The Balance of Trade

President Trump has regularly called for bilateral trade balances with our trading partners. Though he prudently gave up his campaign promise to declare China a currency manipulator on his first day in office because of China’s large trade surpluses with the U.S., he more recently criticized Germany’s even larger surplus. The Trump administration’s objectives in renegotiating the North American Free Trade Agreement (NAFTA) published July 17th also call for reducing U.S. bilateral trade deficits with Mexico and Canada. Economists recognize these objectives as nonsensical, but it might be worthwhile to spell out to the broader public (if not to Trump’s protectionist White House wing) why that is so.

Let’s start with the U.S. trade balance with the rest of the world. As we pay for what we import with what we export, we would generally expect a balance between imports and exports over time, just as we expect a rough balance between our income and expenditures over time. But uniquely in the case of the U.S., we need to have a deficit (imports exceeding exports) paid for with U.S. dollars, because the rest of the world holds and uses our dollars to finance many international transactions. The dollar is the world’s primary international reserve currency and our trade deficit is the primary means by which we supply them to the rest of the world.

This is an over simplification, however, because dollars are also supplied to the rest of the world via our capital account, i.e. Americans investing abroad. At the end of 2016 Americans had invested about $24 trillion USD equivalent. However, the rest of the world had invested over $32 trillion USD in the U.S. Roughly $5 trillion of this net investment in the U.S. of $8 trillion represented official foreign exchange reserves held by foreign governments in U.S. dollars out of total foreign exchange reserves of about $8 trillion.

Something also needs to be said about the relationship between foreign holdings of dollars and changes in those holdings. Any increase in the demand for foreign exchange reserves by foreign governments, something that tends to happen naturally as economies grow, must be met by the balance of payments deficits of the countries supplying those reserves. Thus the U.S. trade deficit last year (2016) of about $500 billion USD more or less reflects the addition to the dollar reserves of foreign governments.

So the use of the U.S. dollar in foreign exchange reserves implies that the U.S. will have, and need to have, a balance of trade deficit of a similar amount. But let’s simplify and assume that U.S. trade with the rest of the world is balanced (zero trade balance as well as zero current and capital account balances), perhaps because the U.S. dollar is replaced in international reserves by the SDR as I have long recommended. See my: Real SDR Currency Board What about the trade balance with Mexico and Canada? Should we want and expect each bilateral trade relationship to be balanced?

The error of such thinking can be easily illustrated with a simple, hypothetical example. Assume that within NAFTA the U.S.’s comparative advantage is in manufacturing all the pieces that make up an automobile and growing wheat, Mexico’s comparative advantage is using its “cheap” labor to assemble those pieces into cars, and Canada’s is growing and milling lumber. Assume that that is all they do that crosses their borders. The U.S. sells its car parts to Mexico, which puts them together and sells the cars to the U.S. and Canada. The value of the parts sold to Mexico is less than the value of the cars (which incorporates the parts from the U.S.) Mexico sells to the U.S. so that on net the U.S. has a trade deficit with Mexico. The U.S. sells wheat to Canadians buying a lesser value of lumber in return and Canada sells its lumber to the U.S. and to Mexico buying a few cars but of less value. Looking at bilateral trade balances, Mexico has a surplus vs. the U.S. and a deficit vs. Canada. Canada has a surplus vs. Mexico just sufficient to cover its deficit vs. the U.S. These bilateral deficits and surpluses are not a problem because the U.S. has a trade balance vs. Mexico and Canada combined and indeed with all of the rest of the world. The same is true for Mexico and Canada. What really matters is whether the value of a country’s exports to the rest of the world match and thus pay for the value of its imports from the rest of the world. As someone noted, no one worries that you have a large trade deficit with the grocery store as long as your total spending everywhere is covered by your income (the sale of your labor to your employer).

Being the eternal optimist, I trust that there are enough people in the Trump administration that understand that seeking bilateral trade balances with each and every country would be a terrible mistake to keep him from trying to do so.

Buy American, Hire American

President Trump continues to repeat his populist slogan “Buy American, hire American,” reflecting the way he and Steve Bannon appear to understand what is needed to make America Great Again. Thus, with apologies, I endeavor again to explain why this catchphrase is fundamentally wrong and would actually make America weak. “Trade and Globalization” “Save trade”

If buying an American made product or service (100% American, 90%, 51%?) or hiring an American worker is my best option, I would not need to be compelled to do so by the government. If it is not my best option, being compelled to do so forces me to accept an inferior option. It would make me worse off. The Trump family understands this as their hotels import and purchase foreign made products (from China, Philippines and India, to name a few) and Ivanka sells clothing made in China.

It is obvious that being forced to buy and hire American would make many of us worse off (not to mention diminish our freedom of choice), but are there compensating benefits or gains for others in the American economy that would justify making us worse off? “Teeing up Trump tariffs”

Buy American

If I must buy an American made Corvette rather than a German Porsche, does the American economy benefit? To simplify, leave aside the fact that a substantial part of the components making up a Corvette are imported from various countries. The fact that I had to be forced to buy the American car rather than the German one, i.e. that it was an inferior deal, means that the American workers who make it were reallocated from the production of export products at which the United States had a comparative advantage. Trading less as a result of buying American mean allocating American workers to producing things (Corvette) that they are not as productive at making. They would be moved from producing Boeing aircraft to sell to Germany (to pay for our imports of Porsches) to producing Corvettes. So in addition to my being made worse off as a result of having to buy American, the American economy as a whole would be worse off as a result of a less productive work force and thus lower overall income (lower GDP). This is Econ 101.

In addition, as noted by the Financial Times, “Attempts to restrict procurement to domestic companies tend to backfire. They induce retaliation from trading partners, harming US businesses trying to sell abroad. They raise input costs, ensuring less infrastructure is built and fewer construction workers are hired for each dollar of public spending.” “The Pitfalls of having to buy and hire American”

Hire American

The meaning and impact of a requirement to hire Americans is a bit more complex. If the terms to American companies of employing the workers needed, whether they are citizens, permanent residents, or temporary or permanent immigrants from abroad, are not competitive with importing the product or service, American companies will in effect hire foreigners abroad (i.e. they will import the goods and services produced abroad). Thus it is a bit unclear what “hire American” means. “The long, rough ride ahead for ‘Made in America'”

Presumably, “hire American” refers to our immigration policies. Indeed our immigration laws need fixing. This includes providing a solution to the status of the 10 or 11 million people living here illegally, and adjusting immigration quotas to better match the needs of American firms for workers without undercutting the status of existing American workers. “Illegal-aliens”

The decline in American manufacturing jobs is largely the result of automation, not foreign trade. Manufacturing employment has fallen almost everywhere in the world as manufacturing output has increased. Automation enables the work force to produce more and thus enjoy a higher living standard. It need not cause unemployment.

The wonderful film “Hidden Figures” tells the true story of the large number of human “computers” employed by NASA (the National Air and Space Administration) who cranked out the numbers needed to put Americans in space and bring them home again. The stars of the film are three black women whose mathematical skills were indispensible to NASA. At the end of the day and in time for the first American to orbit the earth in 1961, new IBM’s mainframe computers proved essential to crunch the critical data fast enough. Overnight the human computers were no longer needed. But rather than becoming unemployed, most of them retrained to program and run the IBM computers with an unbelievable boost in productivity. While other things also affected NASA’s workload, the employment data are interesting. In 1960 NASA had 13,500 in house employees, which increased to 41,100 by 1965 and gradually drifted down to 18,618 in 2010. The numbers for contract workers on the same dates were 33,200 in 1960, 369,900 in 1965 and zero in 2010.

The President’s appeal to Buy American and Hire American, in addition to restricting our freedom of choice, flies in the face of what made America Great in the first place. As proclaimed by the Financial Times: “The principle should remain to keep the US economy as open as possible to the inflow of good products and good workers from abroad. Slamming down the drawbridge is only likely to impoverish the residents of the citadel.”

 

Trump’s Foreign Policy and Mexico

“From this day forward, it’s going to be only America First. America first!” Video of Trump’s inaugural address. Or was it “Trump First?”

If President Trump’s plea for others, such as Mexico, to treat the U.S. fairly were merely an embarrassing gesture, we might overlook it having grown used to Trump’s need for approval. But this is the status and fate of my country at stake. In a hysterical satire made by Dutch television, they ask whether if America is First, they might be second: Dutch youtube satire

There is little disagreement that American foreign policy should serve America’s interests. Even the neocons see the promotion of democracy as ultimately good for America, if we can survive the wars they want us to fight to impose it on the rest of the world. We have and should continue to see our interests in long-run terms—enlightened self interest. As he has shortsightedly done with trade, “Trump outlined a world in which foreign relations are collapsed into a zero-sum game. They gain, we lose.” Charles Krauthammer on Trump’s foreign policy revolution /2017/01/26/.

The real issue is which policies actually serve our interests. These policies should keep us safe and prosperous.

Military: Obviously we need a military capability sufficient to protect our shores from attack, but we need to avoid devoting more of our resources to our military than necessary for that purpose (with a reasonable margin for error) because every dollar spent on the military is a dollar taken away from building our economic strength, which is equally important for our defense and well being.

Diplomacy: We also need to invest in building good relations with other countries, especially our immediate neighbors, in part to minimize the prospect of ever needing to use our military. Thus we must devote the resources, including training, needed by our State Department to build our effective soft power. In an article in Time magazine January 26, 2017, Mikhail Gorbachev, the last president of the Soviet Union said:   “No problem is more urgent today than the militarization of politics and the new arms race. Stopping and reversing this ruinous race must be our top priority.” Gorbachev on Putin – Trump

Treaties: But here is the part least appreciated by the American public and least understood by Trump (I don’t know about the rest of his team yet and eagerly await his appointment to the Undersecretary of State position). Just as the rule of law has been critical to development and vitality of our economy and the protection of our liberties at home, it remains as important when we cross the border. This extends far beyond the critically important agreements on trade, the international monetary system, and the rules of war, to the more mundane aspects of every day life as well.

According to The Washington Post: “Trump proposes internal high-level committees to examine multilateral treaties, with a view toward leaving them….

“John B. Bellinger III, who served as legal counsel to both the National Security Council and the State Department in the George W. Bush administration, said the treaty examination was based on a ‘false premise . . . that the United States has become party to numerous multi­lateral treaties that are not in the United States’ interest.’

“’There are “many hundreds of multi­lateral treaties that help Americans every day in concrete ways,’ he said. Without them, ‘Americans could not have our letters delivered in foreign countries; could not fly over foreign countries or drive on foreign roads using our state driver’s licenses; could not have access to a foreign consular official if we are arrested abroad; could not have our children returned if abducted by a parent; and could not prevent foreign ships from polluting our waters.’” Trump-lays-groundwork-to-change-US-role-in-the-world/2017/01/26/

The Bretton Woods institutions created after World War II (the International Monetary Fund, World Bank, and World Trade Organization) established the institutional arrangements for cooperation in developing the rules of international trade and finance. American leadership in creating the international institutions through which we interact with others abroad, i.e., through which the rule of law is established and enforced internationally, has ensured that the international order has remained true to the liberal values on which America was founded. We would be wise to keep China as strong and active a member of these institutions and the rules they oversee as possible. US global leadership and the AIIB. It would be tragically misguided to undermine these institutions and our leadership of them. But this is the direction President Trump seems to be headed.

Mexico: Close to home, Mexico provides a tragic example of Trump’s failing approach to foreign policy. Our relationship with Mexico is one of our most important in the world. We share a 2,000 mile border with Mexico and it is our second largest export market earning $235 billion in 2016 while importing $296 billion worth of goods and services. The difference of $61 billion, the so-called trade deficit, reflects net Mexican investments in the U.S. Though Mexicans have been leaving the U.S. on net for the last few years, illegal immigration across our shared border has been a big campaign issue for Trump, and the Mexican border is the gateway for many non-Mexican Central American illegal immigrants. The flow of drugs across that border is also an issue.

Close cooperation with Mexico in dealing with these issues has been a critical aspect of managing them. The North American Free Trade Agreement (NAFTA) has been an enormous benefit. Former Mexican President Carlos Salinas told G.H.W. Bush that “goods bought by American consumers will be produced by Mexican workers, it is only a question of where those Mexican workers live!” He also indicated that in addition to jobs that keep Mexicans in Mexico, NAFTA also helped bring the rule of law to Mexico. Jerry Jordon

Illegal immigration reflects and responds to the incentives faced by potential immigrants. These include the quality of life, including jobs, in their home country, the demand for workers in the U.S., and the option of legal immigration. The problem of illegal immigration to the U.S. would be helped by a better legal immigration law, such as proposed by George W Bush in 2007 or later as contained in the Senate law drafted by the Gang of Eight in 2013. Better enforcement of work permit requirements with American employers could help a great deal.

President Trump’s approach has been grossly adversarial rather than cooperative. He has threatened to tear up (or at least renegotiate) NAFTA and build a wall on the U.S. –Mexican border that he would force Mexico to pay for. His approach is disastrously wrong. “President Trump’s Homeland Security secretary, John F. Kelly, has been clear about his views on a border wall with Mexico: It won’t work.” Homeland Security John Kelly on border wall – NYT. Mexican billionaire Carlos Slim stated that: “The best wall is investment, which generates employment in Mexico…. Mexico is the best partner the U.S. has.” Mexico digs in and Trump lashes back as border wall standoff deepens /2017/01/27/

The Mayor of Berlin Michael Mueller urged US President Donald Trump “not to go down the road of isolation.” He warned that such division causes “slavery and pain” and would “destroy the lives of millions.” BBC 1/27/2017. This doesn’t seem fully applicable to the Mexican wall, but still the Berliners know a lot about walls. John Oliver provides a hilarious but informative commentary on The Wall on Last Week Tonight. John Oliver video on The Wall

President Trump’s continued insistence on building the wall and his insulting claim that Mexico will pay for it has damaged the cooperative relationship that we badly need to maintain with Mexico. Trump’s tweet that Mexico should pay for the wall or Mexican President Enrique Peña Nieto should cancel his planned visit to Washington and stay home is an insult beneath the dignity of an American President as well as stupid. That President Trump is surely ignorant of these and other seriously damaging knock on effects of his mishandling of our relations with Mexico is no excuse for his insane behavior. Trump’s ruinous stance on Mexico-deportation-border-wall-tariff-trade.

“For 70 years, we sustained an international system of open commerce and democratic alliances that has enabled America and the West to grow and thrive. Global leadership is what made America great. We abandon it at our peril.” [Krauthammer]

Trust and False News

January 26, 2017

The quality and extent of interactions among people (neighbors, companies, governments) profoundly affect our quality of life. Trust is a critically important element of such interactions and of “The Wealth of Nations,” to quote Adam Smith. No society, beyond (perhaps) the family and relatives, enjoys total trust. The willingness to and low cost of dealing with others in such a society would surely make it the richest one on earth. The more distant our relationship with someone, however, e.g., hiring a contractor to add a room to the house, the more formal our understandings need to be. But the deeper and more reliable is trust within a society, the simpler such contracts and their enforcement can be. This goes well beyond the obvious costs (effectively taxes) of doing business of security guards and surveillance cameras at department stores. More Trust frees up resources to produce the goods and services that we really want.

As part of its attack on Europe and the United States, Russia for some time has systematically worked to undermine trust in the West. For example, it generates and distributes “false news” in a variety of ways. It has become more difficult to judge when news is true or deliberately made up. As a result, the public’s trust in public institutions and performance is eroded to some, hopefully still limited, extent. As I argued above, a decline in the level of trust in Western societies reduces their economic efficiency and output.

False news must be distinguished from biased reporting and from disputed facts, unfortunately labeled “alternative facts”, by Trump senior advisor Kelly Anne Conway. Bias, or priors as we economists put it, reflects our inner beliefs and tentative understandings about what is true and can influence what a reporter chooses to report or emphasize. It does not reflect a willingness to report or repeat knowingly false information. The strange case of the size of the viewing audience for Trump’s inauguration ceremony illustrates bias and a few other things on all sides.

Trump was angry that the press reported mediocre attendance to his inauguration. The highly respected conservative economist Tyler Cowen provided an interesting analysis of why he thinks Trump forced his poor press secretary Sean Spicer to launch an attack on the Press for its “misreporting” of this matter: Why trump’s staff is lying. During his first official press conference on January 23, Spicer stated very clearly several times that his assessment that Donald Trump had the largest audience for his inauguration in history referred to total viewers “both in person and around the globe”. After apologizing for having reported the previous Saturday incorrect numbers for subway ridership he proceeded to present his estimate of TV and Internet viewers along with mall attendants and asked the press to correct them if wrong. USA Today reported that “On that point, Spicer may be correct…. But there is no comprehensive measurement available that would prove or disprove this claim.” The attending press persisted in referring to the size of the crowd on the mall. That reflects bias by the Press to the point of blindness. That Trump felt compelled to speak out about the size of his audience is sad evidence that he has not yet properly transitioned from candidate to President (that the thin skinned, megalomaniac we watched during the campaign has not yet grown up).

Alternative facts abound and refer to a lack of consensus on what the facts are. These are the bread and butter of scientific investigation and debate. Whether global temperatures last year were higher or lower than the year before depends on the measurement instruments used (surface instruments of one type or another, satellite systems, etc.), their location (country side, urban areas, ocean, etc.), frequency of measurements (daily, hourly, etc.), etc. Meteorologists debate this “fact”.

Candidate Trump lied so frequently and so freely during his campaign that I can only assume that he did so deliberately as a part of a general disinformation campaign. His claim, for example, that President Obama was not native born was so irrefutably disproved that Trump eventually (but very late in the game) withdrew it. President Trump sadly continues the practice by following up his ludicrous claim that he won by a landslide, with the claim for which there is no factual support at all of wide spread voter fraud. Trumps-disregard-for-the-truth-threatens-his-ability-to-govern.

Poor Sean Spicer was forced to announce Trump’s voter fraud lie to the press. When asked for evidence he cited “A 2012 Pew study [that] found that about 1.8 million deceased people were still on the rolls and that 2.75 million people were registered in two states. The study called for states to clean up their voter rolls but did not draw conclusions about voter fraud.” Trumps-voter-fraud-claims-undermine-the-voting-system-and-his-presidency/2017/01/24/. In fact, Trump’s Chief Strategist Stephen Bannon is registered in both New York and Florida, Treasury Secretary Steven Mnuchin is registered in New York and California, and Trump’s daughter Tiffany is registered in both Philadelphia and New York though neither voted twice. Bannon-was-registered-to-vote-in-two-states. Recidivism-watch-Spicer-uses-repeatedly-debunked-citations-for-trumps-voter-fraud-claims.

Trump’s lies, whether he believes them himself or not, along with false news perpetrated by Russia and others, are increasingly undermining public trust in the information so freely available on the Internet and elsewhere. This is bad for our democracy. It is not obvious what motivates him.

“Is Trumpism a scam? And if so, whom is Donald Trump scamming?

“Or is the country confronting something even more troubling: a president unhinged from any realities that get in the way of his impulses, unmoored from any driving philosophy and willing to make everything up as he goes along, including “alternative facts”?

“Of course, there’s another possibility: that there’s a method in all of this.” E. J. Dionne, Jr. What’s-the-method-in-trumps-madness/2017/01/25/

It is one thing to disagree with the President’s policy proposals—we can discuss and debate the reasons for our differences—and quite another when we cannot trust the integrity of the President or his administration. When the President proclaims over and over that he will insure that we “Buy American and hire American” (so much for shifting power from Washington to the people), rather than explaining why this is such a bad policy—save-trade—we turn immediately to the President’s hypocrisy rather than the substance of his policy. In Trump’s own business dealings he buys his materials where they are cheapest—steel and aluminum from China (Newsweek), furnishings for his new Hotel in Washington DC from China (The-new-Trump-hotel-in-D-C-hotel-is-filled-top-to-bottom-with-goods-made-in-China), the clothing for his signature Donald J. Trump Collection from Mexico (Trumps-hypocrisy-on-trade-he-outsources-and-invests-globally-but-doesnt-want-Ford-to-do-the-same/), and the long list goes on (Trump products).

Trump’s business career is full of shady dealings (The-myth-and-the-reality-of-Donald Trumps-business-empire). Why would we have expected him to be different as POTUS? Trump the terrible. Lying has worked for Donald Trump—so why should he stop now? Why Trump lies.

Trump is very quickly running out of time to save his administration. His tweet this morning stated: “The U.S. has a 60 billion dollar trade deficit with Mexico. It has been a one-sided deal from the beginning of NAFTA with massive numbers… of jobs and companies lost. If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting.” As a result, the Mexican President cancelled his planned visit. Our current account deficit with Germany in 2015, by the way, was $285.2 billion, about the same as with China. Putting his economic ignorance (or blatant lying) aside, his conduct of foreign policy, trade or otherwise, is simply dangerous. We must stand up and yell STOP. STOP!!!

A glimmer of hope is offered by the fact (a real one) that orders for George Orwell’s classic novel of tyranny “1984” have soared in recent weeks.

Keystone Pipeline, Jobs, and Confusion

Perhaps “haste makes waste” explains the jumble of contradictory statements coming from President Trump with regard to the Keystone XL and Dakota Access Pipeline projects. Or maybe not?? Trump gives green light to Dakota Access Keystone XL oil pipelines. Trump’s trade and jobs rhetoric continues to alarm free market conservatives as well as our trading partners abroad (see the comments coming from a bewildered Germany wondering how to best protect their interests as Trump pursues what he—mistakenly—considered America’s interests).

The pipelines will save jobs (yes save jobs), improve safety, and reduce environmental risks compared with the existing alternatives of rail and trucking. Obama’s State Department reviews, which cleared the Keystone XL project multiple times, concluded in its final review that the Canadian oil in question was coming out of the ground with or without the Keystone XL pipeline and thus there would be no significant impact on greenhouse gas emissions from the pipeline. https://keystonepipeline-xl.state.gov/documents/organization/221135.pdf

The same is true for the Dakota Access pipeline, the final 1,100 feet of which (of the 1,171 mile project) have been stopped because of objections by the Standing Rock Sioux tribe that it would “disturb sacred burial and archaeological sites.” WaPo.

On Tuesday, Trump said: “From now on, we’re going to be making pipeline in the United States. We build the pipelines, we want to build the pipe. We’re going to put a lot of workers, a lot of skilled workers, back to work. We will build our own pipeline, we will build our own pipes, like we used to in the old days.” WaPo

I am increasingly inclined to think that Trump’s blatant misrepresentations of the impact of his “Buy American, hire American” mantra is sinister demagoguery. TransCanada, the Canadian project owner had already planned to buy 65% of the steel pipe from U.S. manufacturers as a purely business decision. Replacing the remaining 35% with American made pipes would increase the cost of the project. It would also redeploy American workers from their current, presumable more productive, employment to make these pipes. It is hard to see what Trump doesn’t get about efficiency and productivity as a source of our wealth. If he insists on doing it “like we used to in the old days,” he will make us poorer as “in the old days.”

“Opponents of the pipeline dismissed the job numbers and economic impacts, arguing that pipelines will create only “a handful” of permanent jobs.

“But the fact that pipelines only have a handful of permanent workers simply conveys how remarkably efficient pipelines are. The high output of labor generates value and wealth and frees up Americans to be more productive elsewhere in the economy.” http://dailysignal.com/2017/01/24/trumps-pipeline-approvals-are-a-win-for-the-economy-and-environment/?utm_source=TDS_Email&utm_medium=email&utm_campaign=MorningBell&mkt_tok=eyJpIjoiT0RJeFlqaGpNamt3TkdOayIsInQiOiJTSnpZZExnVUdLOThQdW5ESnNPNDlIUHByWXFXNSs3bEFDa0VFOHVCbnhTOUtnbTBMWnd6MEkxTkdhRHpCVjU5a0JhQ2EraVZWTVVOcXlJVzVpMkVQVm9OWkJcL29VOEpkdG93RllJeldNNVBpem9KbHlPTWlOOFRJSkVEM3FyR1QifQ%3D%3D

 

 

President Trump and manufacturing jobs

President Trump intends to bring back manufacturing jobs. How might he do that and what would it mean for our economy and our workers?

Keeping in mind that our manufacturing output has steadily increased over the years and is now at an all time high, though the number of manufacturing jobs has steadily declined. Bringing back manufacturing jobs means rolling back and undoing the technical advances that made manufacturing workings more productive. But if we increase the number of workers in manufacturing by making each worker less productive (shelving some of the productivity enhancing technical advances), where will these workers come from? Presumably not from Mexico. They will have to give up what they were producing before in order to take the new manufacturing jobs.

Looking more carefully at such a policy reveals that it would make us poorer. Without Trump’s arm twisting (carrots and sticks—tax breaks, i.e., bribes, and/or tax or other penalties), the workers in question would be employed doing things that were more profitable (i.e. more productive and contributed more to our income) than in manufacturing. Trump would have those workers move from where they are more productive to where they would be less productive. I assume that such a policy reflects ignorance rather than malice, but what ever his motivation, the result of Trump’s protectionist threats would be to lower our standard of living.

If President Trump intends to return power from the government to the people, as he claimed in his inauguration speech, he will have to stop threatening companies to produce things in the U.S. when they would otherwise find it more profitable (cheaper) to produce them abroad and import them. Anything and everything that adds to our economy’s productivity (specializing in what we are best at and exporting it to pay for imports that other countries are better at making) increases our incomes. Trump should stop interfering with our private economic decisions and get on with the other aspects of his promises (tax and regulatory reform) that will increase our well-being.

Econ 101 – Jobs and Income Growth

At long last the economy has more or less reached full employment. The December 2016 unemployment rate was 4.7 percent while the Federal Reserve’s assessment of normal full employment (NAIRU—non-accelerating inflation rate of unemployment) is 4.8 percent. More over, wage growth has picked up, increasing 2.9 percent over a year earlier. The producer price index increased 0.3 percent in December (4.3% annualized). The economy is heating up. The Federal Reserve raised its overnight interbank interest rate target (Fed Funds rate) from 0.5 to 0.75 percent in December.

What does this mean for PEOTUS Trump’s goal to create jobs and increase the economy’s growth rate? At his press conference January 11, 2017 he claimed to be: “The greatest jobs producer God ever created.”

A new job is created when a company demands an additional worker for some reason or other and the desired worker is supplied. More jobs (by which I mean more new ones than the loss of old ones, i.e., a net increase in jobs) can come from any of three sources: a) an increase in the labor participation rate (more people looking for work from those of working age who are physically able to work); b) more young people entering the labor force than retiring old people leaving it; and c) a net immigration of working age foreigners. An increase in the demand for workers that cannot be filled will put upward pressure on wages and ultimately on prices.

In December the labor participation rate rose to 62.7 percent from its low in November of 62.6. It had been around 66 percent in the years just before the great recession of 2008. While we don’t really understand why so many people have dropped out of the labor force, there is scope to increase employment if some of them return. Some of the new jobs are filled by immigrants, especially those jobs requiring information technology skills, which creates additional jobs to feed, cloth, and entertain the new residents. http://wapo.st/2irYDYW. While 7.4 million people were looking for work in November 2016 (latest available), there were 5.5 million unfilled vacancies. If you like data: 5.1 million were hired in October while 4.9 million left their jobs for a net increase in employment of 0.225 million. Of those leaving their jobs 0.372 retired or died.

In short, the economy does not lack jobs and the number of jobs is growing at about the rate of growth of the working age population. If the government increases employment for infrastructure projects, those workers must be attracted away from their existing jobs, which will require higher wages. Increasing employment at much faster rates would be inflationary. Higher inflation would undermine the real value of excessive nominal wage increases.

The problem—issue or challenge—is that the new jobs offered often require skills that do not match those of the workers looking for work. Most layoffs and discharges result from automation and other productivity improvements (not from trade), which increases the wages offered for the new jobs needed as a result. This process—increased worker productivity—is the source of per capita income growth, i.e. of our increasing standard of living. However, the benefits of increased productivity will only be broadly shared if workers are trained (or retrained) in the new jobs needed. In addition, the increased income inequality in the U.S. since the 1970s is largely the result of increased rent seeking from government as government regulations have expanded to protect the established companies from outside competition.

Faster income growth, therefore, will depend on improving productivity and its rate of growth over time (not creating more jobs). Improved and simplified regulations will free up some of the large armies of compliance officers to work in jobs that actually produce things we want. It will also increase market competition by reducing regulatory capture and related rent seeking. The same is true for any reforms in the provision of medical services that lower their cost (e.g. from greater transparency of costs of treatment options and patient responsibility for and interest in those costs). This is a different issue than who pays for medical care (insurance) but the nature and structure of medical insurance profoundly influences the incentives patients and doctors have to choose cost effective medical services. Tax reforms that lower the cost of investing in the U.S. will also increase productivity and income growth.

Investments in plant and equipment and new technology increase labor productivity and income in the future but require workers and materials to build them in the present. In an already more or less fully employed economy the resources used for investments must come from giving up other uses, primarily from producing consumption goods and services. To finance investment people will need to consume less and save more.

If none of the resources and their financing come from the government (and Trump plans the opposite), interest rates will need to rise in order to encourage more savings and to moderate the increase in investment. The Federal Reserve will have to raise its interest rate targets just to stay neutral (i.e. to keep inflation rates near their 2% per year target) as the tightening labor market puts upward pressure on wages and equilibrium interest rates. Thus interest rates will need to increase even more to encourage the additional savings needed to finance additional investment.

The new government has yet to propose its budget for the coming year, but Trump cannot simultaneously increase military spending and infrastructure spending and leave entitlement commitments unchanged (which imply significant increases in actual social security and medical outlays because of an ageing population and increased retirements relative to new entrants into the labor force) even if his tax reforms are revenue neutral (which current proposals are not). We don’t know yet which of his plans will have to give and to what extent. None of this takes into account the large impact not so far down the road of unfunded fiscal liabilities (unfunded social security, Medicare, and Medicaid obligations). https://wcoats.wordpress.com/2013/03/16/the-sequester/ https://wcoats.wordpress.com/2011/04/23/thinking-about-the-public-debt/ http://tinyurl.com/yjos2ed. Thus it is difficult to forecast how much interest rates will need to rise in order to keep inflation in check while crowding out private investment to finance the growing public debt.

Higher interest rates will also tend to strengthen (appreciate) the dollars’ exchange rate, which will increase our trade deficit unless Trump totally destroys our trade flows in a misguided effort to balance our trade account (balance imports and exports). A larger trade deficit would result in some of the increased investment being financed by foreign saving (capital inflow) and to that extent would reduce the upward pressure on interest rates. So far I have not taken account of possible changes in the economic conditions of the rest of the world. However, an appreciated dollar would improve the exports and thus economic activity of other trading partners but would increase their local currency cost of any borrowing their firms and citizens have done in dollars.

The bottom line is that any increase in economic growth in our fully employed economy will come from increases in productivity not increases in employment. Tax and regulatory reform should improve the allocation of our labor and capital resources to more productive uses. They should also lead to increased investment, which will enhance future productivity. Jawboning or pressuring the allocation of these resources into less productive uses (e.g. domestic production of goods that could be more cheaply imported) will reduce economic growth. Increased investment will require higher interest rates in order to generate the savings needed (reduction in consumption) to finance the additional investment. However, continued fiscal deficits will divert that amount of savings away from investment. Without significant cuts in future entitlement commitments (and/or defense spending) these deficits will grow larger at the expense of economic growth. New trade tariffs threatened by Trump or other new impediments to trade will also reduce our productivity and growth. While the Trump administration could increase our economic growth rate in the coming years, this outcome depends on it resolving existing internal contradictions in its proposed policies.

My Political Platform for the Nation – 2017

For me, the ideal American government would deliver its important but limited functions efficiently and effectively and would raise the money to pay for these activities with efficient, minimally distorting (neutral), and fair taxes following a principle of maximum subsidiarity (decisions made and services performed at the most local levels possible). The government should do fewer things than it does now but should do them better and should fully pay for them with taxes and fees (cyclically balanced budgets).

My unrestrained, radical platform will be presented here at a high level of general principles. Details need to be refined by a political process involving public discussion and are likely to evolve somewhat over time. Links to earlier articles provide additional details. In the very broadest terms Americans should be self reliant and free to work and play as hard as they choose with the government supporting their choices by providing security, the legal foundation and framework of private property and contracts, and an efficient safety net when individual undertakings are not feasible or fail.

The limited functions of the Federal government are enumerated in Article 1 section 8 of the U.S. Constitution. Broadly these are to:

  1. Develop and maintain our relations with other countries and international bodies and to maintain an Army, Navy and Air Force for the purposes of defending and promoting the security of the United States;
  2. Establish and enforce the rights to property and contracts and to adjudicate related disputes;
  3. Provide for public safety;
  4. Provide an efficient and effective social safety net (welfare);
  5. “Regulate commerce with foreign Nations, and among the several States;”
  6. “Coin money, regulate the value thereof, and of foreign coin, and fix the Standard of Weights and Measures;”
  7. Arrange for the provision of roads and essential infrastructure; and
  8. Tax, borrow, and levy fees and tariffs to pay for these activities.

Our Social Contract

Sovereignty resides with each individual, who have collectively ceded limited powers to government for the general welfare. Each of us is free, within legal limits on doing harm to others, to lead our own lives and build or work at whatever we choose. Thus the government’s laws apply equally to each of us without regard to our race, religion, sex, or sexual orientation. From this environment of freedom and innovation, America has built the most successful economy in the world.

When building companies or developing products, many will fail and try again. The government provides the legal framework (bankruptcy) for resolving such failures. The implicit agreement between citizens and their government is that government will provide a floor—a safety net—whenever a person’s efforts fail or when, e.g., for health reasons, a person is unable to provide for him or herself. The level of the safety net should reflect the level of the country’s income and social consensus and should be designed to achieve its objective as efficiently as possible with careful consideration of the incentives it creates.

Income redistribution: taxation and a guaranteed minimum income

All income (personal and corporate) taxes should be replaced with a comprehensive, flat, consumption tax (Value Added Tax—VAT) and limited progressivity introduced by paying every legal man, woman and child resident a guaranteed minimum income. US federal tax policy, Cayman Financial Review July 2009 Each recipient of these monthly guaranteed income payments would be required to set aside a minimum amount for health insurance (chosen by each person or family in the competitive market place) and a minimum amount for retirement (invested in qualifying retirement funds in the competitive market place). Saving social security

As the guaranteed minimum income should be at a level sufficient to minimally support life’s basic needs, supplements such as unemployment or disability insurance would not be needed or provided. However, disabilities acquired from military or public safety service should receive additional income support.

Health care

Each person will be responsible for paying for at least part of routine medical care (the copay required by the insurance they have chosen) and will thus care about its cost. The cheapest insurance policies will be limited to major medical expenses (catastrophic health insurance). As everyone will be required to contribute monthly to a health savings account from their guaranteed minimum income, most people will chose to use such funds to buy health insurance, which would not be tied to employment or an employer.

Doctors and hospitals will be required to make medical service costs transparent. On that basis, patients, in consultation with their doctors, will decide the level of care and treatments to receive. These measures will introduce normal market competition into the provision of medical care that is currently absent, which will improve its quality and lower its cost.

Education

Equal access to quality education is a critical element in maximizing opportunity for all and the wealth of our society and each person in it. The public school system has often failed in this objective. While the wealthy can afford to put their children in private schools when the neighborhood school is of poor quality, lower income families generally cannot. Every K-12 aged child will receive a tuition voucher that covers the cost of state provided education. The amount will generally vary from state to state (or school district to school district). The voucher can be used to attend the local neighborhood public school with no additional cost, or any private school the family chooses, which might incur additional costs. Schools eligible to receive such vouchers must meet minimum education standards set by the state and must disclose the performance of their students on state administered achievement tests. This information must be available to the public. The learning progress of each child is more important than the average level of achievement of each school’s students as some schools might well specialize in slow or problem learners and performance data should reflect this distinction. The neighborhood school has the advantage of being easier to get to every day and will normally be chosen by families if it provides a good education. The argument for universal tuition vouchers goes beyond providing a level playing field to all. It also introduces the competition for students that is the basis for good quality, low cost goods and services in every other area of our economy.

Access to higher education raises different issues. Those with the aptitude and desire for a college or postgraduate degree can significantly increase their lifetime incomes as a result. It would hardly be fair to tax the general public to subsidize the higher education of those who will become wealthier as a result. However, the tuition loans that may be needed by those from lower income families to make this investment would be hard to get without insurance against default. Many states also provide community (or Jr.) colleges at public expense that provide training in various trade skills as well as four year college preparatory courses. These seem to have often been successful in leveling the playing field. The optimal structuring of higher education subsidies (e.g. between insurance guarantees and tuition subsidies) needs further examination.

Monetary and Financial Policies

Government policies that affect business should be as rule based and transparent as possible. Monetary policy stands out as a particularly important area in which clearer rules are needed. A currency with stable real value (purchasing power) is an important part of the foundation of efficient free markets. At the very minimum the Federal Reserve’s mandate should be tightened as provided in the very pragmatic Federal Reserve Accountability and Transparency Act of 2014. This act would require the Fed to chose an operational rule, from which it could depart only with an explanation to Congress of its reasons. A deeper review of options is proposed by the Centennial Monetary Commission Act of 2015. I have proposed a more radical reform in the spirit of the gold standard but with tighter rules and an anchor of a large number of goods rather than just gold. The supply of this currency, which ideally would become the global currency, would be regulated by the market using currency board rules and “indirect redeemability.” A hard anchor for the dollar.

The banking and financial sector are currently smothered with detailed regulations the compliance cost of which are driving smaller banks out of business. Under the Dodd Frank law adopted after the financial crisis of 2008, the largest five American banks have grown even larger (in absolute terms and as a share of the banking sector) than they were in 2008. Regulators, despite (or because of) their detailed banking regulations have failed to make banks safer and have slowed the competitive process of producing better and cheaper services. Bank owners and market preferences should regulate risk taking by banks.

Bank regulation by the government should focus on broad principles with strong owner accountability. Bank capital requirements should be raised and the no bail out rules strengthened. Bank owners and investors should absorb any bank losses. The payment services of banks should be isolated from the rest of its lending and investing business by adopting the Chicago Plan of one hundred percent reserve requirements against current account deposits, and virtually all other regulations (other than accounting and reporting standards) should be dropped. Larger banks will develop their own risk weighted capital requirements for their internal use, but the government’s capital requirements should state the minimum required leverage ratio (ratio of core capital to total assets) and set it at a high level. Changing direction on bank regulation, Cayman Financial Review April 2015. A bill now in congress moves in this direction: The Financial Choice Act

Business activities and regulation

The government should only provide services that that private sector can’t. It should provide the legal and regulatory framework for the private economy rather than compete with it. Though the approaches to providing “public goods” such as police, courts, prisons, firemen, parks, highways, airports, etc. have varied over time, they are almost always paid for by the government (i.e. collectively by tax payers) and should be provided efficiently at the level expected by the public. Publicly funded and privately produced goods and services are often sources of hard or soft corruption. Rather than over charging for services or paying bribes to win contracts (hard corruption), soft corruption exploits influence on government to obtain contract terms or regulations favorable to particular firms (“rent seeking”). The government’s purchases of goods and services from the private sector should be governed by transparent rules that promote competition among suppliers. This is easier said than done. Open the Books

While the government is involved in and trying to do far too many things, it doesn’t do many of them very well. Of those services the government needs to provide, states generally perform better than the federal government though performance varies across states. In Maryland, where I live, I was able to register my Limited Liability Company on line in about 30 minutes start to finish. Registering my car and updating my driver’s license is quick and easy. However, it took me months to obtain a statement of my residency from the U.S. Treasury and a personal trip to the State Department to have it certified to provide to the National Bank of Kazakhstan before they could pay me for my services. Getting a passport or green card is more complicated and takes longer than they should. The government should do much less and do it much better.

Those in the government who believe they can judge better than competitive private markets how best to allocate resources (what to invest in and produce) are generally wrong. Moreover, they establish an opportunity and thus incentive for corruption.

The government’s regulation of private businesses in the interest of public safety, environmental protection, and market competition should be limited and subject to very serious cost/benefit tests. Cost/benefit analysis unavoidably reflects subjective judgments but their role should be limited to the extent possible by full transparency of the basis of any assessment. Competitive capitalism vs. the other kinds.

Foreign policy and national security

The purpose of our foreign policy is to serve American security interests and the international rule of law under which American’s can explore the world and American businesses can compete globally on a level playing field. Our security requires a strong military, but it also requires the skillful use of diplomacy. Our military must be structured for defense, not offensive wars of our choosing. Our 2003 war in Iraq and subsequent developments in the Middle East have cost many lives (some American) and treasure, undermined our moral authority, and seriously damaged our security. Our foreign policy should be one of “restraint.”

Our relations with other countries should be based on shared interests consistent with our respect for individual dignity and the rule of law. We should support and, where appropriate, lead international bodies dedicated to developing, promoting, and overseeing compliance with the rule of law internationally. Our international leadership should rest, in addition to our economic and military strength, on our commitment to broadly shared values and standards of behavior. Just as we give up limited amounts of our individual sovereignty to our own government when it serves our individual and collective interests, so should we give up limited amounts of our national sovereignty to international bodies when it serves our national and international interests.

Our economic strength depends in part on providing for a sufficiently strong military in the most economical way possible. Money spent on tanks can be spent on building other businesses and producing goods that we enjoy. The very nature of the relationship between our military and the industries that supply it, what President Eisenhower called “the military industrial complex,” makes achieving this objective very difficult. As argued above, clear rules and transparency are important tools. Our unsupportable empire

Trade

Next to the right to personal property, nothing is as central to our liberty and well being as the right to trade. It is the basis of virtually all of our enormous increase in productivity and thus our standard of living. The government impedes our right to trade with a wide range of often unnecessary or excessive regulations. Restricting our freedom to trade across national borders is also a mistake that reduces our standard of living from its potential.

Trade has destroyed some jobs while creating others. “Since 1900, the portion of the U.S. workforce in agriculture has declined from 41 percent to less than 2 percent. Output per remaining farmer and per acre has soared since millions of agricultural workers made the modernization trek from farms to more productive employment in city factories…. Manufacturing’s postwar share of the labor force peaked at about 30 percent” in 1953 and has since declined to less than 9 percent while manufacturing output continued to climb. “Of the 5.6 million manufacturing jobs lost between 2000 and 2010, trade accounted for 13 percent of job losses and productivity improvements accounted for more than 85 percent.” George Will, Washington Post.

As with domestic, competitive trade, those out-performed in competitive markets suffer, at least temporarily. The safety net for “losers” in the competitive process discussed above is an important feature in our willingness to unleash the benefits of free trade. We must insure that they are adequate. We should support the World Trade Organization (WTO) as well as regional and bilateral agreements that reduce the barriers to trade and promote freer trade. Save trade. Globalization and nationalism-good and/or bad?. Trade and globalization

Conclusion

Our government should assume that each of us is capable of and has the right to make our own decisions and lead our own lives as we see fit. Its role is to protect those rights, in part by protecting us from others, foreign and domestic, who would violate them. We are, however, part of and best flourish within broader communities. Our government should develop legal frameworks to facilitate our interactions and relationships within and across societies both business and personal. Our successful flourishing will also depend greatly on a shared culture of mutual respect and comity.

Save Trade

I have written about the importance of trade to our standard of living many times because it seems to be under attack. The graph below, which reflects Angus Maddison’s data showing a massive increase in income throughout the world over the last two centuries and which is reproduced, courtesy of Human Progress, provides a dramatic visual depiction of the impact of Trade.

Once households were able to trade what they produced for what they needed, the increase in their output as they specialized in what they were best at was truly staggering. But it is not surprising when you reflect on how limiting it would be if you had to be self sufficient in everything.

Following the disastrous imposition of high tariffs by the U.S. in 1930 (Smoot-Hawley Tariff Act) to save American jobs and the great depression and world war that followed, representatives of all 44 Allied nations came together under U.S. leadership at Bretton Woods in 1944 anticipating the end of World War II. They established the International Monetary Fund (IMF), the World Bank, and what is now the World Trade Organization (WTO) in order to establish, protect, and further a liberal international economic order (i.e., to protect and promote free markets globally).  Trade again flourished, as it had previously at the end of the nineteenth century, leading a resumption of dramatic growth in wealth and income across the globe.

The United States was the natural (indispensable) leader in promoting this liberal order for several reasons. By the end of WWII the U.S. was the largest economy in the world. And while the size of the United States and the guarantee of free trade within its boarders provided in the U.S. Constitution assured substantial trade within the U.S., opening the rest of the world to trade was very beneficial to all countries (win-win). The Boeing Company, for example, sells more of its planes abroad than domestically because the world market is larger than the U.S. market. So the U.S. is the natural leader because it is the largest trader. But more than that, most other countries respect the commitment of the U.S. to the rule of law and a level playing field for commerce. Thus they gladly accept our leadership.

The world is far from the ideal level playing field for trade but is much closer to that model than it was at the end of WWII. The WTO (the successor of the General Agreement on Trade and Tariffs – GATT) and regional and bilateral trade agreements keep moving us closer and closer to such a world. It is a very desirable goal for the United States and for the rest of the world (look at the above graph again). As with technical progress and the increasing productivity it brings, some capital and labor (workers) will need to move to new activities and we need to insure that displaced workers do not suffer in the process (we seem to care less about the displaced capitalists assuming, I guess, that they can take care of themselves).

While it is still early, President-elect Trump seems uncommitted to the U.S. leadership of our increasingly liberal (freer) international economic order. In fact, he is threatening to throw it away by unilaterally imposing tariffs on imports and behaving like a bully internationally. We need to recall the terrible consequences of the Smoot-Hawley tariffs and resist any moves in that direction.

It is true that following WWII the U.S. often gave favorable terms to Europe (the Marshall Plan) and less developed countries in order to promote their reconstruction and development (“Trade not Aid” we used to say). The world’s economies are now growing into better balance and the U.S. is no longer as dominant as it once was. The international rules of the game (trade agreements) can and should seek a better balance of mutual benefits. But we would be making a very serious mistake to give up our leadership of the world order and abandon our commitment to free and fair global commerce.

Globalization and Nationalism: Good and/or Bad?

Globalization is under attack and nationalism is on the rise. The evidence includes the election of Donald Trump. But what is this globalization these people are so opposed to?

After 1945—after the Great Depression and two world wars—Western nations established an international system of rules that honored national sovereignty, facilitated the flourishing of global commerce, and encouraged respect for human rights and liberties. This liberal international order resulted in the longest period of peace among the world’s major powers the world had ever seen, broad-based economic growth that created large middle classes in the West, the revival of Europe, growth in poor countries that lifted hundreds of millions of people out of poverty, and the spread of freedom across the globe. Fareed Zakaria, Washington Post/2016/11/17/. This is the liberal international order that I largely support.

What exactly is under attack and what is on the rise? In a very insightful article in the National Review, Michael Lind characterizes the globalist view as follows: “In the 1970s and 1980s, libertarians made all of the major arguments heard from globalists since the 1990s: Favoring citizens over foreign nationals is the equivalent of racism; national borders impeding the free flow of labor and goods are both immoral and inefficient; the goal of trade and immigration policy should not be the relative security or relative wealth of particular countries, but the absolute economic well-being of all human beings.” Michael Lind, National Review, Sept 15, 2016

What about the rise of nationalism in relation to globalism? I believe strongly in the economic benefits of the freest possible global trade, but it would be a mistake to overlook or ignore the concerns of those who oppose it. In this note I attempt to restate the case for freer trade in terms that should appeal to economic nationalists who wish American trade (and other) policies to reflect the interests of Americans first (before taking into account the benefits to the rest of the world). I also reflect on the international rules of trade from the perspective of the sovereignty concerns of nationalists, or what economist Larry Summers calls “responsible nationalism.” Voters deserve responsible nationalism not reflex globalism

I was forced to think more carefully about the case for freer trade by the opposition to globalization expressed by many of Trump’s supporters. But I quickly discovered that my friend Michael Lind has been there before (see above) as has the brilliant social psychologist Jonathan Haidt who noted that: “those who dismiss anti-immigrant sentiment as mere racism have missed several important aspects of moral psychology related to the general human need to live in a stable and coherent moral order.” Jonathan Haidt: “When and why Nationalism Beats Globalism”, The American Interest, July 2016

Haidt’s closing words succinctly summarize our challenge: “The great question for Western nations after 2016 may be this: How do we reap the gains of global cooperation in trade, culture, education, human rights, and environmental protection while respecting—rather than diluting or crushing—the world’s many local, national, and other “parochial” identities, each with its own traditions and moral order? In what kind of world can globalists and nationalists live together in peace?”

Immigration and trade are intimately linked – if Mexicans can make it in Mexico and export it to the U.S. they will be less interested in moving to the U.S. in order to build it there (in fact, net Mexican migration to the U.S. has been negative for the last few years)—and thus I will look at both.

The most promising starting point in my view is with the sovereignty of each American citizen. Unlike the Magna Carta, which wrested more autonomy for the people from the King, the free men and women of revolutionary America gave up a limited amount of their autonomy to a new state in order to better protect their property and individual rights. The direction of delegation was the exact opposite of what the world had ever seen before. It is not without profound significance that our Constitution begins with “We the people.”

Thus it is quite appropriate to judge governmental authority and policies by the standard of how well they serve our individual sovereign interests. In evaluating those interests, it is appropriate to do so from the perspective of John Rawls’ veil of ignorance, i.e. principals of fairness—rules of the game—that we accept as fair without knowing which positions in society we will occupy. This is the perspective of free market, competitive capitalists and is opposite to the perspective of crony capitalists who exploit the power of government for their personal benefit.

We have surrendered limited (enumerated) powers to our governments (local, state, federal, etc.) in order to enjoy greater security and protection of our property but also to support and protect our freedom to trade and to enjoy its benefits. No one really needs to be convinced that being able to specialize in what we make best and trade it for other things we need has enormously increased our wealth over being self-sufficient (no trade). No one needs to be convinced that by investing in tools and better technologies we have been able to produce more for trade and thus become wealthier. But investing and trading require common understandings with those with whom we trade—the rules of trade. We have long ago understood that we all benefit from giving up some of our sovereignty to our government to negotiate and enforce the agreed rules of trade, protect our property, and mediate disputes over whether the rules were followed.

The simple act of entering into a contract with someone involves giving up the freedom to act as we want each moment in exchange for a similar commitment by our counterparty for the mutual benefit of both of us. Where the mutual benefits of such rules are greater than the cost of the forgone freedom of action, the agreement is a positive sum arrangement—win-win. Conforming to international product standards, e.g. adhering to standards of weights, measures, voltage, labeling, etc., facilitates trade. The key policy issues in this area are the nature and details of the rules of trade that best serve our personal interests (in the Rawlsian sense) and thus our community and national interests, and the extent of the market in which we are able to trade (village, province, nation, world). “Free Markets Uber Alles,” Dec 2014

The more widely we can trade, the greater is our opportunity to specialize in what we produce and to develop and apply more productive technologies.

“Trade and Globalization,” Aug 3, 2016. Our founding fathers were rightly concerned about the power of the new American government to limit the right of its citizens to trade. In fact, the U.S. Constitution prohibited the States from interfering with trade across State borders (interstate commerce). Article I, Section 8, Clause of the Constitution states that the United States Congress shall have the power “To regulate commerce with foreign nations, and among the several States, and with the Indian Tribes.” While Congress has occasionally used this power to impose restrictions on trade across national borders, the majority of Americans still believe that cross border (international) trade has been mostly good for the U.S. (65% in 2015). The wrong-headed effort to save American jobs during the Great Depression with high tariffs imposed by the Smoot Hawley Tariff Act of 1930, precipitated retaliatory tariffs around the world and a disastrous collapse of global trade and employment. U.S. imports and exports fell by more than half and the whole world was made poorer by it.

As noted above, the resulting increase in the world’s wealth from technical progress and trade has been enormous. But the incentive created by trade in a large market to innovate new products and more efficient ways to produce them has also meant that some of the existing products and/or technologies lose out and must give way to the improved ones. Those producing the old products and services are forced to find new ones and if necessary new productive skills.

The United States has generally grown economically faster than most other countries, in part, because its citizens have not been willing to allow those who lose out in such competition to block progress by the “winners” by protecting their products and jobs. The ultimate willingness of Americans to accept and protect the dynamic economics of competitive national and global markets rests, I think, on the three pillars: maximum wealth creation, maximum opportunity for everyone (the chance to win at a fair game), and help for those who lose out.

Americans should only be willing to give up some of their personal sovereignty to their government when they gain more in exchange in the Rawlsian sense of a positive sum, fair game. We should impose the same conditions on the extension of the rules of trade beyond national boundaries. This is the standard by which bilateral, regional and global trade agreements should be judged. They have the largest potential for win-win expansions of mutual trade and the greater income and wealth that expanded trade can produce. The Bretton Woods institutions created after World War II (the IMF, World Bank and World Trade Organization) established the institutional arrangements for such international cooperation. It is important to insure that such agreements do not increase the protection of “privileged” industries or sectors of the economy. In fact, they should diminish such protections where they already exist, which is why many European industries and interests oppose the Transatlantic Trade and Investment Partnership (TTIP). Much of the Trans Pacific Partnership (TPP) has this positive character. American leadership in creating the international institutions through which we interact with others abroad, i.e., through which the rule of law is established and enforced internationally, has ensured that the international order has remained true to the values on which America was founded.

The evolution of man established the family as the unit of first and primary concern. The well being of one’s family stands above the interests of all others. However, the process of civilization has been one in which mechanisms of trust and mutual assistance have convinced individuals to yield some of their sovereignty to larger units (village, state, etc.) under conditions that strengthened the security and well being of family units. Globalization is the logical conclusion of such a process. It is the development of laws of cooperation and the mechanisms of their enforcement (i.e. the rule of law) that potentially raise the welfare of everyone. But the details of the expanding circles of cooperation are important and must not violate genuine national and family interests.

In listening to the views of many Trump supporters I concluded that their anger and demand for big change derives from feelings that their government—especially the federal government—is not serving their legitimate interests and in fact is interfering with their lives without commensurate benefits. “The reason Mr. Trump won, [Mr. Bannon] says, ‘is not all that complicated. The data was overwhelming: This is a change election. People weren’t happy with the direction of the country. So all you had to do was to give people permission to vote for Donald Trump as an agent of change, and make sure he articulated that message.’” steve-bannon-on-politics-as-war-WSJ

So what are the Trump supporters mad about? What do they want to change? To the extent that they are concerned about the same things I am, it is that too much of our individual sovereignty has been taken by an overweening government, which has become a big brother who attempts to make our decisions for us for our own welfare. Our personal choices have increasingly been taken away from us and with them our opportunities. The “elites” have arranged the rules for there own benefit. It is no longer a fair game.

The weaknesses of current arrangements at the national level that seem to anger Trump supporters largely concern: a) regulatory capture of an over extended regulatory state, b) inadequate provision of a level playing field and c) an inefficient and poorly designed safety net for the losers in the competitive game. Very briefly:

  1. a) The crony capitalism reflected in President Eisenhower’s famous concerns with the risks of a military industrial complex, have metastasized into a much broader capture by legacy industries of a much more extensive government intrusion into the economy. Wherever government regulates (and some are actually helpful), the most affected, established firms are best placed to insure that such regulations benefit rather than hurt them, usually by protecting themselves from the competition of new comers. Wall Street comes to mind. Changing direction on bank regulation, Cayman Financial Review April 2015
  1. b) A level playing field. Good quality education (especially K-12) is one of the most important ways for the poor and initially disadvantaged to get into the productive economy and to rise as far as their talents and energy will take them. But the education provided to this group is often of poor quality. The iron grip of teachers’ unions has often served the interests of teachers at the expense of their students. School choice (tuition vouchers) would introduce badly needed competition in the provision of education to all – the poor as well as the rich (who all ready enjoy considerable choice).
  1. c) An efficient safety net. When jobs disappear to technological advancements (e.g., increased automation) the affected workers and capital need to be reallocated to more productive uses. But this is economist speak. The workers involved often lose their human capital (i.e. their existing skills lose value in the market place) and need to retrain for new tasks. Older works might never rebuild new skills sufficient to restore their previous incomes. Government policy should give more attention to vocational training (and retraining). But the ultimate safety net should be strengthened and redesigned by replacing existing welfare programs and social security with a guaranteed minimum income for each and every citizen (in the spirit of Milton Friedman’s negative income tax). US federal tax policy, Cayman Financial Review July 2009

Responsible Nationalism and Globablization

As Michael Lind observed earlier, America has been dividing into liberal internationalists like myself who live in the big urban centers and civic nationalists, who live in the rest of the country. The civic, economic, responsible and just plain old nationalists seem to be reacting against their sense of a loss of control over their own lives. Big brother seems to be regulating more and more what we can do, say, produce, or buy. Their opportunities are being thwarted by an unfair game—crony capitalism for the well-placed elites. This sense of a loss of control is compounded by concerns over the lack of control of our borders against undesirable immigrants and potential terrorists. While the assimilation of different cultures into the framework of basic American values of personal freedom and responsibility can be touchy and challenging at times, the finger pointing and pressure from the American left for full cultural integration feeds the fears of many of a loss of cultural, ethnic, and religious identity.

When some groups receive preferential treatment some other groups are necessarily discriminated against. While I have tried hard to accept the logic of “Black Lives Matter,” it always rubbed my sense of fair play the wrong way. All lives matter. Thus while I am saddened that it seems necessary to some white males (I am guessing they are males because that is what the press always says) to carry signs saying “White Lives Matter,” I can understand. If we need to say the one, we need to say the other if we still have any sense of fairness.

So there are plenty of things for Trump supporters to be angry about and to want to change. But now that we have him, what changes should we push for? I am particularly interested in changes that will reassure Trump’s angry voters to support American participation in the liberal global order. In evaluating what is in our national interest, we need to consider the long term rather than immediate benefits of a rule based, freely competitive world order.

We should push for a thorough reform of our tax system (see my article above), strengthen our safety net for those displaced by technology (by far the major source of job losses in the U.S.) and trade, and shift more of the regulation of commerce to the market (to consumers and owners) thus significantly reducing government regulation. We must also fashion an immigration policy that meets the needs of our economy without overwhelming the capacity of our society to absorb new members. Existing long term, undocumented residence need to be offered a realistic path to legal status. But most of all, in fashioning these and other changes we need to listen carefully and constructively to each other’s concerns and take them into account.