Tag: deficit

The Five Most Important Takeaways from Trump’s Budget

It’s both amusing and frustrating to observe the reaction to President Trump’s budget.

I’m amused that it is generating wild-eyed hysterics from interest groups who want us to believe the world is about to end.

But I’m frustrated because I’m reminded of the terribly dishonest way that budgets are debated and discussed in Washington. Simply stated, almost everyone starts with a “baseline” of big, pre-determined annual spending increases and they whine and wail about “cuts” if spending doesn’t climb as fast as previously assumed.

Here are the three most important things to understand about what the President has proposed.

First, the budget isn’t being cut. Indeed, Trump is proposing that federal spending increase from $4.06 trillion this year to $5.71 trillion in 2027.

 

Trade Statistics Are a Source of Great Mischief

Following is my response to the Commerce Department’s request for public comments on the “Causes of Significant Trade Deficits.”

In a globalized economy, where the value embedded in most manufactured goods originates in multiple countries and two-thirds of trade flows are intermediate goods, bilateral trade accounting is meaningless.  In a world where statistical agencies attribute the entire $180 cost of producing an Apple iPhone to China, where it is merely assembled for a cost of about $6, what do trade statistics and trade balances mean?   By assigning 100 percent of the value of an import to the final country on the assembly line, trade statistics have lost most of their meaning.

The misguided belief that the trade account is a scoreboard measuring the success or failure of trade policy explains much of the public’s skepticism about trade and trade agreements, lends plausibility to claims that the United States is routinely outsmarted by shrewder foreign trade negotiators, and provides cover for the same, recycled mercantilist and protectionist arguments that have persisted without merit for centuries.

If the trade deficit reduces economic activity and destroys jobs, why are there positive relationships between these variables?  The overall trade deficit, by and large, is also a meaningless statistic.  It is neither a barometer of economic health nor a running tally of debt with which we are burdening future generations.

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Peter Navarro Responds to His Trade Critics (Sort of)

White House National Trade Council Director Peter Navarro’s views have been roundly criticized by economists and policy professionals from across the political and ideological spectra. There seems to be an emerging consensus that the more Navarro speaks and writes, the more he marginalizes his influence within the administration. It is with that cause and (positive) effect in mind that I continue pulling on this thread.

A couple of weeks ago, Navarro wrote an oped in the Wall Street Journal, offering some really unconventional perspectives about trade policy and revealing a profoundly unique understanding of economics. I replied (in long form) on the Cato blog and (in shorter form) with a letter to the editor of the WSJ.

This afternoon, the WSJ published a response from Navarro to me and the authors of the two other letters published in response to Navarro’s original oped. And in response to Navarro’s response, Cafe Hayek’s/Mercatus’s/GMU’s Don Boudreax wrote this letter to the WSJ editor:

22 March 2017

Editor, Wall Street Journal

1211 6th Ave.

New York, NY 10036

Dear Editor:

The headline is promising: “Peter Navarro Responds to His Trade Critics” (March 22). So I eagerly anticipated reading Navarro’s substantive defense, against knowledgeable critics, of his reasons for fearing trade deficits. Alas, disappointment. Navarro offers not a single relevant argument.

Typical is his contemptuous treatment of Dan Ikenson. To establish that Mr. Ikenson has an “Alice-in-Wonderland worldview,” Navarro merely lists some of Mr. Ikenson’s policy positions without offering as much as a syllable to inform us why these positions are untenable.

The closest Navarro comes to making a relevant argument is when he writes, responding to Desmond Lachman, that “if India agrees to lower its tariffs on Harley Davidson motorcycles, Indian consumers will buy more Harleys and save less while Harley will sell more Harleys and invest more.” Well, no one has ever denied that Indians would buy, and Harley would sell, more Harleys if India reduces its tariff on these bikes. But it doesn’t follow that Indians would necessarily, as a result, save less. (Does Navarro always save less when his cost of living falls?) And while more resources would indeed likely be invested in Harley’s operations, these resources would have to come from foreigners if Americans don’t increase their savings. Contrary, therefore, to the conclusion that Navarro wants us to draw from what he pretentiously (if inaccurately) calls “obvious general equilibrium effects,” a cut in India’s tariffs on Harleys is not remotely guaranteed to lead to a decrease the U.S. trade deficit.

Sincerely,

Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030 

Stay tuned!

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Peter Navarro, Harvard Ph.D. Economist, Trade Warrior

Peter Navarro, director of the newly-established White House National Trade Council, gave a speech last week to the National Association for Business Economics, which he condensed into an opinion piece for the Wall Street Journal. The analytical errors and the fallacies portrayed as facts in that op-ed are so numerous that it is bewildering how a person with a Ph.D. in economics from Harvard University—and a potentially devastating amount of influence within the White House—could so fundamentally misunderstand basic tenets of introductory economics.

Almost every paragraph in the op-ed includes an error of fact or interpretation.  I’ll focus on a few, deferring to others’ noble efforts (Phil Levy, Don Boudreaux, Linette Lopez) at wading through the rest of Navarro’s confused and misinformed diatribe.

Consider Navarro’s portrayal of the national income identify as an economic growth formula.  He claims:

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).

The sentence betrays a deep and troubling misunderstanding of the factors of economic growth. Real GDP growth (growth in the total value produced in the economy) depends on increases in the factors of production and increases in the productive use of those factors, which trade and specialization facilitate. What Navarro refers to as the drivers of growth are actually the channels that account for the disposition of our output – what we do with our output.

The national income identify is expressed as: Y=C + I + G + X – M.  It tells us that our national output is either consumed by households (C); consumed by business as investment (I); consumed by government as public expenditures (G); or exported (X). Those are the only four channels that can account for the disposition of national output.  We either consume our output as households, businesses and government or we export it.

Imports (M) are not a channel through which national output is disposed.  We don’t import our output. But M appears in the identity and is subtracted because we consume – as C, I, and G – both domestically produced and imported goods and services.  If we didn’t subtract M in the national income identity, we would overstate GDP by the value of our imports.

But Navarro believes – or wants the public to believe – that the national income identity is an economic growth formula or function, where Y (GDP) is the dependent variable, C,I,G, X, and M are the independent variables, and the minus sign in front of M means that imports are inversely related to (or detract from) GDP.  That’s wrong and a Harvard Ph.D. economist should know that.

Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

The evidence is overwhelming – month after month, quarter after quarter, year after year – that the trade deficit and GDP rise and fall together. The largest annual decline in the trade deficit ever recorded was between 2008 and 2009, during the trough of the Great Recession. The largest annual increase in the trade deficit occurred between 1999 and 2000, when the economy grew by 4.7 percent – the strongest annual economic growth in the past 33 years.

When the economy grows, households, businesses, and government tend to spend more, and they spend more on both domestic and imported goods and services.  When the economy contracts, there is less spending on both domestic and imported goods and services.  For the past 42 straight years, the United States has registered trade deficits.  In 40 or those 42 years, annual changes in the value of imports and the value of GDP moved in the same direction.

Navarro either believes, or would have the public believe, that imports detract from GDP and that our national security requires all of the gears of U.S. trade policy be put to the service of eliminating our trade deficit. This is a fool’s errand and a Harvard Ph.D. economist should know that.

Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.

First, note the implication that Navarro expects U.S. trade agreements to include commitments by our trade partners to meet certain outcomes – “…Mexico agrees to buy more products from the U.S.”  This kind of managed trade is unprecedented and utterly defies the purpose and spirit of trade liberalization.  Trade agreements are intended to reduce barriers to competition, not to preempt competition by anointing the winners at the outset.  But, okay, the administration believes it has a mandate to blow things up on the trade front.

But, here’s another problem with Navarro’s scenario.  If Mexico agrees to buy from the United States some of what it now purchases from other countries (Navarro’s key to decreasing the bilateral trade deficit with Mexico), then won’t those other countries have fewer dollars with which to purchase U.S. exports?  Wouldn’t that, all else equal, increase bilateral trade deficits or reduce bilateral surpluses the United States has with those other countries?  Yes and yes.  What Navarro is suggesting is a game of trade policy whack-a-mole. Bilateral trade accounting is utterly meaningless, and a Harvard Ph.D. economist should know that.

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New CBO Numbers and the Simple Formula for Good Fiscal Policy, Part II

Based on new 10-year fiscal estimates from the Congressional Budget Office, I wrote yesterday that balancing the budget actually is very simple with a modest bit of spending restraint.

If lawmakers simply limit annual spending increases to 1 percent annually, the budget is balanced by 2022. If spending is allowed to grow by 2 percent annually, the budget is balanced by 2025. And if the goal is balancing the budget by the end of the 10-year window, that simply requires that spending grow no more than 2.63 percent annually.

I also pointed out that this wouldn’t require unprecedented fiscal discipline. After all, we had a de facto spending freeze (zero percent spending growth) from 2009-2014.

And in another previous column, I shared many other examples of nations that achieved excellent fiscal results with multi-year periods of spending restraint (as defined by outlays growing by an average of less than 2 percent).

Today, we’re going to add tax cuts to our fiscal equation.

Some people seem to think it’s impossible to balance the budget if lawmakers are also reducing the amount of tax revenue that goes to Washington each year.

And they think big tax cuts, such as the Trump plan (which would reduce revenues over 10 years by $2.6 trillion-$3.9 trillion according to the Tax Foundation), are absurd and preposterous.

After all, if politicians tried to simultaneously enact a big tax cut and balance the budget, it would require deep and harsh spending cuts that would decimate the federal budget, right?

Nope. Not at all.

They just need to comply with my Golden Rule.

 

 

New CBO Numbers and the Simple Formula for Good Fiscal Policy, Part I

The Congressional Budget Office, as part of The Budget and Economic Outlook: 2017 to 2027, has just released fiscal projections for the next 10 years.

This happens twice every year. As part of this biannual exercise, I regularly (most recently here and here) dig through the data and highlight the most relevant numbers.

Let’s repeat that process. Here’s what you need to know from CBO’s new report.

  • Under current law, tax revenues over the next 10 years are projected to grow by an average of 4.2 percent each year.
  • If left on autopilot, the burden of government spending will rise by an average of 5.2 percent each year.
  • If that happens, the federal budget will consume 23.4 percent of economic output in 2027 compared to 20.7 percent of GDP in 2017.
  • Under that do-nothing scenario, the budget deficits jumps to $1.4 trillion by 2027.

But what happens if there is a modest bit of spending restraint? What if politicians decide to comply with my Golden Rule and limit how fast the budget grows every year?

This shouldn’t be too difficult. After all, even with Obama in the White House, there was a de facto spending freeze between 2009-2014. In other words, all the fights over debt limits, sequesters, and shutdowns actually yielded good results.

So if the Republicans who now control Washington are serious about protecting the interests of taxpayers, it should be relatively simple for them to adopt good fiscal policy.

And if GOPers actually decide to do the right thing, the grim numbers in the CBO’s new report quickly turn positive.

  • If spending is frozen at 2017 levels, there’s a budget surplus by 2021.
  • If spending is allowed to grow 1 percent annually, there’s a budget surplus by 2022.
  • If spending is allowed to grow 2 percent annually, there’s a budget surplus by 2025.
  • If spending is allowed to grow 2.63 percent annually, the budget is balanced in 10 years.
  • With 2.63 percent spending growth, the burden of government spending drops to 18.4 percent of GDP by 2027.

To put all these numbers in context, inflation is supposed to average about 2 percent annually over the next decade.

Is the U.S. Trade Deficit a Problem to Solve?

Since 1975 – for 41 straight years – the United States has registered annual trade deficits with the rest of the world.  That means that year after year, Americans spend more on foreign-produced goods and services than foreigners spend on U.S.-produced goods and services or, put simply, the dollar value of U.S. imports exceeds the dollar value of U.S. exports.

For almost as long, some economists have been arguing that trade deficits are unsustainable – they sap economic growth, bleed jobs, and saddle our descendants with debt.  Perhaps if one looks at the trade deficit (or the slightly broader current account deficit) in isolation, these concerns might seem to have merit.  But looking at the U.S. trade or current account deficits without considering the capital account surplus is a meaningless, misleading exercise.

Yesterday, I published this piece at Forbes online, explaining why the trade deficit is not only not a problem, but that the associated capital surplus (the excess of inward investment over outward investment), which includes high-quality foreign direct investment, bestows huge advantages on the U.S. economy.  In that piece, I ask trade deficit hawks (or scolds, as I call them) to furnish their best, fact-based, comprehensive arguments – to finally step up to the plate and explain why it is that the trade deficit is a problem to solve.  

It would be of immense public policy value if we were to be able to catalogue and compare the arguments of both sides (and those who may be in the middle).  After all, one of the reasons that trade is so maligned is that the public has been lead to believe that the trade account is a scoreboard, with the deficit indicating that Team America is losing – and it’s losing on account of poorly negotiated trade deals and foreign cheating.  Helping the public reach that conclusion (rather than find the truth) may be the goal of some noisy contributors, but I suspect there are plenty of trade deficit hawks with purer motives, if not convincing arguments.

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