Month: July 2025

U.S. – Japanese trade agreement

Free trade of goods and services produced without government subsidies or restrictions would maximize the incomes of all involved. To promote this result, the World Trade Organization has led the effort to reduce or eliminate tariff and other trade restrictions and has authorized the use of tariffs carefully targeted to nullify the distorting effect of government subsidies or other interferences in the competitive market production of goods and services.

This is not how President Trump has used or threatened in his usual bully style to use tariffs. For Trump, tariffs are not established to improve a level playing field for world trade, and not even always to protect inefficient American manufacturers such as the 50% tariff on imported Steel. An outrageous example was his threat to impose a 50% tariff on all Brazilian imports, effective August 1, 2025, if Brazil went forward with the prosecution of his ally, former President Jair Bolsonaro, who is charged with attempting to stage a coup d’état to overturn the results of the 2022 presidential election in Brazil. Incidentally, the U.S. currently has a trade surplus with Brazil. Go figure.

On July 23, “President Donald J. Trump announced a landmark economic agreement with Japan…. [In exchange for a reduction of US tariffs on all Japanese imports from 25% to 15%, it] will invest $550 billion directed by the United States to rebuild and expand core American industries…. The United States will retain 90% of the profits from this investment…. In addition to raising billions in revenue, this new tariff framework, combined with expanded U.S. exports and investment-driven production, will help narrow the trade deficit with Japan and restore greater balance to the overall U.S. trade position.” “Whitehouse fact-sheets/2025/07/”  

As an aside, Trump has also threated to punish any country that stops using U.S. dollars as its reserve and trade vehicle currency. Somehow, he fails to understand that for a country to acquire these dollars (and for Japan to acquire the $550 billion it is to invest in the US) they must have a trade surplus (US trade deficit). Oh well.

“Japanese officials said there was no written agreement with Washington — and no legally binding one would be drawn up — after Trump administration officials claimed Tokyo would back investments in the US from which American taxpayers would reap nine-tenths of the profits.”  https://www.ft.com/content/c1183b13-9135-41f6-9206-7b52af66f0a5

In addition to the fact that Japanese officials are disputing that they have agreed to such a deal, I hope that you are surprised that the American government is proposing to create new state owned companies. The world’s experience with state own companies has not been good. Our private enterprise dominated economy has served us (our standard of living) very well.

If this all seems rather confusing, welcome to Trump land.

The Fed’s policy interest rate

Among the things our protectionist, isolationist President fails to understand correctly is the role of the Federal Reserve’s policy rate. He wants interest rates to be lower and thinks that the Fed can cause that by lowering its policy rate. That rate used to be the overnight money market rate. If the Fed lowered that target it would supply more money (bank deposits at one of the twelve Federal Reserve Banks) to banks and thus the interbank money market for managing bank liquidity by buying government securities from banks. If banks’ liquidity (“reserves”) is increased, their demand to borrow in the interbank money market will be reduced and thus the interest rate prevailing in that market will be reduced. Thus, raising or lowering the Fed’s policy rate (and the consequent change in base –Fed reserve—money) was the instrument by which the Fed controlled the money supply (its own base money and the more relevant boarder bank money—M1, M2, etc.)

If you are into this subject, you will already understand what money is and where it comes from. If you would like a refresher read this: https://wcoats.blog/2024/11/08/econ-101-money/  

The above description of the policy rate was applicable until 2008 when banks held minimal reserves (or excess reserves when there was still a minimum reserve requirement) at the Fed. But in response to the financial crisis in 2008 when the Fed purchased huge quantities of government debt (and mortgage-backed securities), the Fed began to pay banks interest on their now very large deposits at the Fed to keep them from lending them in the market and thus expanding the money supply excessively. So, the relevant Fed policy rate now is the rate it pays on banks’ reserves at the Fed, the so-called Interest on Reserve Balances (IORB).

As with the policy rate in the old regime, the IORB is the instrument by which the Fed now controls the growth in the money supply. When the IORB is reduced below prevailing overnight market rates banks will draw down their Fed deposits to lend at the higher market rate thus increasing money growth.

Interest rates in the market are determined in and by the supply and demand for credit in the market. If the Fed lowers its IORB it will increase the growth rate of dollars. The Fed will do so when it judges that appropriate for achieving its inflation rate target of 2.0 percent. The twelve-month inflation rate in May was 2.4% and rose to 2.7% in June. The Fed decided not to lower the rate further at this time. Doing so could well lead market participants to expect higher inflation in the future, which would raise (not lower) market rates for say 10 year Treasury bills.

Current Fed policy seems appropriate to me. It adheres to an inflation forecast targeting regime that has become popular in recent years in major central banks. But it reacted by raising rates too slowly in response to the surge in inflation in 2021-2 during the Covid pandemic. Inflation reached 9% in mid 2022. A better system is to return control of the money supply to the public that can buy and redeem dollars at a fixed price for a hard anchor (such as a gold standard). I laid this out in the following blog: https://wcoats.blog/2022/06/06/econ-101-the-value-of-money/

Retirement

For those who save for their retirement, what they save is what they get. For those who depend on Social Security income for their retirement (most people do both), the story is different. Social Security is a pay as you go system. While working, people (shared with their employer) pay a SS tax and once retired they receive a legally fixed income (defined benefit). The system works ok as long as there are enough workers paying the tax to finance the benefits received by those retired. “Saving Social Security”  “What to do about Social Security”

But American’s are living longer than they did when the SS system was designed. Without any change in their retirement age they will live in retirement longer. In 1975 there were 3.2 workers (paying the SS tax) per retirees receiving SS benefits. By last year this had fallen to 2.8. Over the next ten years this ratio is projected to fall to 2.3. The simplest solution to the shortfall of taxes paid into the Social Security Trust Fund for financing its benefit payments to the retired is to raise the retirement age. Most of us want to work longer anyway. A new extensive study of these issues and the experiences of some other countries will be available in a few weeks. “Reimagining Social Security”

Taxation norms

Taxes are levied to raise money but also to influence behavior. What is taxed and how much influences how much of it is demanded. To take an example of a tariff (tax) on steel imports, the resulting higher price of imported steel increases the relative attractiveness of domestically produced steel. Under the rules of the World Trade Organization, such a tariff would be justified if it offsets an artificial (and thus economic efficiency undermining) subsidy of the foreign produced steel.

President Trump has introduced a totally different way of using tariffs/taxes. He uses them as threats to pressure a country to take action totally unrelated to the item to be taxed. This follows his general bully approach to negotiations. To pressure a country or firm to agree to his requests, he threatens harm if they refuse. If a university or newsman behaves in ways he doesn’t like, he attacks them or threatens them with harm.

In the most recent example Trump is threatening a 50% tariff on all imports from Brazil primarily due to Brazil’s legal proceedings against former President Jair Bolsonaro, which Trump characterizes as a “witch hunt,” and to address what he claims is an “unfair” trade relationship between the two countries.

“Trump demands that the trial against former president Bolsanero, who had tried to instigate a military coup after he had lost the last election, should be immediately end.”  “First casualties from Trump’s increasing tariff craze”

 It’s not clear what Trump means by “unfair” trade relationship. His positions on trade, which he clearly does not understand at all, are contradictory. He has threatened to raise tariffs on imports from countries that avoid using US dollars in their FX reserves and foreign trade payments. For countries to use US dollars they must have a trade surplus with the US (a US trade deficit with such countries) in order to acquire them. “Why Does the World Need a Reserve Asset with a Hard Anchor?”  But Trump doesn’t seem to like or want such deficits. The US actually has a trade surplus with Brazil.

It may sound like this is all from the Onion, but sadly it is not. I don’t expect it to end well.

Benjamin Netanyahu

The International Criminal Court (ICC) issued an arrest warrant for Netanyahu in November 2024, accusing him of war crimes and crimes against humanity related to Israel’s actions in Gaza, including the alleged use of starvation as a method of warfare and intentionally targeting civilians. 

Netanyahu is now considered a wanted suspect by the ICC, and member states are obligated to arrest him if he enters their jurisdiction. So why is he enjoying dinner with US President Trump? Sadly, the US too often ignores the rules of international relations that we helped establish. In doing so we are diminishing our status in the world community. Lossing friends and becoming more and more isolated is NOT in America’s self-interest.

As of now, Netanyahu has not been tried or found guilty by any international court for war crimes. The legal process would require his arrest, extradition, and a full trial before any conviction could occur. Not only has America failed its obligation to arrest him, we have supported his efforts to eliminate Palestinians (one way or another) from their homeland. America is complicit in these crimes. Our support of Israel’s wars is not compatible with our principles of the rights of each and every person and our generous and well-meaning hearts. Those of us who speak out against these crimes risk punishment by the Trump administration — even the deportation of legal residents who have committed no crimes. If we do not speak out against these horrors, we must accept some blame for them.

Econ 101: Government Budgets

Newspapers are full of articles about the deaths or other losses that will result from proposed budget cuts. Today’s Washington Post, for example, headlined a story on USAID cuts “USAID cuts may cause 14 million more deaths in next five years, study says”  “Washington post /2025/07/01/”

If the government’s spending on X is reduced (aside from any improvement in efficiency) the benefits of that spending will be lost. But our resources are limited. If we spend more on X we have less to spend on Y.  So when we lament the losses from reduced spending on X we should take account of the gain from the increased spending on other things.

To put a bit of flesh on this issue, consider the following: “The administration has cut more than a hundred contracts and grants from the President’s Emergency Plan for AIDS Relief, the HIV and AIDS program credited with saving millions of lives in poor countries. President Donald Trump has shut down the agency that signed off on most PEPFAR spending and fired other staffers who supported it.”  “Rubio-pepfar-aids”

Evaluating whether this cut is “good or bad” is not easy because determining the likely alternative use of the money saved is not easy. If we stick to a fixed government budget total, the alternative use by the government of the money saved might save even more lives (or maybe not). But the saving could also be given to tax payers whose use of that money would reflect their own personal needs and priorities.  

The process used by Elon Musk’s DOGE to arrive at the spending and/or personnel cuts they proposed was not transparent thus is largely unknown to us. But I have serious doubts that it was appropriate. Semafor offers the following advice:

“A lot of US government work is highly inefficient, says the science reformer Stuart Buck. Federally funded scientists say they spend 44% of their research time on bureaucracy, federal procurement is “broken” and often results in the government buying products that don’t work, and “the Paperwork Reduction Act paradoxically results in endless paperwork.” “Many such cases,” says Buck. “We should have an official effort to address these issues… We could even call it a ‘Department of Government Efficiency.’” As you might be aware, there is one: It is “widely viewed as a failure,” but the basic idea is sound. How could we make it good?

“The first step, says Buck, would be taking a long time to deeply understand how each government agency works, so you don’t mistake routine human error or some statistical artifact for fraud. Second, it should focus on high-value reforms, like outdated data systems or software. Third, it should learn from previous attempts to cut red tape — because there have been many, not all of which worked. And importantly, a good DOGE would not mistake things we don’t use for “waste” — like an insurance policy, we hope pandemic preparedness infrastructure and fire departments are never used, but they’re in place in case we need them. The real-world DOGE is a failure, says Buck, because it ignored all of these strictures.”  “Semafor.com/newsletter/06/30/2025/”

I think some, if not many, government programs or activities should be reformed or eliminated. But those the public really want must be paid for by the public paying additional taxes or lending to the government (buying US bonds). U.S. debt is dangerously high (123% of US GDP) and continuing to grow.  So to the extend spending is not reduced, taxes should be raised.