some news show an incredibly stupid statement from our President earlier today and in utter disbelief fired off this comment on some blog:

Trump equates our trade deficit with us being ripped off. Let’s do this as a simple example. You walk into Best Buy and purchase a $1000 computer but do not have cash. So you put it on your credit card incurring a $1000 liability. Even though you now have the computer and Best Buy does not – Best Buy just ripped you off as you have a $1000 financial obligation. An odd statement from someone who routinely defaulted on his financial obligations!

Never mind that as on Friday Jeffrey Sachs beat me to this:

But don’t expect an impulsive and ignorant man like Trump to heed the lessons of economic history, logic of retaliation, and the basics of trade. His actions are based on three primitive fallacies. First, Trump thinks that America runs trade deficits with countries like China and Germany because the US is being swindled by them. The real reason is that the US saves too little and consumes too much, and it pays for this bad habit by borrowing from the rest of the world. The Trump theory of international trade is like a man in deep debt who blames his creditors for his spendthrift behavior. Come to think of it, that is precisely how Trump has spent his whole business career: over-borrowing, going bankrupt, and blaming his creditors.

Check out his discussion of the other two primitive fallacies! I guess Trump would argue that it was very unfair to me when Best Buy gave me a credit card.

When I watched this clip by Wilbur Ross – all I could think of was Mr. Ed. But what did he say?

“In a can of Campbell’s Soup, there are about 2.6 pennies worth of steel. So if that goes up by 25 percent, that’s about six-tenths of 1 cent on the price on a can of Campbell’s soup,” Ross argued. “I just bought this can today at a 7-Eleven … and it priced at a $1.99. Who in the world is going to be too bothered?”

Ross is doing his best (I guess) to explain the Effective Rate of Protection:

The principle objective of a tariff is to dampen imports in order to encourage domestic production of the protected industry. Until recently, the protective effects of a tariff were measured in terms of nominal rate of tariff on the imports of final products. It was believed that a higher nominal rate tariff of would bring a larger increase in the output of the protected industry. But the various duties imposed by a country are not likely to give a true picture of the degree of production afforded by the nominal tariff rate. For the nominal tariff rate does not take into consideration the amount of the duty on imported intermediate products and raw materials which are used in domestic import competing industries. The theory of effective rate of protection takes into account duties levied on such raw material and intermediate products. It measures actual rate of protection that the nominal tariff rate provides to domestic import competing industry. The nominal tariff rate is the rate of duty on the value of the imported final product (as for example the ad valorem tariff). It is important to the consumer, because the nominal tariff rate affects the price of final goods which the consumers ultimately consume. The effective rate of tariff, on the other hand, is important to producers, because the degree to which their production activity is protected from foreign competition depends upon effective and not the nominal rate of tariff.

In cases where the percentage of the imported inputs in the locally produced good is very small, then maybe we should not be too bothered, but let’s consider another example:

The global price of aluminum fell below $1500 per metric ton by the end of 2015. By June 2017, it had risen to $1885 per metric ton. This source suggests that this price is even higher. So what happened yesterday?:

The stock market dip reflects the enormous impact that a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum will have on the economy. That’s because so many American industries need steel and aluminum: They’re used to build cars, skyscrapers, roads, bridges, washing machines, refrigerators, and a whole host of other products. More expensive steel and aluminum means higher costs for the American businesses that make these products — higher costs that will likely get passed on to consumers. Trade groups and businesses didn’t wait long to slam the president’s decision. Some of the country’s most influential industry groups warned that the tariffs would hurt more than a company’s bottom line

C’mon man! Aren’t there winners from these tariffs?

There are a handful of winners from the proposed tariffs: the companies that produce steel and aluminum in the United States. The CEOs of the big American steel companies were invited to the White House for Trump’s big announcement. David Burritt, the CEO of US Steel, was thrilled. “This is vital to the interests of the United States,” he said at the White House after the announcement, according to a pool report. “This is our moment, and it’s really important that we get this right.” As the stock market slid, share prices for his company — and other steel companies — jumped.

Forget steel – what about Alcoa! Alcoa has seen a recent slide in its revenues and profitability so we will look at certain information from their 10-K filing shortly. But first let’s check with Census to see how much bauxite and aluminum we imported last year. End use code 14200 shows that total imports were $16.255 billion but only $1.267 billion was from China. Yes boys and girls it was those socialists in Canada that sold us $6.978 billion of these products in 2017. That damn NAFTA! I saw some pro-Trump cheerleader commenting on another economist blog that we had to protect our U.S. smelters from foreign competition, which brings me to Alcoa’s most recent 10-K filing: From 2016 to 2017, their sales picked up and they return to profitability. But the details on their smelters is interesting:

Master Yoda at the end of the second of the Star Wars prequels:

Begun the clone war has

Exactly the right sentiment with this news:

President Donald Trump is expected to announce new tariffs on imports of steel and aluminum as soon as Thursday, a move that could trigger significant economic repercussions. “Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world,” Trump tweeted Thursday morning. “We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!”

I wonder if the agriculture sector will see this as smart:

The tariffs would most likely trigger retaliation from other countries. China is already looking into restrictions on US exports of sorghum and soybeans, both of which are important crops for American farmers. Additionally, the European Union was said to be mulling tariffs on US agricultural products like cheese and bourbon.