Posts tagged ‘trade’

How I Am Getting Driven Towards Being A Single Issue Voter

I confess that historically, I have always had a bit of disdain for folks who say they are single issue voters.  "Really?" I would ask, "You are going to ignore everything else going on and only vote based on X?"  I thought it was a narrow-minded and shallow way to vote.

My apologies.  I may have become a single issue voter myself.  Here is why:

Two years ago, when the Republicans manage to elect Trump, I was sure I was going to vote straight-ticket Democrat in reaction.  I find Trump's entire style distasteful in the extreme.  And while I think there has been some good news on the regulatory front in various Departments under him, on his signature issues of immigration and trade I am 100% opposed to his goals and his approach.  And while I have always believed Trump is probably a social liberal himself, he has a lot of advisors and cabinet members who are pretty hard-core opposed to a variety of freedoms, from gay marriage to marijuana use.

But that was two years ago, before the Democrats decided that their future was in a hard left turn into Marxism.   I am not sure how a serious person can really entertain socialism  given its pathetic history, but it seems to be a product of several cardinal sins of the modern generation (e.g. ignorance of history, evaluating policy based on its intentions rather than its logical consequences, and categorizing all perceived problems as resulting from white male European hetereosexual priviledge).  At first I thought perhaps people were just using "democratic socialism" as a synonym for more redistributive taxes and greater welfare spending within an otherwise capitalist society.  But over time I see proposals like one in Congress with fully 100+ Democratic sponsors calling for banning health care companies of all sorts from making a profit.  This is straight-on socialism and ignorant in the extreme of any consequences beyond good intentions.  By the way, I actually don't think we will end up with socialism under the Democrats but a form of European-style corporatism.  This will mean that large companies like Google and Amazon with political influence will be ok, maybe even better.  But small companies like mine with no hope of political access will get hammered.

So here is my voting problem.  Republicans suck on many issues -- gay rights, drug law liberalization, immigration, trade -- that I am extremely passionate about (I briefly ran an Arizona initiative to legalize gay marriage) but that don't directly affect me.  Yes, they affect many of my friends -- I have friends with potential immigration issues, I have friends with businesses getting hammered by tariffs, I have friends who are gay and married, I have friends that smoke rope and would rather not go to jail for it -- but not me directly.  On the other hand, Democrats suck on most business regulatory issues, trying in the near term to turn the US into California and in the long-term into Venezuela.  These are issues that DO affect me directly and greatly as a business owner.   Already I have had to red line states such as California, Oregon, Illinois, New York, and Rhode Island where I formerly did business but backed out because the business climate was impossible.  If this spreads to more states, I will be wiped out.

All of this is being made worse as both parties have started to get worse in the areas where they were traditionally more sensible.  Republicans have abandoned whatever free market credentials they had by pursuing trade protectionism and increased restrictions on companies trying to hire foreign workers.  Democrats are in the process of turning against free speech and have started sticking their nose in the bedroom (for example, by shifting the discussion of sex work to "trafficking," Republicans have successfully gotten Democrats to turn against a number of sorts of sexual freedom).

For years I have voted against my personal interests in elections, because my interests did not seem as weighty as other issues in play.  Folks are being denied basic civil rights, so am I really going to vote for the folks enabling that just to avoid (admittedly costly and loony) California meal break laws to be applied in Arizona? Now, though, I am starting to rethink this position.  In part because threats to businesses like me are more existential, and part because I am exhausted spending time defending other people's rights who in turn actively work to take away mine.  For certain offices like sheriff, that don't affect my business, I will still be voting as I always have -- which person is least likely to harass the sh*t out of certain marginalized groups.  But for others, and particularly the national offices, I am thinking about voting a straight "it's all about me" ticket (I am reminded, ironically, of the old "Me, Al Franken" SNL news bit he used to do.)

By the way, you might ask, "Coyote, you are a libertarian, why not just vote for the Libertarian candidate."  Good question.  Well, it turns out that the Arizona state legislature changed the rules for third parties explicitly to get the libertarian party off the ballot and prevent libertarians from "taking" votes from Republicans.  Seriously, they were not even subtle about it.  Instead of having to get a certain percentage of libertarians to sign a petition to get on the ballot, libertarian candidates now have to get a certain percentage of all independents to sign a petitions to get on the ballot.  This is an very high bar and one that most libertarians could not clear this year (cynically, somehow the rules allowed green candidates to get on easier as Republicans want them on the ballot to "steal" votes from Democrats.)  This is the #1 reason I may not vote tomorrow at all -- I cannot vote for our Marxist Democratic candidate for Senator, but I refuse to be forced to vote for the Republican.  Ugh.

This is The Resistance's Real Failure (Assuming They Want to Make Progress on Their Issues, and Not Just Score Political Points)

From even before day 1 of the Trump Administration, the "resistance" has proclaimed that Trump is an illegitimate President and anyone who even has civil discourse with him will be othered and humiliated.

Readers know that I find Trump and his style to be distasteful, and believe he is dead wrong on immigration and trade, but the irony of the Resistance's position is:

  1. I am not sure there ever has been a President more open to a deal (at least on issues outside of his hot buttons like immigration and trade).  If one approaches him to bargain, he will bargain.  If one instead challenges his manhood, he is going to dig in his heels and likely childishly harden his position against whatever you support.
  2. There are very few things that Trump seems to have a hard-and-fast ideological position on, which tells me he is likely to act pragmatically (or in the case where he is resisted, vindictively).
  3. There is zero evidence that he is anything but a liberal on social issues  (OK, yes, he has been crass and offensive with women, but many other prominent social liberals have done the same thing).  I have gay friends who were horrified at his election, but I still don't see any evidence Trump has a problem with gay people. Prominent gay rights groups should go to the White House and could make some real progress (and then maybe create a Kickstarter campaign to help beef up Trump's Secret Service protection because Pence could be a real problem on gay rights issues if President).

I have said all this for a while but am reminded of it from this story by Jacob Sullum entitled, "Kanye’s real success: Trump now backs criminal justice reform"

Kanye West’s literal embrace of President Trump was all over the news last week. The president’s rhetorical embrace of criminal justice reform got considerably less attention, but may prove more consequential.

In an interview with Fox News on the morning of his meeting with the rap impresario, Trump signaled that he was ready to go beyond “back-end” reform, which focuses on rehabilitation of inmates, and support “front-end” reform, which focuses on reducing sentences and sending fewer people to prison.

The key to understanding Trump’s remarks is Alice Marie Johnson, whose sentence the president commuted in June at the behest of West’s wife, Kim Kardashian.

Life in the Trump Era: Conservatives Now Define Raising Taxes as "Progress"

John Hinderaker of Powerline writes approvingly of Trump's apparent trade deal with Mexico.  First, he quotes the New York Times celebrating the higher taxes:

Under the changes agreed to by Mexico and the United States, car companies would be required to manufacture at least 75 percent of an automobile’s value in North America under the new rules, up from 62.5 percent, to qualify for Nafta’s zero tariffs. They will also be required to use more local steel, aluminum and auto parts, and have 40 to 45 percent of the car made by workers earning at least $16 an hour, a boon to both the United States and Canada and a win for labor unions, which have been among Nafta’s biggest critics.

I am not sure how narrowing the scope of products subject to lower taxes is a "boon" to this country, though I suppose labor unions might be happy and one is suspicious that this is sufficient reason for the NYT to support it.  My suspicion is that these numbers are incredibly carefully tailored by Ford and GM lobbyists to hit a couple of their competitors while missing themselves -- this has all the fingerprints of a classic crony deal that benefits very few powerful groups to the detriment of most consumers.

So the NYT can be expected to cheer for bad crony economics that helps a few unions, but what about Conservatives, who are supposed to understand markets and trade.  Hinderaker writes:

So, from 62.5% to 75% to qualify for zero tariffs. Not exactly radical, but positive.

So broadening a US government tax on US consumers is "positive."  Powerline in the past has rightfully chided Paul Krugman for abandoning his understanding of economics in favor of cheerleading the Democratic team.  Now Powerline is doing the same for Trump.

Recommendation: 99Designs

I am going to a trade show in a month or two.  I bought one of the standard backdrop things and needed some art for it.  I was quickly told that all my attempts looked like bad powerpoint slides transferred to the backdrop.  So I tried a site called 99designs.  They have a whole pool of freelance designers that compete for simple jobs - logos, wordpress templates, backdrop art, etc.  I committed $250 to a design contest for my backdrop (the site takes some cut of that and the rest is a prize for the winner).  That was 2 days ago.  At this moment I have 35 different designs sitting there for me to comment on and choose from.  Almost any one would be acceptable, and many are fabulous.

This strikes me as a classic victory for the division of labor. I am getting what seems like a crazy amount of good work for $250, work I could not duplicate myself for 100x that.  I suspect that some of this stuff is super-derivative and is banged out using simple tools in just a few minutes, but so what?  They can do something fast that I can't do at all and we all benefit.

Musk's Proposed Tesla LBO Price of 420: Intentionally Hilarious? My Guess Is Musk Wants An LBO Without Any Actual Change in Ownership

Today, following his usual practice of ignoring all the securities laws that other CEO's have legions of lawyers to educate them on, Musk teased a possible Tesla LBO in a series of tweets.  In case you are wondering, it is not generally considered best practice in legal compliance to issue such information in cryptic tweets, and it is definitely not usual to do so while the stock is actively trading.  You can read the whole story here, though it continues to evolve as the market has finally halted trading in Tesla.

Here is the part I found funny watching this in real time:

Mr. Musk’s account tweeted at 12:48 p.m. ET: “Am considering taking Tesla private at $420. Funding secured.” It isn’t clear what prompted the tweet. Mr. Musk has a history of joking on Twitter and sending erratic tweets.

About 30 minutes later, the account tweeted “420” in response to a reporter’s tweet asking what price buyers might pay.

When this came out, I honestly thought "420" was an admission by Musk of a drug-induced mental state when the previous tweet went out, but in fact it appears to be his target price for the LBO.  Some quick thoughts

  • This would fit Musk's personality, as he seems unable to ignore those shorting Tesla stock and would get the twin satisfactions in such a deal of a) burning a lot of current shorts and b) making shorts irrelevant in the future as going private ends the active market for the company.
  • The implied valuation would be insane, something like $75 billion in equity (compared to GM and Ford which are both around $50 billion) plus $9 billion or so of assumed debt.  Tesla is already at the breaking point on debt so it is unclear where the funding would come from -- LBO's generally increase leverage and Tesla needs to decrease it, and needs a lot more capital for operations and growth going forward.  But Musk claims he has the deal funded already.
  • Part of the clue to the capital availability may be the Saudis.  It was revealed today that the Saudi's own just under 5% of Tesla' stock.
  • Here is what I think Musk wants -- he wants an LBO without any actual change in ownership.  Basically he wants to create Tesla New, which will be private and not trade on the markets.  He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New.  Musk has already said he will do this with his 20%.  In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO.  Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity.

This is great for those who want out, but for those who are in for the long haul, it seems like a lot of capital just to remove short sellers from the picture.  This is a company that does not have anywhere near enough capital to do the things it has already promised to do (China plant, model 3 ramp, $35,000 model 3 car, semi, pickup truck, two-seater, battery storage projects, revive SolarCity, etc.).  For those who think that the capital will always be there for Musk, just remember SolarCity, which was close to bankruptcy and in steep decline when Musk engineered the insider deal with Tesla.

Update:  This statement from a Morningstar analyst makes no sense to me:

Taking it private would allow the billionaire “to not constantly worry about going to the public markets for more money,” Mr. Whiston said. “He can do what he needs to do behind closed doors and keep growing the company without all that extra scrutiny.”

I get the second part -- Musk would love to avoid the extra scrutiny -- Theranos probably survived years longer as a private company than it ever would have as a public company.  But I don't understand how it stops the need to go to the public markets for more money.  Cash needs are driven by Tesla growth plans and they still need a LOT more.  Going private does not make this easier, it makes it harder by cutting off one huge source of capital (public markets) and potentially loading up the company with extra debt from the privatization transaction.

Schadenfreude: Crony Jerks at Whirpool Who Begged for Tariffs Are Now Suffering From Them

This is definitely from the schadenfreude files, via the WSJ:

After the Trump administration announced new tariffs on imported washing machines in January, Marc Bitzer, the chief executive of Whirlpool Corp., celebrated his win over South Korean competitors LG Electronics Inc. and Samsung Electronics Co.

“This is, without any doubt, a positive catalyst for Whirlpool,” he said on an investor conference call.

Nearly six months later, the company’s share price is down 15%. One factor is a separate set of tariffs on steel and aluminum, imposed by the U.S. in March and later expanded, that helped drive up Whirlpool’s raw-materials costs. Net income, even with the added benefit of a lower tax bill, was down $64 million in the first quarter compared with a year earlier.

Unfortunately, as is always true in protectionism, consumers are being hurt as well.  This chart on the left is amazing:

One reason politicians do this sort of thing is that there really is not any sort of organized consumer groups in this country, other than groups on the Left like Ralph Nader's PIRG groups that often actually support protectionism -- these groups always seem more beholden to traditional Democratic groups (especially unions) than they are to consumers.  Elizabeth Warren, who styles herself a consumer advocate and who created the CFPB almost single-handedly, actually supports Trump's tariffs.   Since the link above is gated, I will give an excerpt of Senator Warren advocating for higher consumer prices:

But the support of key Democrats—including Sen. Elizabeth Warren of Massachusetts—for Mr. Trump’s “America first” approach to trade stands to complicate any GOP effort to tie the president’s hands.

The awkward political divisions over trade matters were on display Sunday as Ms. Warren backed Mr. Trump’s policy while Republican senators rebuked the president.

“When President Trump says he’s putting tariffs on the table, I think tariffs are one part of reworking our trade policy overall,” Ms. Warren said on CNN’s “State of the Union.”

Some Democratic lawmakers have found fault with the implementation or scope of the steel and aluminum tariffs. But Ms. Warren, to whom Mr. Trump derisively referred as “Pocahontas” again on Saturday, declined to criticize the president’s policy and said previous approaches to trade boosted profits at multinational corporations.

 

US Trade Deficit: Foreigners Are Consuming US Goods, But Consuming Them in the US (So They Don't "Count" As An Export)

Via Don Boudreaux:

Greg Ip writes that “The U.S. runs a trade deficit because it consumes more than it produces while its trading partners, collectively, do the opposite” (“How the Tax Cut President Trump Loves Will Deepen Trade Deficits He Hates,” April 19).

Here is how I like to explain why this is wrong.  The trade deficit exists in large part because foreigners are more likely to consume the American-made goods and services they buy right here in the US, rather than take them back to their home country, while US consumers tend to bring foreign goods back to America to consume them.  Let me unpack this.

First, over any reasonable length of time, payments between countries are going to balance.  If this were not true, there would be some mattress in China that has trillions of dollar bills stuffed in it, and no reasonable person nowadays just lets money sit around lying fallow.  There are some payments between countries for each others' goods.   And there are some payments for each others' services.   And there are some payments for various investments.  All these ultimately balance, which makes fixating on just one part of this circular flow, the payments for physical goods, sort of insane.  If we have a trade "deficit" in physical goods, then we must have a trade surplus in services (which we do) and in investments (which we do) to balance things out.

But what do we mean by an investment surplus?  It means that, for example, folks from China are spending more money in the US for things like real estate and buildings and equipment -- either directly or through purchases of American equity and debt securities -- than US citizens are buying in China.  But note that another name for investment is just stuff that foreigners buy in this country that stays in this country and they don't take back home.  If a Chinese citizen buys a house in Los Angeles (something that apparently happens quite a bit), that is just as much "consumption" as when I buy a TV made in China.  But unlike my TV purchase (which counts as an import), because of the arbitrary way trade statistics are calculated, selling a Chinese citizen a house in LA does not count as an export because they keep and use the house here.  Let's say one Chinese person sells 10,000 TV's to Americans, and then uses the proceeds to build a multi-million dollar house in Hawaii.  This would show up as a huge trade deficit, but there is no asymmetry of consumption or production -- Chinese and American citizens involved in this example are producing and consuming the same amounts.  The same is true when the Chinese build a manufacturing plant here.  Or when then invest capital in a company like Tesla and it builds a manufacturing plant here.

Our bizarre fixation on the trade deficit number would imply that, if trade deficits are inherently bad, then we would be better off if the Chinese person who bought the house in LA dismantled it and then shipped the material back to China.  Then it would show up as an export.  Same with the factory -- if we fixated on reducing the trade deficit then we should prefer that the Chinese buy the equipment for their factory here but have it all shipped home and built in China rather than built here.   Is this really what you want?

I am willing to concede one exception -- when Chinese use trade proceeds to buy US government debt securities.   This is where my lack of formal economics training may lead me astray, but I would say that the US government is the one major American institution that is able to consume more than it produces.  Specifically, by running enormous deficits it is able to -- year in and year out -- allow people to consume more than they produce.  Trade proceeds from foreigners that buy this debt in some sense help subsidize this.

However, I don't think one can blame trade for this situation.  Government deficits are enabled by feckless politicians who pander to the electorate in order to be re-elected, a dynamic that has little to do with trade.  I suppose one could argue that by increasing the demand for government securities, foreigners are reducing the cost of debt and thus perhaps enabling more spending, though I am not sure politicians are at all price sensitive to interest rates when they run up debt -- as a minimum their demand curve is really, really steep.   There is a relation between government borrowing and trade but the relationship is reversed -- Increased borrowing will tend, all things being equal, to increase the value of the dollar which will in turn make imports cheaper and exports more expensive, perhaps increasing the trade deficit.

Addressing the Pro-Tariff Arguments

Don Boudreaux and and Mark Perry have been doing a great job making the case against Trump's trade sanctions.  But it is always a danger only to learn about opposing views from those who disagree with you, so in the spirit of Bryan Caplan's "Ideological Touring Test" I wanted to address directly some of the arguments in support of Trump's sanctions.

I followed several links to this article by Spencer Morrison.  After reading the whole thing, I fear I have made the intellectual error of choosing a poor representative of the opposing side's argument, but I am committed now, so here goes.

Consider that China steals more than half a trillion dollars in American intellectual property every single year. This is one of the reasons America’s trade deficit with China is so massive. For example, in 2010 Chinese companies stole high-speed rail designs from American firms, thereby depriving them of hundreds of billions in potential revenues. Such theft occurs in nearly every industry, whether it’s software programs or branded consumer goods. And the worst part? We let it happen.

I find the author's figure absurd, and likely untrustworthy given his example.  Following his high-speed rail design "theft" link one quickly finds that 1) Americans were not involved at all, which is not surprising since we really don't have high-speed rail manufacturing industry or expertise in this country; 2) the technology seems to have been acquired or copied legally; and 3) the real competitive issue for non-Chinese companies seems to be that the Chinese have extended and improved the technology.

This one paragraph essentially summarized the theme of the article, that technology is the key to increased well-being and that the US is poorer when they cannot monopolize the best technology.  The first is true, the second is dead wrong and flies in the face of 200 years of history.

I won't spend time on the mass of the article where describes the economy in very production-based terms which I don't totally agree with, but his basic point is one I can partially accept -- that real economic growth over time comes from  productivity growth.  I agree that technology is part of the productivity equation, but unlike the author I also see other drivers such as trade (which he calls "noise").  Trade is a critical factor in productivity improvement as specialization and comparative advantage greatly increase productivity.

But where I think he really goes off the rails is to say that because technology is wealth-creating, we need to monopolize that technology in the US.

The core issue remains: we continue to  offshore our advanced industries at an alarming pace, which will only increase the likelihood that the “next big thing” will be invented abroad. If we do not reverse this trend, we will soon be on the outside looking in.

It would be entertaining to discuss the origins of the American textile industry in the late 18th and early 19th century with the author, which were largely based on spinning jenny and powerloom designs that were literally stolen from manufacturers in the UK (countries don't own technologies, only individuals and their companies do).  The UK at the time had strict technology export restrictions of which I am sure the author would have been approving.

So did the UK suddenly become poorer as America built a lively cloth industry?  No, in fact the UK boomed along with the US.  It turns out that spreading new technology and productivity techniques around more widely made everyone richer.  This only makes sense.  Would the West really be wealthier if they had kept all technology from spreading, and thus were surrounded by countries dominated by subsistence farming and medieval crafts?  A skeptic might argue that the UK did eventually become poorer relative to the US and upstart Germany, but Andrew Carnegie could have told you why at the beginning of the 20th century.  He went back and toured manufacturers in his old home and was horrified at how little they reinvested in new technology.

Which brings me back to Chinese high speed rail, the example he started with.  Clearly the Chinese have a growing high-speed rail manufacturing industry, and they DIDN'T invent the technologies originally in China.  This is what trade is all about.  Rather than keep technologies locked up in a secret underground bunker in the Rockies, as the author seems to prefer, it spreads technologies around the world.  Production then shifts around the world based on a variety of factors such as comparative advantage in ways that are hard to predict, but seldom has a strong relationship to the country in which the technology was first invented.  One place production does NOT shift, though, is towards countries whose government has artificially raised critical raw material prices through border taxes on its consumers called tariffs.

Which reminds me, if the problem is China "stealing" things like high-speed rail technology, then why in the hell are we imposing steel and aluminum tariffs?  What the heck does this have to do with technology transfer?  In fact, if the US really had a high-speed rail industry we were worried about, or if one were exclusively concerned with the auto industry, the author is essentially telling them "we are sorry you had your technology stolen so to help you out we going to substantially raise the prices of your two largest purchases (steel and aluminum) so that you can be even less competitive internationally."  Ahh, I can feel the economic growth from that already.

If the author wants better intellectual property protections for US companies and individuals, I am generally supportive of efforts to achieve this (as long as we don't over-specify intellectual property and end up again with endless patent troll suits).  For all its flaws, though, joining the TPP seems to be a better path to this end (it actually addresses, you know, intellectual property protections rather than just raise steel prices for consumers).

To conclude, I love this quote from his article because, despite being anti-trade, he in fact is echoing the pro-trade observation by Steven Landsburg.

Yet our trade policy does exactly the opposite. After the North American Free Trade Agreement took effect in 1994, U.S. corn exports surged, as did our imports of automobiles. The problem is that automobile manufacturing is much more likely to benefit from disruptive technology than is growing corn—under NAFTA, the preponderance of long-run benefits went to Mexico, not the United States. The same is true with America’s trade relationship with China: America’s advanced goods trade deficit with China now tops $120 billion. Meanwhile, our biggest export is soybeans.

Free trade is, quite literally, turning America into China’s mercantile resource colony: we buy their value-added, manufactured products, and we sell them raw materials.

This is freaking awesome!  We grow and sell soybeans and get back advanced technology products.  Brilliant!  No wonder we are the richest nation on Earth.

Postscript:  So to save the time clicking through to Steven Landsburg, here is a part of what he said (via Carpe Diem):

There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars. Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.

The task of producing a given fleet of cars can be allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.

That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.

A Chinese Consumer's Perspective on Chinese Trade Policy

This is, plus or minus, a reprint of an article on trade policy written 12 years ago at our Chinese sister publication, Panda Blog.

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States. The Chinese government does so through a number of avenues, including:

  • Limiting yuan convertibility, and keeping the yuan's value artificially low
  • Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers. A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese. So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  We Chinese send our resources, our capital, and the output of our most productive workers overseas to be enjoyed by American consumers, and what do we get in return?  A trillion dollars or so of foreign exchange surpluses that our government invests for 2% returns in US government bonds.  Yes, that's right -- not only are we subsidizing American consumers, but we are subsidizing their taxpayers by financing their government's debt at low interest rates.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties. It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports. Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods. Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses. And surpluses they did create. Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world. And what did this get them? Decades of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses. These achieved nothing lasting for Japan and they will achieve nothing for China. In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much. They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth. They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese. They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending. They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China! This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by the CIA-controlled American media. After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa. And, with well over a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse. American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse. Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Dolphin Intelligence -- Simply Amazing

This has been shared around a lot but I was very impressed with dolphins following strategies of deferred gratification that some humans I know would be challenged by.

At the Institute for Marine Mammal Studies in Mississippi, Kelly the dolphin has built up quite a reputation. All the dolphins at the institute are trained to hold onto any litter that falls into their pools until they see a trainer, when they can trade the litter for fish. In this way, the dolphins help to keep their pools clean.

Kelly has taken this task one step further. When people drop paper into the water she hides it under a rock at the bottom of the pool. The next time a trainer passes, she goes down to the rock and tears off a piece of paper to give to the trainer. After a fish reward, she goes back down, tears off another piece of paper, gets another fish, and so on. This behaviour is interesting because it shows that Kelly has a sense of the future and delays gratification. She has realised that a big piece of paper gets the same reward as a small piece and so delivers only small pieces to keep the extra food coming. She has, in effect, trained the humans.

Her cunning has not stopped there. One day, when a gull flew into her pool, she grabbed it, waited for the trainers and then gave it to them. It was a large bird and so the trainers gave her lots of fish. This seemed to give Kelly a new idea. The next time she was fed, instead of eating the last fish, she took it to the bottom of the pool and hid it under the rock where she had been hiding the paper. When no trainers were present, she brought the fish to the surface and used it to lure the gulls, which she would catch to get even more fish. After mastering this lucrative strategy, she taught her calf, who taught other calves, and so gull-baiting has become a hot game among the dolphins.

Government Regulatory Template: Subsidize Demand, Restrict Supply

The government does it in health care, education, and housing.  Usually in the name of increasing access to or usage of something, they will subsidize demand.  But then at the same time they will restrict supply, giving lie to this stated justification of increasing access, making the whole exercise a crony enrichment of a small number of incumbent producers or asset owners.  The government creates low income housing programs and subsidized mortgages but limits the ability to construct new homes, thus having the primary effect not of increasing housing access but of driving up home prices for current incumbent home owners.  In health care the government subsidizes access to care in any number of ways but then restricts supply through certificates of need, onerous licencing programs, and drug manufacturing restrictions.

Now, consider solar panels.  The government has many programs to subsidize the purchase of solar panels.  Often, one can get local, state, and federal rebates and tax breaks for buying solar panels.  But at the same time:

President Donald Trump’s pledge to offer American companies more aggressive protection from foreign competition got fresh ammunition Friday, when a government board cleared the way for him to deploy a long-dormant legal weapon to restrict solar panel imports....

In the solar panel case, filed by Georgia-based Suniva Inc. and joined by Oregon-based SolarWorld Americas Inc., the ITC commissioners will now consider specific policy recommendations and submit those to the White House by Nov. 13. Mr. Trump then has two months to decide whether to impose solar trade barriers....

“We brought this action because the U.S. solar manufacturing industry finds itself at the precipice of extinction at the hands of foreign market overcapacity,” Suniva said. The firm filed for bankruptcy protection earlier this year.

This really is utter madness, even from a domestic employment standpoint.  I would be willing to be that the solar panel installation industry, which will be hurt by rising costs of solar panels, employs way more people than the US panel manufacturing industry.  The solar industry's trade association seems to agree:

“Analysts say Suniva’s remedy proposal will double the price of solar, destroy two-thirds of demand, erode billions of dollars in investment and unnecessarily force 88,000 Americans to lose their jobs in 2018,” said the Solar Energy Industries Association, which promotes solar use.

For Progressives who are suspicious of public choice theory, this is they sort of prediction public choice theory makes and should be an area where Progressives and libertarians could make common cause.  But traditionally Progressives have always been trade restrictionists, which seems crazy to me.

 

I am Going To Make A Fortune in the New Legalized Marijuana Market.... Uh, Maybe Not

Here are Coyote's first three rules of business strategy:

  1. If people are entering the business for personal, passionate, non-monetary reasons then the business is likely going to suck.  When I say "suck", I mean there may be revenues and customers and even some profits, but that the returns on investment are going to be bad**.  Typically, the supply of products and services and the competitive intensity in an industry will equilibrate over time -- if profits are bad, some competitors exit and the supply glut eases.  But if people really love the industry and do not want to work anywhere else and get emotional benefits from working there, there always tends to be an oversupply problem.  For decades, maybe its whole history, the airline industry was like this.  The restaurant industry is this way as well.  The brew pub industry is really, really like this -- go to any city and check the list of small businesses for sale, and an absurd number will be brew pubs.
  2. If the business is frequently featured in the media as the up and coming place to be and the hot place to work, stay away.  Having the media advertising for new entrants is only going to increase the competitive intensity and exacerbate the oversupply problem that every fast-growing industry inevitably faces as it matures.
  3. Beware the lottery effect -- One or two people who made fortunes in the business mask the thousands who lost money (Freakonics had an article on the drug trade positing that it works just this way -- while many of us assume the illegal drug trade makes everyone in it rich, in fact only a few really do so and the vast majority are and always will be grinders making little money for high risk).  Even those people who made tons of money in hot businesses sometimes just had good timing to get out at the right time before the reckoning came.  Mark Cuban is famous as an internet billionaire, but in fact Broadcast.com, which he sold for over $5 billion to Yahoo, only had revenues in its last independent quarter of about $14 million and was losing money (that's barely four times larger than my small company).

When I was at Harvard Business School, the first two cases in the first week of strategy class were a really cool high-tech semiconductor fab and a company that makes brass water meters that are sold to utilities.  After we had read the cases but before we discussed them, the professor asked us which company we would like to work for.  Everyone wanted the tech firm.  But as we worked through the cases, it became clear that the semiconductor firm had an almost impossible profitability problem, while Rockwell water meters minted money.  I never forgot that lesson - seemingly boring industries could be quite attractive, and this lesson was later hammered home for me as I later was VP of corporate strategy for Emerson Electric, a company that was built around making money from boring but profitable industrial products businesses.

Of course there are exceptions, but almost every one of these have built some sort of competitive advantage that allowed them to rise above the rivalry.  Google and Facebook are sexy and make money, but they have built scale and network effect advantages that make them hard now to challenge.   Apple makes money now because it has created switching costs (try switching from an iPhone to an Android and ever being able to text again with iPhone users) and a powerful brand.  The NFL owners have enormously sexy businesses but have created a brand and other competitive restrictions that protect their positions (not to mention have perfected the art of sucking money out of taxpayers for stadiums).  But even looking at these examples, the world is littered with folks who tried to be in the same business and failed.  Remember Nokia, Blackberry, Motorola, Lycos, Yahoo, AOL, Netscape, USFL, XFL, Myspace, etc.  I don't really know how strategy is being taught today, but I was schooled at HBS in Michael Porter's five forces.  I still find this framework useful, and probably about as much as any layman needs to know about business strategy.

But what about marijuana?  There are a lot of people very passionate about marijuana.  It is easy to grow (I remember an ex-girlfriend way back in the eighties whose mom grew it in the attic) and easy to sell (there is plenty of retail space nowadays going begging, or there is always the internet).  Every time there is some expansion opportunity in the business (e.g. a new state legalizing) the fact is advertised all over the media.  Overall, most folks are going to fail and most investment is not going to have very good returns for all the reasons listed above.   For most entrants, marijuana is gong to suck as a business for years to come.   And, some states seem to be developing onerous licensing regimes, and this may allow a few folks with the coveted licenses to make pretty good money.  Some day there could well be someone who consolidates the business and builds a powerful consumer brand and drives down costs and increases scale that makes money in marijuana.  But that is years away and typically the person who leads this is not among the initial entrants.  Remember, the vast vast majority of folks who traveled to California in the 1849 gold rush never made a cent.

You can already see this in California (my emphasis added). 

California's marijuana growers are producing far more pot than is consumed in-state — and will be forced to reduce crops under new regulations that ban exports, the Los Angeles Times reported.

"We are producing too much," Allen told the Sacramento Press Club during a panel discussion, the Times reported; he added that state-licensed growers "are going to have to scale back. We are on a painful downsizing curve."

Estimates vary for just how much surplus California produces — anywhere from five times to 12 times what is consumed in-state, the Times reported.

 

** You can tell I have classical training in business strategy because my goal is return on investment.  One can argue, perhaps snarkily but also somewhat accurately, that there is a new school of thought that does not care about profitability, revenues, or return on investment but on getting larger and larger valuations from private investors based on either user counts or just general buzz.  I am entirely unschooled in this modern form of strategy.  However, the general strategy of getting someone to overpay for something from you is as old as time.  I mentioned Mark Cuban but there are many other examples.  Donald Trump seems to have made a lot of money from a related strategy of fleecing his debt holders.

Trade and The World's Most Misunderstood Accounting Identity: Y=C+I+G+X-M (Update)

(Note:  This is an update of this post based on a new set of economically illiterate people in the White House).

Repeat after me:  Y=C+I+G+X-M is an accounting rule.  It does not explain anything about the economy.  It is as useful to telling us anything interesting about the economy as the equation biomass=plants+animals+bacteria tells us anything about the ecosystem.

Apparently our new commerce secretary is totally ignorant of this fact:

[New Commerce Secretary Wilbur Ross] has a simple but misguided view of global trade. He believes that good trade policy yields a national trade surplus, while bad deals produce trade deficits—as if every country in the world could run a trade surplus. In an August letter to this newspaper, Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. Many domestic products wouldn’t exist without foreign components.

Here is his faulty logic.  The GDP (Y) is calculated by adding Consumer spending + Investment by Business + Government spending + eXports and then subtracting iMports.  Because imports are subtracted in the GDP equation, they look to the layman like they shrink the economy.  How do we grow the economy?  Why, let's reduce that number that is subtracted!  But this is wrong.  Totally wrong.   Anything that reduces imports (e.g. a tariff) will likely reduce C+I+G by the same amount.   The M term is there simply to avoid double counting.  It has no economic meaning in this context whatsoever.  I have tried many times to explain this, but let me see if I can work by analogy.

Let's say we wanted an equation to count the amount of clothing we owned.  To make things simple, let's say we are only concerned with the total of Shirts, Pants, and Underwear.   Most of our clothes are in the closet, so we say our clothes are equal to the S+P+U we count in our closet.  But wait, we may have Loaned clothes to other people.  Those are not in our closet but should count in our total of our owned clothing.  So now clothes = S+P+U+L.  But we may also have Borrowed clothes.  Some of those clothes we counted in the closet may be Borrowed and thus not actually ours, so we need to back these out.  Our final equation is clothes owned = S+P+U+L-B.  Look familiar?

Let's go further.  Let's say that we want to increase our number of clothes owned.  We want wardrobe growth!  Well, it looks like those borrowed clothes are a "drag" on our wardrobe size.  If we get rid of the borrowed clothes, that negative B term will get smaller and our wardrobe has to get larger, right?

Wrong.  Remember, like the GDP equation, our wardrobe size equation is just an accounting identity.  The negative B term was put in to account for the fact that some of the clothes we counted in S+P+U in the closet were not actually ours.  If we decrease B, say by returning our friend's shirt, the S term will go down by the exact same amount.  Sure, B goes down, but so do the number of shirts we count in the closet.  So focusing on the B term gets us nowhere.

But it is actually worse than that, because focusing on reducing B makes us worse off.  If negative term B rises, our wardrobe is no larger, but we get the use of all of those other pieces of clothing.  Our owned wardrobe may not be any larger but we get access to more choices and clothing possibilities.  When we drive the negative term B down to zero, our wardrobe is no larger and we are worse off with fewer choices.  Similarly, in the the economy, focusing on reducing imports does not grow the economy, it just serves to make us poorer by reducing our buying choices and increasing the cost of consumer goods as well as manufacturing inputs.

I don't want to say that it's impossible for increases in imports to drag the economy.  For example, if oil prices rise, the imports number measured in dollars will likely rise, and the economy could be worse off as we have to give up buying other things to continue to buy the oil we need.  But, absent major price changes, drops in exports more likely just mirror drops in C+I+G.  If consumers are hurting, they spend less on everything, including imported goods.   At the end of the day, none of these numbers (Mr. Keynes, are you listening?) are independent variables.

Postscript:  Here is another example.  Imagine a company with three divisions, D1, D2, and D3.  How do we compute the company's total revenue?  Well, typically we would add the revenue from the three divisions, so Total Corporate Revenue R = RD1 + RD2 + RD3.  Oh, but there is a problem.  Some of the sales from each of our divisions are to each other.  We only want to measure our true revenue from external sales, so we need to subtract intra-company sales from the total (this is a very typical step in conglomerate accounting).  So total company revenue R = RD1+RD2+RD3-IC, where IC are the total of intra-company sales within the company between divisions.  If you had a new CEO who looked at this accounting, and the CEO's first thought was "if we got rid of all these intra-company sales, surely we would have more revenue, because they are subtracting from total revenue in the revenue equation."  What would you do with this CEO?  If you knew the first thing about corporate accounting, you would fire him or her immediately for being a moron.  Just because the IC term is negative in the accounting equation does not mean that intra-company sales are a drag on revenues.  Eliminating intra-comapny sales would likely reduce revenues and profits as company insiders are forced to find new, less trusted, and more expensive sources for their purchases than buying internally.

Why Aren't The Chinese Ticked Off About Subsidizing American Consumers? And Why Aren't We Happy About It?

Ten years ago, we published an editorial from our Chinese sister publication Panda Blog.  Though some of the details of their government's financial actions have changed since then, the gist of it is still correct -- the Chinese government still engages in actions that they call "export promotion" and President Trump calls "currency manipulation".  So I think this editorial from the perspective of the Chinese consumer is still relevant:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

  • Limiting yuan convertibility, and keeping the yuan's value artificially low
  • Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
  • Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Congratulations #DeleteUber on Weakening an Important Source of Restraint on Trump

A couple weeks ago I was having dinner with a couple of guys who fear and despise Trump.  I told them that all the marches in the streets were not going to affect Trump's behavior one bit, though it will affect the behavior of the Congress when (and if, given the new Imperial presidency, copyright Bush and Obama) they are called on to ratify some of Trump's actions.  I told them that the biggest check on Trump, at least in the near term on issues like immigration, was going to be American corporations.  As much as the Left may not like corporations, businesses need trade and immigration and free international travel to function in the global economy and they are not going to be happy about all of Trump's planned restrictions (you could see echoes of that last night in a number of the Superbowl commercials).

So of course the Left gears up a #DeleteUber campaign because Uber didn't participate in a taxi strike at JFK protesting Trump's immigration order.  Essentially, protesters who are mad at Trump for restricting travel are mad at Uber for, uh, not restricting travel.  In the end, all the #DeleteUber folks did was force the Uber CEO to quit Trump's advisory counsel.  Congratulations Left, you managed to remove a likely voice of reason from inside the White House.

I would happily join up with the Left in opposition to a lot of Trump's actions if I wasn't so absolutely horrified at their tactics.  There is no reason, no thoughtfulness at all.  Even the media participates in this dumbing down by simply refusing to making issues clear (e.g. continuing to call the 90-day visa timeout from 7 countries a "muslim ban").  And the first person from the Left who I hear criticize the anti-free-speech violence at Berkeley will be the first.

Update:  97 tech firms team up against Trump's immigration ban.  The problem with this approach is that I am not sure the "immigration ban", which is in fact a 90-day pause in issuing visas to folks from 7 countries, is actually illegal under current law and precedent.   Obama did something similar with Iraq at one point.   But I am happy to see them taking a shot at it -- in my mind a single person should not have this much power.  By the way, Amazon and Tesla did not sign, in part because their leaders still sit on Trump's advisory board.  The latter strikes me as a reasonable strategy, but I wonder how long the Left will allow them to remain inside the tent.

 

Trade and Consumer Advocacy, Part 2

Yesterday, I suggested we needed a new, real consumer advocacy organization to replace the economically ignorant Nader-led PIRG organizations.  The reason is that it is time that consumers banded together and resisted Trump's protectionism, since such protection generally protects a few politically favored unions and corporations while raising prices and reducing choice for all consumers.

A couple of hours after I posted that, the absolutely indispensable Mark Perry brings us a great post on academic research about how protectionist actions nearly always cost consumers more than they help producers.

The empirical evidence above helps us to understand a very important economic lesson about international trade, call it “protectionist math” — and that mathematical reality is that the costs of protectionism imposed on American consumers in the form of higher prices and a reduction in trade will always be greater than the benefits generated for the protected industries and the workers in those industries. And here’s another part of that “protectionist math” that helps us answer the question: Sure, we can save US jobs with protectionist trade policies, but how much does it cost consumers for every job saved with protectionist trade policy, and is that cost worth it? Economic analysis and the empirical evidence presented above suggest that it’s very, very expensive to save US jobs with protectionism — more than half-a-million dollars on average per year per job in 2016 dollars (see chart above). If Trump enacts protectionist policies that save $50,000 per year US factory jobs but at a cost to consumer of $500,000 annually for each job saved, that’s a surefire formula to “Make America Expensive and Poor Again,” not “great again.”

I won't reprint his chart, but he has detailed results form a number of academic studies in different industries that back this statement up.

My point about needing a new consumer advocacy group was a little tongue in cheek, but here is Perry quoting from a study at the Federal Reserve Bank of St Louis a number of years ago (back during the last wave of protectionism, which was based on Japan rather than China bashing).

The primary reason for these costly protectionist policies relies on a public choice argument. The desire to influence trade policy arises from the fact that trade policy changes benefit some groups, while harming others. Consumers are harmed by protectionist legislation; however, ignorance, small individual costs, and the high costs of organizing consumers prevent the consumers from being an effective force. On the other hand, workers and other resource owners in an industry are more likely to be effective politically because of their relative ease of organizing and their individually large and easy-to-identify benefits. Politicians interested in re-election will most likely respond to the demands for protectionist legislation of such an interest group.

Does The Left Know How To Make An Argument Not Based On Racism? The Trouble With the Left's Critique of Trump

As I predicted in my letter to the Princeton University President last year, two decades of living in university monocultures and political echo chambers, combined with a one-track focus on social justice, seems to have left the political Left with no ability to engage in rational opposition politics.

The Golden Globe Awards were a magnificent example.  I presume that many of these actors are reasonably intelligent people.  And they are obviously upset and worried about Donald Trump's election to President.  But they can't express anything beyond their fear and loathing.  They can't articulate what specifically worries them, and when they do articulate something specific - e.g "this may be the last Golden Globes Awards" - it is silly and illogical.

Perhaps worse, these critiques of Trump are, IMO, focusing on all the wrong things and sucking the oxygen out of the room for more relevant criticism.  The Hollywood types all seemed terrified that they and their industry are going to somehow fall victims to government authoritarianism.  At some level I guess this makes sense -- when the Left was in power, they used their power to hammer industries they did not like (eg energy) and thus expect that the Right will do the same once they are in power.  But Trump is a New York social liberal who is a part of the entertainment industry.   While I confess that one of the problems with Trump is that he is wildly unpredictable, Hollywood is an unlikely target, at least until they just  went on TV and begged to be one.

An even better example of focusing on all the wrong problems is the confirmation hearings for Jeff Sessions.  If you read pretty much any of the media, you will be left with the impression that the main issue with Sessions is whether he is a racist, or at least whether he is sufficiently sensitive to race issues.  But this is a complete diversion of attention from Sessions' true issues.  I am not sure what is in his heart on race, but his track record on race seems to be pretty clean.  His problems are in other directions -- he is an aggressive drug warrior, a fan of asset forfeiture, and a proponent of Federal over local power.  As just one example of problems we may face with an AG Sessions, states that have legalized marijuana may find the Feds pursuing drug enforcement actions on Federal marijuana charges.

Why haven't we heard any of these concerns?  Because the freaking Left is no longer capable of making any public argument that is not based on race or gender.  Or more accurately, the folks on the Left who see every single issue as a race and gender issue are getting all the air time and taking it away from more important (in this case) issues.    The SJW's are going to scream race, race, race at the Sessions nomination, and since there does not seem to be any smoking gun there, they are going to fail.  And Sessions will be confirmed without any of his real illiberal issues coming out in the public discussion about him.

I have said this before about Left and Right and their different approaches to politics.  The Left is great at getting attention on an issue.  Think of BLM and their protests and disruption tactics -- they had everyone's attention.  But they went nowhere on policy.  I challenge you to list the 5 or 10 policy goals of BLM (they actually had a good set once, but abandoned them).  The Left is great at expressing anger and dismay and frustration and outrage, but terrible about thoughtfully taking steps to fix it.  The Right on the other hand is great at working (plodding, really) in the background on policy issues, often at the local level.  ALEC is a great example, building a body of model legislation, working in groups around the country to try to implement these models.  But they absolutely suck at generating emotion and excitement around key issues (except maybe for wars and in abortion protests).  The only example I can really think of is the Tea Party, and (despite how the media tried to portray it) the Tea Party was extraordinarily well-behaved and moderate when compared to protest movements on the Left.

Trump has an enormous number of problems in his policy goals, not the least of which is his wealth-destroying, job-destroying ideas on trade nationalism.   But all we get on trade are a few lone voices who have the patience to keep refuting the same bad arguments (thanks Don Boudreaux and Mark Perry) and instead we get a women's march to protest the Republican who, among the last season's Presidential candidates, has historically been the furthest to the Left on women's issues.    It is going to be a long four years, even longer if the Left can't figure out how to mount a reasonable opposition.

Postscript:  All of this is without even mentioning how the Left's over-the-top disruption tactics seem to just feed Trump's energy.  At some point, Hercules figured out that cutting heads off the hydra was only making things worse and switched tactics.  If only I could be so confident about the Left.

Trump Silver Lining: Liberals Are Now Defending Trade Deficits

Thanks to Trump, it appears that some of the Left have discovered economic reality and are defending trade and suddenly seem less unsettled by trade deficits.  Here is Kevin Drum with one in a series trying to downplay panic over trade deficits, in this case with Mexico.    Here are some of my recent thoughts on the trade deficit.

International trade is such an obvious benefit to the country that it is simply incredible that we are, hundreds of years after Adam Smith and Ricardo and Bastiat, still trying to explain and defend it against ignorance.  It's like we have to constantly battle recurrences of the phlogiston theory of combustion.

In Defense of Profits -- Why They Are At Least As Moral as Wages

Quick background:  my company privately operates public parks, making our money solely from the entry fees voluntarily paid by visitors and campers.  We don't get paid a single dollar of tax money.

A major partner of ours is the US Forest Service (USFS), which actually operates more recreation sites than any other agency in the world (the National Park Service has a higher profile and the Corps of Engineers has more visitors, but the USFS is the most ubiquitous).  Despite the USFS being an early pioneer of using private companies to reduce the operating costs of parks and campgrounds, the USFS still has a large number of employees opposed to what we do.  The most typical statement I hear from USFS employees that summarizes this opposition -- and it is quite common to hear it -- is that "It is wrong to make a profit on public lands."

It would be hard to understate the passion with which certain USFS employees hold to this belief.   I discovered, entirely accidentally through a FOIA request my trade group had submitted to the USFS, that a Forest Supervisor in California (a fairly senior person in the USFS management structure) whom I have never met or even had a conversation with circulated emails through the agency about how evil he thought I was.

This general distaste for profit, which is seen as "dirty" in contrast to wages which are relatively "clean" (at least up to some number beyond which they are dirty again), is not limited to the USFS or even to government agencies in general, but permeates much of the public.  As a result, I thought I would describe a conversation I had with a USFS manager (actually this is the merger of two conversations).  The conversation below had been going on for a while discussing technical topics, and we will pick it up when the District Ranger makes the statement highlighted above (a District Ranger is the lowest level line officer in the USFS, responsible in some cases for the land management functions of an area the size of a county.  I have cleaned up the text (I am sure the sentences would not be as well-formed if I had a transcript) but I think this captures the gist of it:

Ranger:  I think it's wrong that you make a profit on public lands

Me:  So you work for free?

Ranger:  Huh?

Me:  If you think it's wrong to make money on public lands, I assume you must volunteer, else you too would be making money on public lands

Ranger:  No, of course I get paid.

Me:  Well, I know what I make for profit in your District, and I have a good guess what your salary probably is, and I can assure you that you make at least twice as much as me on these public lands.

Ranger:  But that is totally different.

Me:  How?

At this point I need to help the Ranger out.  He struggled to put his thoughts on this into words.  I will summarize it in the nicest possible way by saying he thought that while his wage was honorable, my profit was dishonorable, or perhaps more accurately, that his wage paid by the government was consistent with the spirit of the public lands whereas my profit was not consistent

Me:  I'm not sure why.  My profit is similar to your wage in that it is the way I get paid for my effort on this land -- efforts that are generally entirely in harmony with yours as we are both trying to serve visitors and protect the natural resources here.    But unlike your wage, my profit is also a return on the investment I have made.  Every truck, uniform, and tool we use comes out of my profit, whereas you get all the tools you need paid for by your employer above and beyond your salary.  Further, your salary is virtually guaranteed to you, short of some staggering malfeasance.  Even if you do a bad job you likely would just get shunted to a less interesting staff position at the same salary, rather than fired.   On the other hand if I do a bad job, or if one of my employees slips up, or even if some absolutely random occurrence entirely outside my control occurs (like, say, a flood that closes our operations) my profit can completely evaporate, or even turn into a loss.  So like you, I get paid for my efforts here on public lands, but I have to take risk and make investments that aren't required of you.  So what about that makes my profit less honorable than your wage?

Ranger:  Working on public lands should be a public service, not for profit

Me:  Well, I think you are starting to make the argument again that you should be volunteering and not taking a salary.  But leaving that aside, why is profit inconsistent with service to the public?  My company serves over 2 million visitors a year, and 99.9% give us the highest marks for our service.  And for the few that don't, and complain about a bad experience, every one of those complaints comes to my desk and I personally investigate them.  Do you do the same?

Why do I make such an effort?  Part of it is pride, but part is because I understand that my margins are so narrow, if even 5% of those visitors don't come back next year -- because they had a bad time or they saw a bad review online -- I will make no money.  Those 2 million people vote with their feet every year on whether they think I am adequately serving the public, and their votes directly affect how much money I make.  Do you have that sort of accountability for your public service?

Postscript:  Interestingly, though perhaps not surprisingly, the government ranger did not bring up what I would consider the most hard-hitting challenge:  How do we know your profits are not just the rents from a corrupt, cronyist government contracting process.  Two things let me sleep well at night on this question.  The first is that I know what lobbying I do and political connections I have (zero on both) so I am fully confident I can't be benefiting from cronyism in the competitive bid process for these concession contracts.  Of course, you don't know that and if our positions were reversed, I am pretty sure I would be skeptical of you.

So the other fact I have in my favor, which is provable to all, is that the recreation areas we operate are run with far lower costs and a demonstrably higher level of service than the vast majority of recreation areas run by the government itself.  So while I can't prove I didn't pull some insider connections to get the work, I can prove the public is far better off with the operation of these parks in private hands.

Why Are We Making It So Hard For the Chinese to Provide Us With Lower-Cost Aluminum?

This WSJ article's hook is a huge cache of raw aluminum photographed in the Mexican desert.  American aluminum manufacturers claim that this is Chinese aluminum being illegally transshipped through Mexico to get a lower tariff rate.

The U.S. Commerce Department says it is investigating the Mexican aluminum’s origin as part of a slew of trade complaints by the U.S. metals industry against China, many of which include allegations of transshipping.

China’s booming industrial production has reordered global markets, few more dramatically than aluminum. Fueled by access to inexpensive electricity and tax breaks, Chinese aluminum output doubled between 2010 and 2015. With local demand slowing,more of it was sent to the U.S., which was importing 40% of its aluminum by 2015—up from only 14% in 2010.

By the end of 2016, only five aluminum smelters will be operating in the U.S., down from 23 in 2000.

Alcoa Inc., the largest American aluminum maker, is splitting in two, isolating its profitable parts-making units from its troubled raw-aluminum operations. Alcoa Chief Executive Klaus Kleinfeld last year said illegitimate Chinese exports were “the major driver” of lower aluminum prices.

I suppose to an incumbent who has convinced himself that he has a God-given right to his historic market share, new sources of competition are always "illegitimate."  But through the whole article I kept asking myself, why are we forcing these folks in China to jump through so many hoops just to bring us lower-cost aluminum?  Given how fundamental aluminum is to almost every manufactured product today, we should be welcoming them as heroes, not forcing them to play silly games in the Mexican desert just to deliver their product at the price they want to sell it for.

It turns out that all this government effort to "protect" us from lower cost aluminum is to support an American aluminum industry that is tiny, maybe 2% of world production.

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The industry would argue that the lower prices of Chinese imports are "illegitimate" in part because the sales price in the US is subsidized by Chinese taxpayers.  To which I answer, "so what?"  Or actually, to which I answer, "yay!"  If another country's taxpayers want to pay higher taxes so that they can provide valuable raw materials to US industry at lower prices, why in the heck would we want to stop them?

China Doesn't Kill American Jobs, Politicians Do

I am simply exhausted with the notion that seems to have taken over both political parties that trade with China is somehow the source of US economic woes.

Remember that voluntary trade can't happen unless both parties are benefiting from each trade.  Remember the masses of academic evidence that the (largely hard to see) benefits of trade in terms of lower costs and more choice tend to be greater than the (easier to see) job losses in a few trade-affected industries.  But even if none of that is compelling to you, consider that our trade deficit with China is just 2% of GDP.  It's almost a rounding error.

If politicians want to know why lower-skilled laborers struggle to find employment, they need to look past imports from China and Mexican immigration and look at their own policies that are making it more and more expensive for businesses to hire people in this country.   I have written about this many times before, but some of the most prominent include:

  • minimum wage laws, rising to $15 an hour in many parts of the country, and increasingly draconian overtime rules, both of which substantially raise the cost of hiring someone.
  • minimum benefit laws, including expensive health care requirements in Obamacare and a myriad of other state-level requirements such as mandatory paid sick leave or family leave
  • payroll taxes that act as sales taxes on labor  -- we understand that cigarette taxes are supposed to reduce cigarette purchases but don't understand that payroll taxes reduce purchases of labor?
  • employment regulations, such as chair laws and break laws in California, that make employing people more expensive and risky
  • employer liability laws, that make employers financially responsible for any knuckleheaded thing their employees do, even when these actions violate company policy (e.g. making racist or sexist statements)**
  • laws that make hiring far more risk, including those that limit the ability to do due diligence on potential employees (e.g. ban the box) and those that limit the ability of employers to fire poor performing employees.

And this is just employment law -- we could go on all day with regulations that make life difficult for lower income workers, such as the numerous laws that restrict the housing stock and drive up housing prices and rents for these same folks who are struggling to find a job.

Let's say you live in California.  Who has killed more jobs in your state -- China or the California legislature?  The answer is no contest.   The California legislature wins the job destruction race in a landslide.   While California's high-tech community enjoys a symbiotic relationship with China that has created immense wealth, the California legislature works overtime to make sure low-skilled workers in the state don't benefit.

 

**Postscript:  Of all the factors here, I won't say that this is the largest but I think it is the most underrated and least discussed.  But think about it.  If you are going to be personally financially libel for ignorant, insensitive, or uncouth remarks made by your employees, even when you have explicitly banned such behavior in company rules and don't personally tolerate it, how likely are you going to be to hire a high school dropout without a good work history to interact with customers?

Thanks to Arnold Kling, I Sort of Understood Trump's Speech Last Night

My personal reaction was that Trump's speech was horrifying, a dystopian vision that bears no relationship to what is actually going on in this country (e.g. violent crime continues to fall, trade continues to make us wealthier, immigrants continue to make productive contributions, etc).  Peter Suderman has more in case you missed it.

But in Arnold Kling's 3-axis model of politics, the speech made perfect sense.   Trump has decided he is going to run hard on the civilization-barbarism axis.  The barbarians are at the gates, and his opponents are either too weak to deal with them or are actually in league with the barbarians.  He is the strong leader who will turn them back and make everyone safe again.  We're not going to trade with the barbarians, we are not going to treat with them, and we are not going to waste civil rights on them.  Ugh.  Trump is working hard to make me feel the victim, but I don't accept victim status.

I am not sure if this is marginally better or worse than what we are going to get at the Democratic Convention, where we will get four days of hearing that I personally am the bad guy and source of all misery in the world and the person that needs to be regulated harder and looted more furiously.   I almost prefer the Democratic approach, because at least evil is being done against me rather than in my name.

If I Were President, On The Day After Vote for Brexit...

I would propose a free-trade agreement with the UK.    No loss of sovereignty, no stupid EU regulations and bureaucrats, no restrictions on what can be called "sausage" -- just trade.  I would offer a similar deal to anyone else who wanted to leave.

Actually, when Obama visited, I would have been tempted to offer it to Britain at that time.  Why was the US President so hell-bent on encouraging closer ties between Britain and Germany when he should have been working to improve the relationship between the UK and the US.

I will admit that I am not thrilled with the anti-immigration tone of the Brexit vote, but the EU is a package deal, and there is a lot of bad with the good in the package.  Here is a good list of reasons to vote for Brexit (hat tip maggies farm)

2016 Presidential Election: Battle of the Crony Capitalists

I am not sure that many politicians are good on this score, but Hillary Clinton and Donald Trump are likely as bad as it gets on crony capitalism.  Forget their policy positions, which are steeped in government interventionism in the economy, but just look at their personal careers.  Each have a long history of taking advantage of political power to enrich themselves and their business associates.  I am not sure what Cruz meant when he said "New York values", but both Trump and Clinton are steeped in the New York political economy, where one builds a fortune through political connections rather than entrepreneurial vigor.   Want to build a new parking lot next to your casino or start up a new energy firm -- you don't bother with private investors or arms length transactions, you go to the government.

With that in mind, I particularly liked Don Buudreaux's quote of the day:

First, we labor under a ubiquitous threat of being shackled by crony capitalists.  [Adam] Smith wondered how internally stable a free market could be in the face of a tendency for its political infrastructure to decay into crony capitalism.  (The phrase “crony capitalism” is not Smith’s.  I use it to refer to various of Smith’s targets: mercantilists who lobby for tariffs and other trade barriers, monopolists who pay kings for a license to be free from competition altogether, and so on.)  Partnerships between big business and big government lead to big subsidies, monopolistic licensing practices, and tariffs.  These ways of compromising freedom have been and always will be touted as protecting the middle class, but their true purpose is (and almost always will be) to transfer wealth and power from ordinary citizens to well-connected elites

The Trade Deficit is Not A Debt

If you search Coyoteblog for the title of this post, you will see a number of others with the same title.  It seems to be a theme we keep having to come back to.  Here is one example of where I tried to explain why the trade deficit is not a debt.

Take the Chinese for example.  One thing that people often miss is that the Chinese buy a LOT more American stuff than the trade numbers portray.  The numbers in the balance of trade accounts include only products the Chinese buy from the US and then take back to China to consume there.  But the Chinese like to buy American stuff and consume it here, in the US.  They buy land and materials to build factories and trade offices.  They buy houses in California.  They buy our government bonds.  None of this stuff shows up in the trade numbers.  Is it somehow worse that the Chinese wish to consume their American products in America?  No.  How could it be.  In fact, its a compliment.  They know that our country is, long-term, a safer and more reliable place to own and hold on to things of value than their own country.

Dollars paid to a Chinese manufacturer have to get recycled to the US -- they don't just build up in a pile.   If I am a construction contractor in LA and build that manufacturer a new office or a local home and get paid with those recycled dollars, I am effectively exporting to the Chinese, only the goods and services I sold them never leave the country and so don't show up in the trade numbers.  So what does this mean?   In my mind, it means that the trade deficit number is a stupid metric to obsess over.

Another way I think about it is to observe that the US is winning the battle of stuff.   Money as money itself does not improve my well-being -- only the stuff (goods and services) I can purchase with it can do so.   So i t turns out that other countries ship far more stuff to the US than we ship out. And then these folks in other countries take the money they earn from this trade and buy more stuff in the US and keep keep that stuff here!

I am reminded of all this because several other folks are taking a swing at trying to make this point to the economically illiterate.   Don Boudreaux does so here, and Dan Ikensan here.  And here is Walter Williams as well.