Coyote Blog

A while back I took at Teaching Company course on Victorian Great Britain.  The professor said something about the Victorians that really stuck with me -- he said that the British never understood the soft power they had in the world.   The world wanted to dress British and emulate British manners.  They read British authors.  They desperately wanted to send their children to British schools.  Even the native revolutionaries in their colonies sometimes revolted in very British ways.  Sure the leaders of the Indian National Congress harbored enormous resentments against the arrogance of British power, but all their leaders were British-schooled and cast many of their arguments in terms from the British enlightenment.

I was thinking about this a while back when I was in France and attended a show of local French artists.  As with much modern art, much of it incorporated bits of pop culture.  And about 98% of that was American and to a lesser extent British pop culture.  Sure, some of it was used ironically, but American culture is consumed everywhere in the world.  I must have seen 5 or 6 artists using Captain America imagery alone in their art in a not-at-all hostile or ironic way..  America in the 20th and 21st century is in the same position as the British in the 19th century, and we are probably just as unaware of that soft power and pissing it away just as surely with our slamming around the world like a bull in a china shop.

And speaking of China, it is simply insane in my mind to turn them into our enemies.  Whatever the top Chinese officials are after, much of the population wants to be like Americans.  They want to come to our schools and wear our fashions and watch our movies and TV.  We have had several exchange students from China live with us and they treat getting to spend time living in America like having hit the lottery.  We have watched one woman who goes by "Cat" in the US all the way from high school to college in America to getting a good banking job.  She first showed up at our house looking exactly like Ching "Honey" Huan from Doonesbury -- the hair, glasses, clothes, everything.  She now looks, dresses, and talks like any young American.  For a while her Instagram was dominated by pictures of her and her friends at Big 10 football games.

I have been consumed of late with other things in my life, and really have not had the chance to address the increasingly insane extent of the Trump Administration's economic nationalism. But go to Don Boudreax's and Mark Perry's blogs and scroll through them -- they do a much more eloquent job of defending free trade than I can.

On Friday I was browsing the AM dial looking for a sports talk radio station discussing Game 1 of the NBA Finals when I ran into Rush Limbaugh.  Now, I am not one of those who will say that I never listen to X -- I will listen (at least for a while) to both the Limbaughs and Olbermans to understand what is going on in Tribe Blue and Tribe Red.  And I am glad I did on Friday because I heard something that really shocked me.

No, this is not faux public shock at some Conservative taking a position one would fully expect him to take, but just the opposite -- Limbaugh was at least partially defending Trump's tariffs despite the fact that I am absolutely positive he knows better.

In fact I am sure he knows better because he made a very good 60-second case for exactly why tariff's were bad.  Couldn't have done a better job in that short time myself.  But then he did what many Conservatives have been doing of late -- he tried to justify the tariffs as part of some hypothetical long game of Trump's to negotiate a better deal in the future.

Personally, I think it is absurd to assume that Trump's real intention is to get us to a new equilibrium with lower tariffs all around the world.  He does not understand the value of free trade and his closest adviser on this issue is an ardent protectionist.  Trump's negotiation experience is all in zero-sum games where he is trying to extract the most of a fixed pie for himself, not in trying to craft win-win solutions across multiple parties.

But here is the real reason this won't work:  The current relatively-free trade regime that exists today was built almost totally on America's moral leadership on the issue.  Let me take a quick aside to discuss a parallel case.  In 2012 the US compound in Benghazi was attacked.  The Obama Administration publicly blamed this attack on an obscure anti-Muslim video posted on YouTube, and continued to insist for weeks on the video being to blame despite the fact that new evidence shows the Administration knew from the beginning the video had nothing to do with the attack.  This was a terrible action for the Administration to take, because from China to Russia to Iran to Saudi Arabia to Britain to Berkeley, there is growing skepticism, even hostility, towards free speech.  If the US President is not staking out a moral position on the world stage in favor of free speech, then it is not at all clear who in the world is going to oppose what seems to be a natural authoritarian tide to shut inconvenient people up.  Obama did not have to defend the video itself (I have not seen it but I understand it to be confused and absurd and fairly indefensible) but he should have said something like "I don't like the video myself but in a free society we do not meet speech with violence, no matter how confused or misguided that speech is."

I have the same problem for many of the same reasons with Donald Trump's tariffs.  Pro-tariff folks pretend like there is some powerful free-trade globalist conspiracy they are fighting, but in fact the real headwinds all around the world are in favor of protectionism.  Few countries outside of the US have our historic dedication to free trade.  In addition, many of our partners have their own anti-trade populist parties on the rise (e.g. Britain, Italy).  And many of the most powerful political actors in our trading partners actually represent large corporations (some state owned and some just highly-aligned with the state) and powerful labor unions who would be perfectly happy to pursue additional crony protectionism of their industry even at the expense of the majority of their country's consumers and businesses.  All these forces for protectionism have always been kept at bay in large part by America's leadership on the issue.   How better to demonstrate to the Luddites that trade deficits are not bad than by accepting large trade deficits and having the strongest economy in the world?

Rush Limbaugh and other Trump Conservatives want to argue that these Trump tariffs are the opening move in an extended negotiation that will likely result in a better end state.  I have an alternate way of portraying them.  This is the United States walking into a group of barely-recovering alcoholics -- a group in which the US has historically been the powerful moral voice who has kept all these countries on the wagon -- and slamming a bottle of Jack Daniels on the table.  The results are not going to be pretty.

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.

There has been a lot written about "chaos" in UK government and financial markets since the Brexit vote, so much so there are supposedly folks who voted for Brexit who want a do-over.

A few thoughts:

• Short term changes in financial asset prices, like bank stock prices or currency futures, are largely irrelevant in the long-term.  The recent supposed "big drop" in US equities markets, for example, took the market all the way back to where it was in... March, barely 3 months ago.  You will see buying in these assets in the coming days and the drop of the last few days will be largely forgotten soon.   Financial markets don't react well to being surprised, but they will get over it.
• I don't see how the UK and the pound are necessarily weaker post-Brexit.  The US is fine.  The Swiss are fine.  Heck, the Swiss have to constantly fight to keep their currency lower.
• Unlike other EU nations, the majority of UK trade is with non-UK nations.  While trade with the EU will likely be on worse terms in the future (though the Swiss and Norwegians have pretty good deals), UK will be unshackled from the EU bureaucracy in negotiating new deals with the rest of the world.  If the US President had any vision whatsoever, he would already have offered the UK a free trade deal, rather than being petty and saying the UK goes to the back of the line for exiting a transnational body the US would never join itself.
• Much of the "chaos" in British government can be traced 100% to the anti-Brexit folks.  The Anti-Brexit folks very explicitly refused to craft any Brexit contingency plans, using threats of post-Brexit chaos to try to up the pressure against the Brexit vote.  President Obama did the exact same thing with Obamacare, refusing to create contingency plans if the SCOTUS overturned key parts of the ACA, hoping to ratchet up pressure against that outcome.  Had their been at least the outlines of a plan, they would be checking down it right now.  Things I would do as PM on the trade front:  1.  Demand the Swiss deal from the EU for Britain.  2.  Approach major trading partners with offers of free trade deals.  A British commonwealth free trade zone is a great idea.

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)

The media tends to talk about the growth of the Chinese economy as if it is something new and different.   In fact, there probably have been only about 200 years in the history of civilization when China was not the largest economy on Earth.  China still held this title into the early 18th century, and will get it back early in this century.

This map from the Economist (via Mark Perry) illustrates the point.

Of course there is a problem with this map.  It is easy to do a center of gravity for a country, but for the whole Earth?  The center in this case (unless one rightly puts it somewhere in the depths of the planet itself) depends on arbitrary decisions about where one puts the edges of the map. I presume this is from a map with North America on the far left side and Japan on the far right.  If one redid the map, say, with North America in the center, Asia on the left and Europe on the right, the center of gravity would roam around North America through history.

..is when people attribute differences of opinion on policy issues to the other side "not caring."

I could cite a million examples a day but the one I will grab today is from Daniel Drezner and Kevin Drum.  They argue that people with establishment jobs just don't care about jobs for the little people.  Specifically Drum writes:

Dan Drezner points out today that in the latest poll from the Council on Foreign Relations, the opinions of foreign policy elites have converged quite a bit with the opinions of the general public. But among the top five items in the poll, there's still one big difference that sticks out like a fire alarm: ordinary people care about American jobs and elites don't. Funny how that works, isn't it?

Here are the specific poll results he sites.  Not that this is a foreign policy survey

The first thing to note is that respondents are being asked about top priorities, not what issues are important.  So it is possible, even likely, the people surveyed thought that domestic employment issues were important but not a priority for our foreign policy efforts.  Respondents would likely also have said that (say) protecting domestic free speech rights was not a foreign policy priority, but I bet they would still think that free speech was an important thing they care about.  The best analogy I can think of is if someone criticized a Phoenix mayoral candidate for not making Supreme Court Justice selection one of her top priorities.  Certainly the candidate might consider the identity of SCOTUS judges to be important, but she could reasonably argue that the Phoenix mayor doesn't have much leverage on that process and so it should not be a job-focus priority.

But the second thing to note is that there is an implied policy bias involved here.  The Left tends to take as a bedrock principle that activist and restrictive trade policy is sometimes (even often) necessary to protect American jobs.   On the other hand many folks, including me and perhaps a plurality of economists, believe that protectionist trade policy actually reduces total American employment and wealth, benefiting a few politically connected and visible industries at the expense of consumers and consumer industries (Bastiat's "unseen").  Because of the word "protecting", which pretty clearly seems to imply protectionist trade policy, many folks answering this survey who might consider employment and economic growth to be valid foreign policy priorities might still have ranked this one low because they don't agree with the protectionist / restrictionist trade theory.  Had the question said instead, say, "Improving American Economic Well-Being" my guess would be the survey results would have been higher.

Whichever the case, there is absolutely no basis for using this study to try to create yet another ad hominem attack out there in the political space.  People who disagree with you generally do not have evil motives, they likely have different assumptions about the nature of the problem and relevant policy solutions.  Treating them as bad-intentioned is the #1 tendency that drags down political discourse today.

Postscript:  This is not an isolated problem of the Left, I just happened to see this one when I was thinking about the issue.  There likely is a Conservative site out there taking the drug policy number at the bottom and blogging something like "Obama state department doesn't care about kids dying of drug overdoses."  This of course would share all the same problems as Drum's statement, attributing the survey results to bad motives rather than a sincere policy difference (e.g. those of us who understand that drugs can be destructive but see the war on drugs and drug trafficking to be even more destructive).

Mike Rizzo writes:

A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

1. Taxes today.
2. Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing.
3. Printing money. It’s not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.

So, this is what the government budget identity looks like for “normal” countries:

G = T + the change in debt + the change in base money

I think this is a useful simplification, but I wanted to add a couple other refinements  (refinements by the way he did not neglect in his text, just did not put in the formula).  One other source of funds we have seen in Greece is what I would call Aid, which used to be humanitarian aid (think India in the 1970s) but today tends to be bailout money and debt forgiveness.  So we will write the equation

G = Taxes + ΔDebt  + Money Printing + Aid

But due to the Keynesian orientation of many commenters on the Greek and European situation, it becomes useful to expand the "taxes" term into some sort of base income, which I will just call GDP for simplicity, and some sort of tax rate t.  So then we get:

G = GDP x t + ΔDebt  + Money Printing + Aid

The Greeks can't print money (unless the EU does it for them) and at the moment no one in their right mind will lend to them without guarantees from stronger European countries (e.g. Germany).  If we call EU money printing for Greece or EU loan guarantee programs Aid, we get

G = GDP x t + Aid

As Rizzo noted, aid is drying up and Greek tax revenues are going down rather than up, so basically they are screwed.  The only out seems to be for Greece to exit the Euro and then, once on the drachma again, print money like crazy and inflate their way out of the debt.

But expanding the tax term reveals one more policy alternative that is being suggested.   Keynesians seem to believe there is a path out of this situation in Greece (or if Greece is too far gone, certainly in Italy and Spain) where money from some source  (aid, borrowing, whatever) is spent in the economy by the government in some way that is stimulative, thus increasing GDP and therefore taxes and allowing Greece to increase the money available to the government.  Since Aid is currently only be granted tied to "austerity" programs rather than stimulative spending, they feel Germany et al are following exactly the wrong course.

I am incredibly skeptical of this for two reasons, beyond just my general skepticism of Keynesian stimulus.  First, I have heard something akin to this in my personal experience.  For a short time in my life, during the Internet crazy period, I was brought in by some investors to look at their portfolio of languishing Internet plays (e.g. discountshoelaces.com)* and decide if they should keep pouring money in or shut down.  The plan I got from management was always - always - this stimulus approach.  They suggested that rather than cut back, the investors should give them a bunch of new money to really blow out the marketing effort, which would kick start their growth, etc. etc.

The problem was that they never, ever had a lick of evidence beyond just hope that the next $1 million would suddenly do what the last $10 million failed to do.  So we shut most of these efforts down.  Your first loss is your best loss, as they say.

Similarly, I don't think Keynesians can point to any example in history where this actually worked.   A country is drowning in debt, but suddenly a Hail Mary play of adding a huge chunk more to the debt and spending it on civil service worker salaries suddenly turned the tide.  Seriously, do people honestly think this will work?  Or are they just frustrated because they grew up with an assumption that there is always a public policy answer for everything and there just does not seem to be one here.

I have an emerging hypothesis, not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases.  I am not sure in actual practice it is ever above one, but if it were to be above 1 at 20% debt to GDP, it certainly is not going to be the same at, say, 150%.

If so, great for them.  The more free trade in the world, the better:

Canadian and European officials say they plan to begin
negotiating a massive agreement to integrate Canada's economy with the
27 nations of the European Union, with preliminary talks to be launched
at an Oct. 17 summit in Montreal three days after the federal election.

Trade Minister Michael Fortier and his staff have been engaged for
the past two months with EU Trade Commissioner Peter Mandelson and the
representatives of European governments in an effort to begin what a
senior EU official involved in the talks described in an interview
yesterday as "deep economic integration negotiations."

If successful, Canada would be the first developed nation to have
open trade relations with the EU, which has completely open borders
between its members but imposes steep trade and investment barriers on
outsiders"¦

A pact with the United States would be politically impossible in Europe, senior European Commission officials said.

I would have said that changing the last statement would be a great goal for an Obama administration that wants to make Europe love us again (did they ever?)  But he has made clear that trade does not count in his definition of good relations, and in fact has already committed to initiating trade wars against our neighbors Mexico and Canada.

For years, protectionists in this country have tried to argue that "oh, I am really for free trade, but to be fair we must impose environmental and labor standards on our trading partners."  Well, now Europe is proposing doing exactly the same to us:

The European Commission is considering proposing a
carbon dioxide tariff on imports from states failing to tackle
greenhouse gas emissions, while also considering a toughening-up of the
EU's own emission trading system....

The plan reflects pressure by French president Nicolas Sarkozy who
argued in October that Europe should "examine the option of taxing
products imported from countries that do not respect the Kyoto
Protocol," referring to the 1997 international agreement on fighting
climate change.

Mr Sarkozy urged Brussels to discuss the implications of "unfair
competition" by firms outside the EU, which do not have to abide by
strict European standards on CO2 emissions.

This letter from Don Boudreaux seems relevant:

Hillary Clinton needs a
language lesson.  She favors only trade that is found by government to
"benefit[] our workers and our economy" and that promotes "rising
standards of living across the world" ("" December 3; my emphasis).  She then asserts that "There is nothing
protectionist about this."

Oh please.

Protectionism
exists whenever, wherever, and whyever government artificially raises
its citizens' costs of buying imports.  Protectionism has forever
rested on the false notion that government officials know best how
consumers should spend their money.  And it attempts today to hide its
ugly face behind the smiling mask of allegedly noble intentions, such
as those mouthed by Sen. Clinton.

The title of his post is "The Moment Somone Must Explain that He or She Isn't a Protectionist, You Can Bank on that Person Being a Protectionist."

It has been pretty quiet on the globalization front.  I saw today that Don Boudreaux released his new book on globalization, and I thought to myself -- wow, that was a charged issue a few years ago, what happened to it?   I was in Seattle for the riots and it was a big deal.  Well, in part, I guess the feistiness of the anti-globalization types may have gone down because they are winning -- protectionism is advancing today on many fronts when for a while we had it against the ropes.  In large part this is because the US has virtually abandoned its leadership role on free trade.

However, there is another reason we don't hear much from the anti-globalization folks:  Because they have all joined the global warming movement, deciding that the environmental packaging is a better way to sell socialism and protectionism:

The Social Democrats are calling for sanctions on energy-intensive U.S.
export products if the Bush administration continues to obstruct
international agreements on climate protection, the party's leading
environmental expert said Tuesday.

The move, after the United
Nations climate conference last week in Bali, Indonesia, has won strong
support from the Greens and other leftist groupings in the European
Parliament. Those factions will renew their bid to impose such levies
when the Parliament reconvenes next month.

I haven't really blogged about the Chinese toy recalls, not knowing much about them.  However, my first thought on hearing the problems described was, "aren't those design defects, not manufacturing issues?"  I had a strong sense that populist distrust of trade with China was being used as a fig leaf to cover Mattel's screw-ups.  Several of the recalls were for parts such as magnets that were small and could be swallowed.  There was no implication that the magnets fell off because they were attached or manufactured poorly, they were just a bad design.

I have worked in a number of large manufacturing companies that have plants and suppliers in China.  It was out responsibility to make sure the product that got to the customer was correct.  There is no way we would source a product from an independent foreign company, and have the product delivered straight to stores without inspection, unless we were absolutely damn certain about the company's processes, up to and including having full-time manufacturing people at their plant.

Well, I might have been on to something (WSJ$)

Toymaker Mattel
issued an extraordinary apology to China on Friday over the recall of
Chinese-made toys, saying most of the items were defective because of
Mattel's design flaws rather than faulty manufacturing. The company
added that it had recalled more lead-tainted Chinese toys than was
justified....

Mattel ordered three high-profile recalls this summer
of millions of Chinese-made toys, including Barbie doll accessories and
toy cars, because of concerns about lead paint and tiny magnets that
could be swallowed. The "vast majority of those products that were
recalled were the result of a design flaw in Mattel's design, not
through a manufacturing flaw in China's manufacturers," Mr. Debrowski
said. Lead-tainted toys accounted for only a small percentage of all
toys recalled, he said. "We understand and appreciate deeply the issues
that this has caused for the reputation of Chinese manufacturers," he
said.

Mattel said in a statement its lead-related recalls
were "overly inclusive, including toys that may not have had lead in
paint in excess of the U.S. standards. The follow-up inspections also
confirmed that part of the recalled toys complied with the U.S.
standards."

The other interesting thing here is just how important Mattel's relationship with China is, to have even issued this apology at all.  For such a massive and high-profile recall, Mattel came off very well through the succesful strategy of blaming China.  I know that parents I have heard talk about the recall blame China and have increased fear of Chinese products.  So it is interesting to see that Mattel feels the need to abandon this so far winning PR strategy.

Via the Washington Post:

It has become a Capitol Hill ritual: A few senators, always including the New York Democrat Charles E. Schumer, introduce a bill to punish China
if its leaders do not raise the value of the nation's currency. Photos
are taken, news releases are issued, but nothing really happens.

This
year, the atmosphere on the Hill is markedly different. Powerful
senators from both sides of the aisle, Schumer among them, are pushing
two bills that threaten retaliatory action if China does not budge. For
the first time, the idea is gaining broad support. The bills are moving
swiftly through the Senate, and many analysts expect one will pass.

If the bill's authors are successful, the effect at a minimum will be to raise consumer prices in the United States and lower them for Chinese citizens.  So we are going to "punish" China by making our own citizens pay higher prices.  How does this make any sense?  Also, in the process, let's make sure we reduce the capacity of China to buy US government debt, which to this point has been reducing the cost of the Federal budget deficit.

Tyler Cowen argues this is the best we can expect -- the worst is a substantial debalization in the Chinese economy... and ours.  I wrote much more on continuing to allow the Chinese government to subsidize American consumers here.