Friday, December 30, 2016

An economist goes to Washington

Here is Trump economist Peter Navarro explaining the benefits of protectionism to Paul Solman and the PBS NewsHour audience. The best (worst) part is where they go to a display board and write down the textbook components of final demand that define GDP.

GDP=C+I+G+(X-M). The "chalk talk" quickly gets pretty awful. Trump wants more "I" but "Keynesians" want more "G". Trump-Navarro want to boost GDP by reducing the "trade deficit" (reduce gap between U.S. imports and exports). There follows a discussion of China's trade abuses, including selling their stuff to us at low cost.

Where to start?
1. Trade is a good thing; specialization and exchange are the fundamental insight of market economics; they explain our prosperity.
2.  The "trade deficit" is a meaningless idea left over from the days when mercantilism was a serious idea, embraced by royals seeking ways to pay for their perennial war making. They were perhaps blind to the idea that currency exchange rates are always in flux, responding to the demand and supply for goods and services as well as the demand and supply for assets.  These flows respond to prices (exchange rates). At the end of the day, there are trade flows and capital flows that exactly balance.
3. The international demand for U.S. assets signals confidence in the U.S. economy -- we are still the "tallest pygmy." I would feel better if the U.S. Treasury borrowed less. Tallest pygmy status feeds a bad habit (addiction) by U.S. taxpayers (and Congress). More capital flows would go into U.S. productive projects were there less competition from U.S. unproductive (government) projects.
4. Going back to the textbook definition of GDP, the items on the right-hand-side are not independent of each other. A trade war, for example, could tank "I" as well as "C".
5. If any government anywhere does "manipulate" anything to make their exports (my imports) cheap, thank you very much.

U.S voters have spoken but the conversation never stops. If economists invoke textbook discussions of GDP, they should at least do so without all of the errors that Navarro promotes.

Wednesday, December 21, 2016

Out with the old; in with the new

The NY Times notes: "L.A. Drivers on the 405 Ask: Was $1.6 Billion Worth It?"

Good question. Also interesting amid the clamor for a "big infrastructure push". Also interesting after billions have been spent in L.A. and other U.S. cities on rail transit with nothing to show.  Perhaps people who make (and talk about) public policy operate by their own set of rules; losses are not the usual impetus to re-think. Learning from mistakes (the way to progress) are no big deal.

What are the substitute rules? Do more of the same. Stick to your emotionally-based beliefs. Stick with your crony capitalist partners; it's a beautiful friendship (Bootleggers and Baptists). Fudge the numbers when it's convenient.

In the fairy tale version, there would come a point when people get fed up and throw the rascals out. The fairy tale has no room for a populist reaction. Some of the bootleggers get the drift and catch the wave of discontent.

You get a Bernie Sanders and a Donald Trump.  Poor Hillary Clinton and team Podesta. They were busy so prepping for the coronation that they thought the old politics would work just fine.

Trouble is that the new politics may be as awful as the old politics.


Learning from our mistakes is our only hope.  Here is more:

Friday, December 16, 2016

Better way

Recent LA Times coverage of California's "climate fight" has caused a stir because the writer actually mentioned a downside. There will be economic costs. But the legislature was apparently reluctant to even address possible trade-offs involved. ("California's climate fight could be painful -- especially on job and income growth").

But, on the other side, there is similar disdain for serious discussion of costs and benefits. Michael Greenstone and Cass Sunstein, in this NY Times op-ed write about the incoming administration's seeming efforts to dismiss attempts to place a social cost on carbon. 

For some time, skeptics have been tarred as "deniers".  On the other side there are plenty of proud know-nothings.

In all this mess, what do we know?  First, climate models are not gospel. Here is just one credible critique by Charles Hooper and David Henderson. Should not allegations of "settled science" raise alarms?

Second, the climate discussion involves a global commons and, therefore (presumably), the need for policies and, therefore, politics. But politics sends people to the barricades where they take uncompromising positions that deflect trust.

What to do? Marginal Revolution points us to an economic assessment of fracking. The biggest steps towards cheaper and cleaner energy (natural gas) came about via the market and not (actually in spite of) the politics we have. Entrepreneurial risk taking and trial-and-error learning are all we have. Nothing else come close.

We should have far less reason to worry about temperatures 50-100 years from now if we lower our expectations of what the politicians can do and give the entrepreneurs some space to do what they do.

That is the real way to avoid "doomsday". How have we avoided all of the past "doomsdays"?  Not via politics but via the efforts of private investors who discovered better and cheaper ways to house, feed and clothe us -- and much more.

Johan Norberg has an up-to-date summary of views articulated by Julian Simon about 20 years ago,

Thursday, December 08, 2016

Game changers?

Wendell Cox points us to this essay by Walter Russell Mead: "The Path to Mt. Rushmore? Trump's Third Ring of Suburbs."

Mead is a smart man and always worth reading. While it's pretty clear that Barack Obama's people like high population densities and public transit while they hate fossil fuels and cars, and that these sentiments are less held by whoever Trump brings to Washington, it is also true that unbundling and local NIMBYism are forces to be reckoned and will go on in spite of what happens in Washington.

Richard Balwin's The Great Convergence tells the unbundling stories. He studies the history of location (his interest is globalization) and cites two great unbundlings. He notes three spatial barriers, high trade costs, high communications costs and high face-to-face costs. His “1st unbundling” refers to lowered trade costs. Producers did not have to be near consumers. Shipping costs had fallen dramatically. This changed the world in terms of the comparative advantage of world’s various regions. The “2nd unbundling” lowered communications costs; he cites lower ICT costs. This had an equally profound effect. Much of labor could be offshore. He sees no 3rd unbundling; face-to-face-costs remain high – and we will still have clusters and cities. Baldwin recognizes the special nature of exchanging tacit information. This is beyond ICT.

Back to Mead, would a bunch of bullet trains have made a any difference in all this? They would have accelerated national debt growth a bit faster but that is the only plausible effect.

Public transit was never the game-changer that advocates had promised. Will Uber-type services be the game-changer? Yes and no. Unlike transit, they will cause some households to forgo one or more cars. Look for cars per household to plateau. But, here is the difference: will these services draw people to a residential location closer to the place of work -- as transit was supposed to? Uber is OK only for commutes over relatively short distances -- where you are already close to the office. It complements walking and biking, depending on the weather.

Here Sam Staley speculates on what a Ben Carson-led HUD will and will not be doing. Interesting but I do not see how any of this weighs for or against Mead's argument. The spreading out of cities is very old and will continue no matter who is elected and who is appointed.

Saturday, December 03, 2016

Another one bites the dust

"Industrial policy" is the polite term. Trumpian "bullying" is more accurate. The Carrier deal agreed to last week is a case in point -- and just the beginning. It would be much better to separate politics from economics.  Here are the big four reasons why:

1. No third party is equipped to second-guess any business decision.
2. Third parties are easily involved in political grandstanding. This makes them worse than ill-quipped to intervene.
3. Politicians inevitably over-promise. Delivering is the hard part. The Obama forces may still be puzzling over Democrats' thrashing last week. But it's very simple. "Hope and Change" set expectations much too high.
4. Over-promising also leads to restiveness that invites despotism and repression. Venezuela, Cuba, North Korea and many others are in this state. This is where it gets really ugly.

These are well known non-trivial dangers. The unseen (Bastiat) is always the problem.

Trouble is that both political parties love this stuff. Particularly awful us how the normally sober Peggy Noonan (WSJ) and Mark Shields (PBS NewsHour) also cheer. This is not about elites vs non-elites. One more cliche just died.


Dan Griswold reminds us of the danger of "blowback" retaliation from abroad. Yes, the hole being dug can get pretty deep.