Tag Archives: political economy

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.

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.

Demanding Instant Results

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The Trump administration has threatened tariffs, raised and lowered them (though rarely as much as they were raised), and concluded on-again, off-again tariff agreements with the People’s Republic of China. The bulk of these moves have come within the opening months of Trump II, even though some moves were made during Trump I.

The good editors at The Wall Street Journal are taking a dim view of this. The opening of their lede:

President Trump and Chinese leader Xi Jinping struck their third trade truce in a year on Thursday, and the best we can say is that the deal averted more economic damage.

Later in the piece, they offered this…truism:

One lesson here is that trade wars aren’t easy to win, especially against a peer competitor.

To which I say, “Patience, Grasshoppers.”

Wars—and the PRC has been fighting this economic war with us for lots of years, even if we’ve been slow to recognize that—are rarely over in a day. WWI was fought over four years, and WWII took eight years out of our globe’s weal and life. Looking farther back was the 30 Years War and the 100 Years War. The barbarian’s 3-day invasion of Ukraine now is approaching its 4th year. Over in what is now the PRC, the period of the Warring States lasted 250 years, and the century of humiliation that the PRC still remembers (the opium wars were in the beginning of that period) lasted…100 years and a bit more.

The men and women of the PRC government take a long view of things, even a generational view. It would be good were the changing men and women of our government to take a similarly long view. The WSJ editorial board could contribute by doing the same.

Trump’s moves may, indeed, end up with no material net effect, or they may end in national disaster, or they may end in a renewed and refreshed century of Pax Americana. It’s years too early to tell.

A Thought

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Colleges and Universities are facing budget problems in the current and beginning to grow age of fiscal discipline after decades of profligate spending on one great idea after another and rampant hiring of school staff and management squads having little to nothing to do with academics. In their Wall Street Journal piece, Sara Randazzo and Heather Gillers distilled the problem to its essence:

As schools scramble to make cutbacks, they face broader questions about what kind of university they can be in this new era of financial constraint.

Here’s an idea. Work with me on this, it’s a-borning: how about these institutions turn their focus onto teaching and away from publishing and from pushing the latest politically correct claptrap, the latter which these days is illustrated by DEI bigotries and one-sided sexual offensivenesses “investigations?”

Get rid of all that non-academics-related staff bloat, freeze the gussying up of their labs with froo-froo that serves only to enhance academic shower appearances, take away the publish or perish foolishness that produces little more than word salads with science jargon dressings, reduce the rate of jobs-for-life awards, and stop fancying up student housing with stuff that does nothing to enhance studying and socializing.