Tag: economics

Leland Yeager on Trump and Trade

Cato adjunct scholar Leland B. Yeager had a long career at the University of Virginia Department of Economics in its golden age and later at Auburn University. He is the author of Foreign Trade and U.S. Policy: The Case for Free International Trade (1976), International Monetary Relations: Theory, History and Policy (1976), and Free Trade: America’s Opportunity (1954). At 93 he is still as insightful and as blunt as ever, and he just published this critique of President Trump’s understanding of trade policy at Liberty magazine under the title “Profound and Destructive.” The whole thing is reprinted below.

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President Trump’s destructiveness requires few words here. Consider how world stock and currency markets have been shaken by the resignation on March 6 of Gary Cohn, regarded until then as Trump’s chief economic adviser. Although not a trained economist, Cohn apparently had some sound instincts derived from years of financial experience. His departure apparently and ominously leaves more influence, or echo, to Peter Navarro — look him up with Google.

This latest example of destructiveness follows the one touched off by Trump’s March 2 tweet bewailing America’s loss of “many billions of dollars on trade with virtually every country it does business with” and heralding trade wars as “good, and easy to win.”

I’ll spend more words on how profound Trump’s ignorance is. He considers a country’s excess of imports over exports a measure of loss. This measure applies even to trade with each foreign country separately. He counts China and Mexico among the worst offenders, deserving punishment. He does not understand the multilateral aspect of beneficial trade.

Nor does he understand how we gain in buying goods cheap from abroad. What difference does it make if steel and aluminum are cheap because of low foreign prices or because they grow cheaply on bushes at home? Money cost is a measure of opportunity cost, which means the loss of other goods when resources go instead to make the particular good in question. Opportunity cost reflects scarcity. Scarcity applies even to prosperous America, where we could enjoy still higher standards of living if food, clothing, shelter, entertainment, and other goods and services came costlessly and miraculously from heaven. Scarcity and how gains from domestic and foreign trade alleviate it are fundamentals of economics. The principle of comparative advantage goes far in explaining how.

Without understanding the academic presentation of the “absorption approach to the balance of payments,” everyone should be able to grasp its central idea, which is sheer arithmetic. If we as a country use more output for consumption and real investment than we produce, then the difference must come from somewhere — from abroad in the form of more imports than exports. A big item in this excess absorption, alias national undersaving, is government deficits. Yet Trump and Congress are complacent about increasing the deficit and debt by taxing less and spending more.

All too many politicians say that they are in favor of free trade if it is “fair trade” played on a “level playing field.” These slogans express Trump’s view of international trade as a game, a zero-sum game in which one player’s gain is another’s loss.

Trump does not understand how the price system coordinates economic activity, making most government planning about jobs and industries unnecessary and harmful.

The profundity of Trump’s ignorance goes beyond economics. It extends to diplomacy in domestic and foreign relations and even to the behavior of a decent human being. Yet his destructive economic ignorance remains prominent.

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Republicans Embrace Bad Economics and Bad Policy

To be blunt, Republicans are heading in the wrong direction on fiscal policy. They have full control of the executive and legislative branches, but instead of using their power to promote Reaganomics, it looks like we’re getting a reincarnation of the big-government Bush years.

As Yogi Berra might have said, “it’s déjà vu all over again.”

Let’s look at the evidence. According to The Hill, the Keynesian virus has infected GOP thinking on tax cuts.

Republicans are debating whether parts of their tax-reform package should be retroactive in order to boost the economy by quickly putting more money in people’s wallets.

That is nonsense. Just as giving people a check and calling it “stimulus” didn’t help the economy under Obama, giving people a check and calling it a tax cut won’t help the economy under Trump.

Tax cuts boost growth when they reduce the marginal tax rate on productive behavior such as work, saving, investment, or entrepreneurship. When that happens, people have an incentive to generate more income. And that leads to more national income, a.k.a., economic growth.

Borrowing money from the economy’s left pocket and then stuffing checks (oops, I mean retroactive tax cuts) in the economy’s right pocket, by contrast, simply reallocates national income.

Three Lessons from the Tax Defeat in Kansas

Leftists don’t have many reasons to be cheerful.

Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can’t be very encouraging for them.

They also can’t be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump’s election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).

But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.

The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. …state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. …It will take years for Kansas to recover.

And you won’t be surprised to learn that Paul Krugman also is pleased.

Lessons from the Reagan Tax Cuts

In a column in today’s  New York Times, Steven Rattner attacks Trump’s tax plan for being unrealistic. Since I also think the proposal isn’t very plausible, I’m not overly bothered by that message. However, Rattner tries to bolster his case by making very inaccurate and/or misleading claims about the Reagan tax cuts.

Given my admiration for the Gipper, those assertions cry out for correction. Starting with his straw man claim that the tax cuts were supposed to pay for themselves.

…four decades ago…the rollout of what proved to be among our country’s greatest economic follies — the alchemistic belief that huge tax cuts can pay for themselves by unleashing faster economic growth.

Neither Reagan nor his administration claimed that the tax cuts would be self-financing.

Instead, they simply pointed out that the economy would grow faster and that this would generate some level of revenue feedback.

Which is exactly what happened. Heck, even leftists agree that there’s a Laffer Curve. The only disagreement is the point where tax receipts are maximized (and I don’t care which side is right on that issue since I don’t want to enable bigger government).

Anyhow, Rattner also wants us to believe the tax cuts hurt the economy.

…the plan immediately made a bad economy worse.

This is remarkable blindness and/or bias. The double dip recession of 1980-1982 was the result of economic distortions caused by bad monetary policy (by the way, Reagan deserves immense credit for having the moral courage to wean the country from easy-money policy).

Supporters of BATs and VATs are wrong about trade and taxes

My crusade against the border-adjustable tax (BAT) continues.

In a column co-authored with Veronique de Rugy of Mercatus, I explain in today’s Wall Street Journal why Republicans should drop this prospective source of new tax revenue.

…this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans. …Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.

Much of the column is designed to debunk the absurd notion that a BAT is needed to offset some mythical advantage that other nations supposedly enjoy because of their value-added taxes.

Here’s what supporters claim.

Proponents of the border-adjustment tax also are using a dodgy sales pitch, saying that their plan will get rid of a “Made in America Tax.” The claim is that VATs give foreign companies an advantage. Say a German company exports a product to the U.S. It doesn’t pay the American corporate income tax, and it receives a rebate on its German VAT payments. But an American company exporting to Germany has to pay both—it’s subject to the U.S. corporate income tax and then pays the German VAT on the product when it is sold.

Sounds persuasive, at least until you look at both sides of the equation.

When the German company sells to customers in the U.S., it is subject to the German corporate income tax. The competing American firm selling domestically pays the U.S. corporate income tax. Neither is hit with a VAT. In other words, a level playing field.

Here’s a visual depiction of how the current system works. I include the possibility that that German products sold in America may also get hit by the US corporate income tax (if the German company have a US subsidiary, for instance). What’s most important, though, is that neither American-produced goods and services nor German-produced goods and services are hit by a VAT.

New Video Shows the Simple Recipe for Poor Nations to Become Rich Nations—in Spite of Bad Advice from International Bureaucracies

The recipe for growth and prosperity isn’t very complicated.

Adam Smith provided a very simple formula back in the 1700s.

For folks who prefer a more quantitative approach, Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.

One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.

Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.

That’s the main message in this new video from the Center for Freedom and Prosperity.

The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.

Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.

The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations even though no poor nation has ever become a rich nation with bigger government. Never.

Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.

I’m not joking.

As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.

And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.

Further Thoughts on Mariel Boatlift

Jason Richwine just blogged about my recent Mariel Boatlift post that confirmed George Borjas’ finding of wage increases for those with only a high school degree in post-Mariel Miami.  George Borjas understood my quick extension of his research.  Below are some of Richwine’s points and my quick responses. 

“The point is not especially interesting, since the standard immigration narrative has always been that efficiency gains come at the expense of the natives with whom immigrants most directly compete – high school dropouts, in the case of Mariel.”

It’s important to identify which skill-group of Miamians could have benefited from the Boatlift.  George Borjas pointed out in his report for the Center for Immigration Studies:  “Economic theory predicts that immigration will redistribute income by lowering the wages of competing American workers and increasing the wages of complementary American workers as well as profits for business owners and other “users” of immigrant labor.”  Borjas focused on the benefits for business owners and other “users” of immigrant labor in that paper. 

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