My GMU Econ colleague Bryan Caplan writes insightfully about trade. A slice:
Suppose the U.S. Constitution mandated unilateral free trade with no exceptions. Much could go wrong. A pessimist could fairly ask all of the following:
- What if other countries take advantage of our unilateralism to drastically raise their tariffs?
- What if other countries strategically predate on our critical industries, leaving us vulnerable in a major crisis?
- What if hostile countries buy and stockpile strategic resources from us, then get really hostile?
- What if some unforeseen trade issue, an “unknown unknown,” arises, and our leaders are unable to respond because the Constitution ties their hands?
There are many handy responses to these challenges. Like: “If the problem is that bad, we can amend the Constitution to make an exception.” But a pessimist could readily retort, “What if amending the Constitution takes too much time to avert disaster?” When push comes to shove, the defender of unilateral free trade has no response better than, “Tough luck.” Unconvincing, but as I’ve explained before, “Tough luck” is what every conceivable social system tells you in the end:
Name any political system. I can generate endless hypotheticals to aggravate its supporters. The right lesson to draw: Every political perspective eventually has to say “Tough luck” when confronted with well-crafted what-ifs. There’s nothing uniquely hard-hearted or cruel about libertarianism. Defenders of democracy, nationalism, liberalism, conservatism, the American Constitution, and social democracy all eventually sigh, “Life’s not fair,” or “Well, what do you want me to do about it?”
Case in point: Suppose that instead of Constitutionally-mandated unilateral free trade, you leave trade policy to the U.S. federal government. A pessimist could easily ask all of the following:
- What if Congress passes legislation to delegate tariff policy to the President, leaving the whole economy at the mercy of one power-hungry man?
- What if voters elect an economically-illiterate protectionist to the presidency?
- What if the President laughs in the face of stock market collapse and severe economic distress, or tries to shift the blame to the Federal Reserve?
- What if the President treats friendly trading partners like dirt, making up false accusations about their abusive trade practices when the shoe is on the other foot?
- What if the President antagonizes less-friendly trading partners for no reason, sharply raising the risk of world war?
There’s only one major difference between the first set of what-ifs and the second. Namely: Every item in first set is hypothetical, while every item in the second set has actually happened. Except for #1, in fact, they all happened in the last six months!
Sure, you can sigh, “Well, that’s democracy.” But that’s just democratic fundamentalism’s version of “Tough luck.” The reasonable approach, in contrast, is to acknowledge that neither strict free trade nor “pragmatic” protectionism offer anything like perfect safety — and ask “Which set of what-ifs is more fanciful?”
I know my answer.
One of my favorite papers is “The Macroeconomics of Populism,” a 1991 analysis by Rudiger Dornbusch and Sebastian Edwards. Economic populism in Latin America, the economists argue, follows a drearily predictable pattern. Governments blithely ignore fiscal discipline and external constraints while pursuing rapid growth and redistribution. These experiments inevitably flounder as bottlenecks emerge, currency reserves dwindle, and inflation accelerates.
The denouement proves grimly familiar: Capital flight and economic collapse that impoverishes precisely those regular folks the populists promised to help. The authors’ lesson is stark (and all too applicable to current events here in America): Economic policy cannot simply wish away macroeconomic constraints.
“The Mythical ‘Hollowing Out of the Middle Class’.”
Americans own about $35 trillion in foreign assets and foreigners own about $60 trillion in American assets. We both return about $1.5 trillion of profits annually from those assets. Why is that? Because equity earns higher returns than fixed income. Americans largely invest in corporate assets. Foreigners largely invest in fixed income.
Now, let’s say that we both reinvest some of our profits so that next year’s foreign profits are 3% higher. Americans would have to reinvest about $1 trillion of our foreign profits back into our foreign assets. Foreigners would have to reinvest about $2 trillion of their American profits back into American assets. In order to cover that difference, they have to sell us $1 trillion worth of stuff this year.
They have to keep a trade surplus with us just to keep up with us. They are the ones on the financial treadmill running just to stay in place. That’s why we have had a trade deficit for decades while the dollar remains strong. We’re good at investing and risk-taking.
As Scott wrote, the trade deficit is just the other side of that capital surplus. The difference between investment and saving. That’s just an accounting identity. But, some people want to make it a causal story. We are reckless borrowers, and we recklessly borrow a lot through the federal government, and we use that borrowed money to buy imports that we can’t afford.
It’s just not true. It’s not true that we can’t afford them, and it’s not true that the federal debt leads causally to a higher trade deficit (at least not in this way. More on that below). Look at Figure 1. The late 1990s saw the most aggressive rise in the trade deficit that we have seen in the last 50 years. What was happening in the late 1990s? We were running a federal budget surplus! And, the economy was as strong as it’s been in my lifetime.
Trump is fighting the wrong enemy.
His global tariff is said to be a remedy to bilateral trade deficits. But trade deficits are not inherently a problem – ‘deficit’ is just a misleading language choice, and it speaks only to the current account. Pernicious language has misled us.
Those tariffs, though, attack globalisation – our private decisions to act internationally – by making voluntary, mutually beneficial trade more costly.
Eric Boehm wonders if Princess Awesome can defeat Tariff Man. A slice:
It sounds like something out of a comic book: Princess Awesome vs. Tariff Man.
And, as so often seems to be the case in those stories, the would-be hero faces daunting odds against a powerful villain, with the fate of the world—or at least a chunk of the global economy—hanging in the balance.
Princess Awesome LLC, a Maryland-based shop that sells nerdy apparel for kids and adults, is one of several plaintiffs in a new lawsuit challenging the legitimacy of President Donald Trump’s unilateral tariff powers. Other plaintiffs in the suit include five sellers of tabletop games and board games, an art studio, a kitchen supply company, and a toy store. All say they have paid tariffs or expect to have to pay them in the near future, as their businesses depend on imports.
In a blog post on the company’s website earlier this month, Princess Awesome cofounder Rebecca Melsky showed how tariffs were increasing the prices of her products. “It’s bad for the world, for the country, for you, and for all companies, but particularly small ones,” she wrote. “Big businesses will have an easier time absorbing the extra costs and passing them on to the consumer.”
In the complaint filed this week, Princess Awesome says it has already paid over $1,000 in tariffs this year, with more payments expected on upcoming shipments from Bangladesh, India, and Peru.
One of Princess Awesome’s sidekicks in the lawsuit is Stonemaier Games, a board game company founded in 2012. Orders that are ready to ship from China could cost the company “millions [of dollars] in tariffs,” the lawsuit alleges.
Ken Rogoff wisely warns of the dangers posed to the American economy of the U.S. government’s fiscal incontinence. Two slices:
Some point to Japan, whose roughly 250% debt-to-GDP ratio is the highest of any advanced economy and twice that of the U.S., as proof that a country can have extremely high debt without experiencing a debt crisis. Perhaps, but Japan had a two-decade growth crisis and has managed to avoid a financial crisis only by stuffing government debt into every orifice of its financial system.
Financial repression is a tax on savers, and it reduces funds available for innovative private-sector borrowers. Having been the richest country after the U.S. just a few decades ago, Japan’s per capita gross domestic product is now roughly 60% that of the U.S., and below those of Germany, France and the U.K.
…..
Public-debt problems are never a matter of simple arithmetic. Almost every country default—either through outright default or high inflation—occurs long before debt calculus forces it to. If investors lose faith in the government’s plan for handling its budget, it doesn’t matter if brilliant minds in the government are “right.” The annals of major-country inflations and debt problems are littered with debt trajectories that seemed sustainable until they didn’t.
Mr. Trump has taken over in a difficult fiscal situation where U.S. dollar dominance was already fraying at the edges. Confidence should be injected, not undermined. Given the chaos caused by his tariff war and the concomitant drop in appetite for U.S. bonds, if the coming tax and spending bill doesn’t look beautiful to investors, it doesn’t matter how it looks in the eyes of the president.
