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.

Heather Long reports that the White House economists have no clue about the history of U.S. fiscal policy:

President Trump’s policies are driving an economic turnaround that puts him in the company of transformative presidents such as John F. Kennedy and Ronald Reagan, White House economists said Wednesday as they unveiled their first “Economic Report of the President.” The report presents a highly optimistic view of the economy’s current condition and future course, with growth predictions that exceed most nonpartisan economists’ expectations. Economists also caution the White House’s efforts to juice growth could cause the economy to overheat and then careen into a downturn.

Brad DeLong asks whether his latest on fiscal policy and long-term growth belongs in the next edition of Martha Olney’s and his macroeconomics textbook? While I say it should, permit me to quote the relevant passages after I inform these clueless White House economists about fiscal policy during the 1960’s and under Reagan as I noted over at Brad’s place:

We did get that 1964 tax cut right after Kennedy died and we did ramp up defense spending for Vietnam. In December 1965 Johnson’s CEA had the good sense to tell him that we had gone overboard with fiscal stimulus. Alas we got the 1966 Credit Crunch anyway followed by an acceleration of inflation when the FED backed off on its restraint. Reagan gave us a similar fiscal policy but the Volcker FED did not back off its tight monetary policy so we got the mother of all crowding out – high real interest rates for years and a massive currency appreciation. Glad to see that Trump’s CEA has compared this fiscal fiasco to the previous mistakes. Oh wait – Kevin Hassett thinks this is good fiscal policy. It seems the current CEA is as stupid as the President it advises!

OK – now that I’m done with my rant and little history lesson, let’s hear from Brad:

Simon Wren Lewis illustrates the long-run government budget constraint with this tale:

There are many reasons why, outside of a recession, deficits that, if sustained, would steadily increase the debt to GDP ratio may be bad for the economy, but let me give the most obvious here. For a given level of government spending, interest on debt has to come out of taxes. The higher the debt, the higher the taxes. That is a problem because high taxes discourage people from working, and it is also unfair from an intergenerational point of view. This last point is obvious if you think about it. The current generation could abolish taxes and pay for all spending, including any interest on debt, by borrowing more. That cannot go on forever, so at some point taxes have to rise again. A whole generation has avoided paying taxes, but at the cost of future generations paying even more. As a result, unless there is a very good reason like a recession, a responsible government will not plan to sustain a deficit over time that raises the debt to GDP ratio. The problem though is that it is very tempting for a government not to be responsible. The current US government, which is essentially a plutocracy, wants above all else to cut taxes for the very wealthy, and if they do it without at the same time raising taxes on other people but instead by running a deficit they think they can get away with it. Democrats have every reason to say that is irresponsible, although of course the main thing they should focus on is that the last people who need a tax cut are the very rich.

In my discussion of a paper by Jeffrey Miron, I exemplified what he is saying here with the Reagan tax cuts for the rich and defense spending build-up, which may be a description to what Trump is doing now. As Simon admitted after this comment, borrowing to fund infrastructure investment is different:

But surely spending from borrowing and at least some taxation wouldn’t necessarily have the same effect. An equilibrium could at least be sought at higher levels of borrowing and higher levels of economic activity. Particularly with spending on education of course (where in any case the intergenerational fairness argument is weaker).

I accused John Cochrane of incoherent babbling on the Federal deficit issue noting his update where he flip flopped:

He went from fiscal policy being sober to we are in dire straights just like that! Oh my the sky is falling. We have to take away those Social Security benefits that my generation have been paying into for 35 years. We cannot afford Federal health care spending. After all those tax cuts for the rich can never be reversed. Yes John Cochrane is part of the Starve the Beast crowd even if granny starves from these supposedly required reductions in transfer payments.

But let’s note why Cochrane flip flopped in his update:

Jeff Miron wrote to chide me gently for apparently implying the opposite, which is certainly not my intent. One graph from his excellent “US Fiscal Imbalance Over Time”.

Having read this Cato paper, it is time for my critical review that I promised. The review will start with the technical finance which in one way is a lot better than Cochrane’s rants but still troubling in certain ways. I will next turn to the policy if not political issues where this paper is even worse than Cochrane’s update. Beware – we will have to cover a fair amount of numbers but I hope to keep this within the context of my present value model:

Let g = the ratio of Federal expenditures excluding interest payments to GDP and t = the ratio of Federal taxes to GDP. If we assume a steady state model, the present value of future primary surplus is simply V = (t- g)/(r – n), where r = the real interest rate and n = the long-term growth rate. As long as V is at least as great as the debt/GDP ratio, we are not on the bankruptcy path that economists were talking about when Reagan initiated his 1981 fiscal fiasco. Tax rates were massively cut and defense spending spiked and had this fiscal stance continued forever, then the debt/GDP ratio would have exploded. Of course it didn’t as there were future tax increases and the peace dividend.

Miron is using the same basic model, which he expresses as:

Fiscal Imbalance = Present Value of Future Expenditure – Present Value of Future Revenue + Outstanding Debt

What I like about this equation is its focus on future spending and revenue not historical decisions which can be summarized as the current level of debt in terms of our model. Cochrane’s rant was a bit weak in this regard. May I suggest Cochrane rent the 1989 movie and check out this scene as the Joker gets basic finance! While I may quibble with Miron with respect to his forecasts, my big problem the use of nominal figures to draw his graph – which is far from “excellent”. Note his measure doubled in nominal terms since 2000 but so has nominal GDP (higher prices, more people, and higher income per person). Which is why this title and introduction is misleading:

At times John Cochrane babbles on incoherently on what should be a straight forward issue. This post is one example:

Once you net out interest costs, it is interesting how sober US fiscal policy actually has been over the years. In economic good times, we run primary surpluses. The impression that the US is always running deficits is primarily because of interest costs. Even the notorious “Reagan deficits” were primarily payments, occasioned by the huge spike in interest rates, on outstanding debt. On a tax minus expenditure basis, not much unusual was going on especially considering it was the bottom of the (then) worst recession since WWII. Only in the extreme of 1976, 1982, and 2002, in with steep recessions and in the later case war did we touch any primary deficits, and then pretty swiftly returned to surpluses.

I too advocate looking at the primary surplus. Cochrane is a finance professor so let’s make this simple. Let g = the ratio of Federal expenditures excluding interest payments to GDP and t = the ratio of Federal taxes to GDP. If we assume a steady state model, the present value of future primary surplus is simply V = (t- g)/(r – n), where r = the real interest rate and n = the long-term growth rate. As long as V is at least as great as the debt/GDP ratio, we are not on the bankruptcy path that economists were talking about when Reagan initiated his 1981 fiscal fiasco. Tax rates were massively cut and defense spending spiked and had this fiscal stance continued forever, then the debt/GDP ratio would have exploded. Of course it didn’t as there were future tax increases and the peace dividend. Cochrane takes us through the Great Recession:

Until 2008. The last 10 years really have been an anomaly in US fiscal policy. One may say that the huge recession demanded huge fiscal stimulus, or one may think $10 trillion in debt was wasted. In either case, what we just went through was huge. And in the last data point, 2017, we are sliding again into territory only seen in severe recessions. That too is unusual.

The Great Recession did demand huge fiscal stimulus – we got a tempered version of what was really needed. The last decade has taken the debt/GDP ratio to 100% but we have returned to near full employment so I do not get his 2 last sentences quoted. In 2017, g was 19.5% and t was 18.5% so maybe we should be more concerned especially since we have had another tax cut for the rich as well as a call for a larger defense budget. But then comes his update!

Otherwise why would Mark Perry write 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.

PGL: The reason that prices of certain services have risen relative to the price of manufactured goods is socialism? There could be no other explanation. I guess Perry has never heard of William Baumol’s cost disease:

The example Baumol and the late William G. Bowen made famous is that of the string quartet. The number of musicians and the amount of time needed to play a Beethoven string quartet for a live audience hasn’t changed in centuries, yet today’s musicians make more than Beethoven-era wages. They argued that because the quartet needs its four musicians as much as a semiconductor company needs assembly workers, the group must raise wages to keep talent—to keep its cellist from chucking a career in music and going into a better-paying job instead. The effect now known as Baumol’s Cost Disease is used to explain why prices for the services offered by people-dependent professions with low productivity growth—such as (arguably) education, health care, and the arts—keep going up, even though the amount of goods and services each worker in those industries generates hasn’t necessarily done the same.

Over at Brad DeLong’s blog jonny bakho adds an interesting comment:

How much stimulus did the GWBush tax cuts provide? They came during a recession followed by “jobless recovery” made somewhat better by the housing bubble, then burst big time in 2008. How different would the multiplier be if given to infrastructure repair and broadband extension, investments that create domestic jobs? In a global economy, tax cuts to the investor class are spent globally. Tax cuts for investors can theoretically speed the process of offshoring if most of the good investments are in foreign countries, a negative domestic stimulus. In a global economy, all “stimulus” is leaky. To be a truly domestic stimulus, tax cuts and spending must be carefully targeted. GOP tax cuts in 2001 and 2016 were both designed to enrich wealthy patrons, with little attention to targeting for domestic stimulus

For some reason I could not add to his comment there so I decided to post my thoughts here:

Make that the 2017 tax cut and add in the 2003 tax cut and I agree. First of all the marginal propensity to consume for rich dudes (MPC-rd) is likely quite modest and the impact effect = the tax cut for our rich dude times (MPC-rd minus his marginal propensity to import). If this rich dude takes his trophy wife to Rodeo Drive to spend $1800 on a Louis Vuitton bag – that bag was made in France.