Category Archives: Economics

Miscellaneous economy stuff

Trump, Boudreaux, and Trade

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Don Boudreaux, at Cafe Hayek, recently took issue with President-Elect Donald Trump on the question of trade.  While there’s much about which to argue with Trump about his potential trade policies, here I must take issue with Boudreaux.  Boudreaux argued that a Trump remark in a PBS interview about the EU beating [his emphasis] the US in trade demonstrates Trump’s ignorance of trade matters.

I suggest that Boudreaux has demonstrated his lack of understanding of what Trump believes it means to be beaten in trade.  Boudreaux based his argument on a free market environment in which I have bags of peanuts, you have pears, the two of us agree on an exchange, and thus

If I accept, then we trade.  You gain; I gain.  We both gain.  No one “beat” the other.

Of course.  There’s no reason to believe Trump doesn’t understand that; he’s too successful a businessman.

Boudreaux then threw in a complication: Jones, who’s now nearby with his own supply of bags of peanuts.  You are then able to do a better (in some sense) deal with me to get more of my peanuts for the same number of your pears or to get the same number of my peanuts for fewer of your pears.

[B]oth you and I gain.  No one gets “beat.”  Each of us, to use Trumpian language, is “a winner.”

Again, of course.  We’re both still better off than had we not done the deal; competition just changed the degree of “better off.”  Again, there’s no reason to believe Trump doesn’t understand that; he’s too successful a businessman.

But this isn’t the sort of thing Trump is talking about when he decries existing trade deals (not trade, and not multi-party trade).

Here’s another scenario that Boudreaux omitted from his vignettes.  You and I have our supplies of peanuts and pears for trade, and Jones has his peanut supply to trade, just as before.  This time, though, Jones offers his peanuts below his cost of getting them.  Further, he does this, not because he’s offering a temporary loss leader to introduce himself to a new customer or to a new market, but because he has a Sugar Momma who’ll make good his losses for as long as it suits her and for her own reasons.  Now you do your deal with Jones, or you divide your custom between Jones and me, for many fewer pears or for many more peanuts than would be the case without this nonmarket intervention.  Instead, the terms are driven by Jones’ artificially low, subsidized price.

You and I both are beaten in this arrangement.  I lose immediately because I don’t get the price for my peanuts I might have gotten in a fair negotiation; the price I am able to get—if I can trade at all—is governed by Jones’ subsidized price.  You lose later because after you’ve become accustomed to those low prices, something changes in Jones’ environment (perhaps his Sugar Momma no longer can afford her subsidizing Jones), his price suddenly rises, and you must deal with that price shock to your trading.

Given Trump’s repeated (if under-reported) emphasis on fair trade deals, good trade deals, this would seem to be what Trump means by being beaten by the EU, by China, etc.

It’s puzzling that Boudreaux doesn’t understand that. He’s too good an economist.

The Financial Stability Oversight Council

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Ryan Tracy, writing in The Wall Street Journal, thought Republicans should love this Council and be at pains to keep it, even as they look to “quickly scal[e] back Obama-era policies.”

I demur.

Tracy suggested

Consider the powers [FSOC] grants the Treasury secretary: As chair of FSOC—whose members include the chairs of the Federal Reserve and Securities and Exchange Commission—[Treasury Secretary nominee Steven] Mr Mnuchin  can convene a meeting of the top financial regulators at any time, and set the agenda.

SecTreas already can do this.  While he can’t compel attendance, the regulators would have hard time declining to attend or explaining to the rest of us their decision to stay away.

FSOC can make public statements or recommendations that have a name-and-shame effect.

SecTreas already can do this, too, as can any Cabinet Secretary and Agency head, did any of these have the courage to speak without hiding behind the comfortable numbers of a council.

FSOC’s greatest power is to designate “systemically important” financial firms outside the banking system for stricter federal oversight.

Mere existence of this authority is abusive overreach by Government. The Feds have no business in this business at all.

If Mr Mnuchin sympathizes with FSOC detractors, he could call fewer meetings with lighter agendas.

SecTreas doesn’t need the existence of a Council to decline to call meetings of regulators.

It’s past time for this abusive Council, and Dodd-Frank, to be done away with.

Full stop.

Fiat Chrysler, the EPA, and Diesel Engines

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The EPA has decided to accuse Fiat Chrysler Automobiles NV of using software to cheat on diesel emission limits during tests, sort of reminiscent of Volkswagen’s peccadillo.

The problem for the EPA, though, is that

the EPA is not yet accusing Fiat Chrysler of installing illegal software patches on its diesel engines, but of failing to disclose potentially legal ones.

Never mind that if the software is legal, there’s nothing to disclose.  Not to fear, though, the problem with Fiat Chrysler is that

[i]t’s the company’s finances that make it vulnerable.

The company in the hole with a debt pile of some €6.5 billion ($6.9 billion) as of last September.  And the EPA knows that.

With any other agency, this might be a legitimate beef.  With this EPA, though, it smacks of legal blackmail.  “Nice business you got there; be too bad if something were to happen to it.  I know you’re short of cash; maybe there’s something we can do for each other to help you out.”

Linkages

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They didn’t work when Nixon and Kissinger tried it, even though the Soviet Union generally complied, because the revolutions that the USSR was fomenting continued to occur apace after the Soviets stopped fomenting in return for nuclear and economic concessions.

Treasury Secretary Jacob Lew warned ignoring recent steps by Beijing to liberalize its economy would endanger Chinese cooperation on other major geopolitical issues, particularly containing North Korea’s nuclear program.

They’re not working now with the People’s Republic of China, but for a different reason.

And

The departing Treasury secretary further warned against steps that would prompt China to withdraw its support for tougher sanctions against North Korea.

The PRC still isn’t taking steps to “liberalize its economy,” not when it’s actively interfering with its cross-border yuan flows, manipulating domestic interest rates with a view to control who gets to lend or borrow rather than an effort to maintain a stable monetary policy, manipulating its domestic stock markets as it did in 2015 and today with manipulating the legal environment, and on and on.

Nor has the PRC ever cooperated in any meaningful way with respect to sanctions connected to northern Korea’s nuclear weapons program.  The PRC routinely slow walks its agreement to sanctions (which is why their occasional prompt agreement is such news), and it ignores sanction violations as those occur across its border with northern Korea.

And—ignored by Lew—the PRC is accelerating its aggression in the East and South China Seas and increasing its pressures on the nations rimming the South China Sea to deal with them exclusively and one at a time on trade questions.

Before today’s linkages can have effect, the parties at both ends of the lever must be willing to be responsive.

Polemics vs Reasoned Argument

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As the Congress considers import taxes as part of its general tax reform agenda, toy sellers are expressing their concern: they import most of what they sell; their products are manufactured overseas.  Import taxes are surely a thing worth discussing and debating thoroughly, whether they’re essentially cost of goods sold neutral, as Doug Holtz-Eakin argues (the dollar will rise from the tax change and economic growth, and so the dollar cost of imports will fall; the cost of goods sold will simply emphasize taxes more and import costs less), or they’re dangerously like protectionist tariffs, as others argue.

Arguments that are carefully emotion-laden while devoid of facts, though, are inappropriate.  Here’s an example from Steve Pasierb, President of the Toy Industry Association:

We are fully prepared to work productively or be a royal, boisterous, media-friendly pain in the backsides of people who would take away children’s happy birthdays, steal Christmas, and destroy quality US-based jobs.  And no one wants to have to explain to their children why Santa was put out of work.

Such Leftist “feel my pain” three-hankie argument has little credibility and less validity in the sort of reasoned discourse necessary in an economic debate.