Category Archives: Economics

Miscellaneous economy stuff

Well, Yeah

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David Malpais, Treasury Undersecretary during Trump I’s first two years, has misunderstood what the Federal Reserve Bank must do. He undergirded his misunderstanding with this:

…the Fed’s demand-side model treats economic and job growth as inflation risks and prescribes higher interest rates.

Well, yeah. Economic growth in demand, without a parallel growth in economic supply is inflationary, and job growth increases business’ costs and so applies upward pressure on prices businesses must charge.

The correct answer for the Fed, given its dual mandate of price stability and full employment, is not just to stop reducing its benchmark interest rates—they’re too low already—but to raise them a quarter point to the level (4.75%-5%) historically consistent with its price stability goal of 2% inflation. Then the Fed should sit down and let the market fluctuate interest rates and let the inflation rate bounce around those 2%. A free market, in an environment of reduced regulatory constraints (over-regulation being one of President Donald Trump’s (R) bugaboos) will easily correct on its own, both those market interest rates and that inflation rate. That will allow the market to flourish, and that, in turn, will produce full employment.

Artificially suppressing interest rates is far more inflationary than are stable rates in the 4.75%-5% range. Lowering the cost of money artificially, rather than letting market forces deal with that, only stimulates demand without stimulating production (which by the nature of the two, strongly lags changes in demand), and that’s directly inflationary; it’s the textbook basic cause of inflation.

A Mixed Message

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President Donald Trump’s (R) tariff program is before the Supreme Court (oral arguments were heard last Wednesday), it appears to be in trouble, and I claim it’s due to his mixed messaging to us in the public.

I have long argued, especially during Trump II’s tariff implementations, that there are two purposes for tariffs, and so two kinds of tariffs. One kind is protectionist tariffs, tariffs implemented to protect domestic industries, especially those in their nascent stages and those that are national security critical. Protectionist tariffs are, in the main, badly mistaken for a variety of reasons; although, an argument can be made that protectionism related to national security is a cost of national security that must be paid if we’re to remain free as a nation.

The other kind of tariff is that used as a foreign policy tool, tariffs applied in order to persuade another nation or bloc of nations to desist from their unfair trade practices, viz., dumping product at below cost, unfair subsidies of their own domestic industries, withholding export of products critical to the importing nation’s economy or national security, or other policies to which the tariffing nation might object.

Trump has been busily touting both the revenue raised by all of his tariffs, of both kinds, while also insisting that they’re necessary foreign policy tools intended to get other nations to leave off their unfair trade practices, to “stop ripping off America,” and to mend their ways on other matters.

Which brings me to the present article by The Wall Street Journal‘s Greg Ip.

Lawyers often stretch the facts to make their case, but even so, this was quite the howler from US Solicitor General John Sauer in defense of President Trump’s tariffs at the Supreme Court on Wednesday: “They are not revenue-raising tariffs.”

Ip, with that lede, stripped his Sauer sentence of its context. The rest of what Sauer was saying is that their purpose, as a foreign policy tool, is to persuade the targeted nations to change their ways. That these foreign policy tools also happen to produce money is deeply secondary. Ip later acknowledged that, but not until deep into his piece. Sauer again, originally:

“The fact that they raise revenue is only incidental. The tariffs would be most effective, so to speak, if no person ever paid them,” because they would have achieved their goal of changing another country’s behavior, or diverting all American purchases away from imports to domestic goods[.]

And that’s the problem with Trump’s rhetoric here. He’s made no distinction in his program between tariffs as protectionism and revenue-raising, the latter which is a Congressional prerogative and not Executive, and tariffs as foreign tools, which is an Executive prerogative and not Congressional.

This is a milieu where Trump’s studied vagueness in his rhetoric may well backfire. Keeping adversaries suitably confused as to our intentions through ambiguity can be highly useful. However, American law, and so our courts—especially our Supreme Court—deal in clearly stated specifics within each case that comes before them. Vague, especially, internally conflicting, speech is properly disdained by judges and Justices.

Trump’s contaminating his use of tariffs as foreign policy tools with his use of tariffs as protectionist policy may well produce the elimination of his tariff program in toto. That would be to our nation’s economic ill, and to our nation’s national security detriment.

Whose Inheritance Is It?

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A son wrote to The Moneyist, worried that because he makes so much more than his siblings and freely lives like it he’ll be cut out of his parents’ will. He closed his letter with this paragraph, and Quentin Fottrell seems to have made a meal out the distraction contained in it, instead of giving the short and sweet answer that the question needed.

My siblings don’t make nearly as much as me. They’d say I’m crass or rude for saying that. I’m concerned that my parents are going to strike me from any will/inheritance. If siblings earn different amounts, should that be the primary driver for how much they should get?

Fottrell opened with most of the right answer.

Your parents can divide their estate as they see fit.

Unfortunately, he went on to talk about siblings being differentially poorly- (or well-) off, and so the lesser well-off can receive a larger slice of their parents’ pie. He then proceeded to suggest, over several paragraphs, that the letter-writer’s arrogance and self-importance could well play a role in any parental inheritance decision. Never mind that Fottrell had no evidence in the letter that that played a role, although the letter-writer seems to have made no effort to hide his financial success under a bushel.

Fottrell would have done well to end his response with that opening sentence. He would have done better to add this short bit to that opening: the estate, the inheritance, is the parents’ money and assets and no one else’s. It’s their property to do with as they see fit, and no one else has any claim on it, whether child, parental sibling, or stranger. Parents have no intrinsic duty to leave their money, their assets, to anyone in particular, and they can leave it to no one at all and let the State sort it out.

Full stop.

Weasel Words

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The People’s Republic of China’s governing claque of men and women are engaging in them. Again. Or still. This is The Wall Street Journal‘s lede:

China will loosen its export restrictions on semiconductors made by Nexperia, its Commerce Ministry said….

However.

China will allow exports of Nexperia chips for eligible cases, the Commerce Ministry said Saturday, without specifying the criteria.

Meaning, I fearlessly predict, that Nexperia’s exports from the PRC will be slow-walked, blocked, and otherwise interfered with for the foreseeable future. Just as with any other non-PRC company doing semiconductor business from inside the PRC. Lacking export criteria, the PRC has left itself wiggle room for blue whale pods in which to employ those weasel words. The PRC’s Commerce Ministry also made no mention at all regarding loosening export restrictions on rare earth magnets or rare earth ore.

Nexperia—and everyone else outside of the PRC—would do well to move their raw material production, assembly, and manufacturing facilities—all of them, not just those related to rare earths—entirely outside of the PRC.

Wrong Answer

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Senator Bill Hagerty (R, TN) and Treasury Scott Bessent disagree with The Wall Street Journal‘s editorial How to Make Banks Less Safe, an editorial with which I also disagreed. However, Hagerty and Bessent are wrong in their proposed solution.

They insist that the recent intermediate-sized bank “failures” (my euphemism quotes) stemmed from an intrinsic imbalance in protection for banks.

What explained the flight? A competitive imbalance: the biggest banks benefit from a perceived government guarantee that smaller institutions lack.

That protection imbalance is the Dodd-Frank entrench[ment of] the biggest banks as “too big to fail,” as Hagerty and Bessent correctly identified. Their solution is wrong, though.

…fortify our community banks against existential headwinds by raising the Federal Deposit Insurance Corp. limit. This would put community banks on a more even playing field with their larger competitors, and provide small businesses more certainty to maintain their payroll and other operating accounts with community banks in times of stress.

The correct answer is to take the “too big to fail” protection away from the allegedly systemically important banks and put them on the level of play on which their smaller competitors operate. There is no such thing as too big to fail in a competitive free market. Instead, hold all banks, regardless of size, to the quality of their management teams and those teams’ risk decisions. Do this further in large part by leaving the FDIC’s insurance cap at $250,000. The big players using the big banks will do a better job of moving among banks that are better led than others.

The market, which is individuals, small business, and international behemoths, will in its aggregate do a far better job of identifying well- and poorly-run banks, and imposing performance discipline on all of them, than can any government decision-making, which by design, is rife with political input rather than limited to economic input.