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At the beginning of the Trump era, many of us (including me) warned that his statements on trade were nonsensical.

And when Trump shifted from bad rhetoric to bad policy, Johan Norberg pointed out why trade wars are very misguided.

As you might expect, Johan is correct. More government intervention in global commerce has led to bad consequences.

Trump’s tax increases on trade have produced bad results for the American economy. Consumers have been hurt, businesses have been hurt, exporters have been hurt, and specific sectors such as farming and manufacturing have been hurt.

All of this was very predictable.

Indeed, the Trump Administration’s own economists warned back in 2018 that a trade war would backfire. Here are some excerpts from a report in the New York Times.

A White House economic analysis of President Trump’s trade agenda has concluded that Mr. Trump’s tariffs will hurt economic growth in the United States… The findings from the White House Council of Economic Advisers have been circulated only internally and not publicly released… The administration has hit Canada, Mexico, Japan and the European Union with steel and aluminum tariffs and…tariffs on a range of Chinese goods. In return, many of those countries have either imposed or threatened reciprocal tariffs on everything from steel to pork to orange juice, a move that economists say will depress economic growth. …many economists have been warning that the administration’s trade approach will undercut economic growth and partially offset any boost from the $1.5 trillion tax cut that Congress passed and Mr. Trump signed… Wall Street research firms have warned that those tariffs, and the retaliatory tariffs that trading partners have threatened in response, will slow growth in the United States. …In a…survey of an expert panel of academic economists assembled by the University of Chicago’s Booth School of Business, no economist agreed with the statement, “Imposing new U.S. tariffs on steel and aluminum will improve Americans’ welfare.”

Needless to say, Trump ignored the good advice from his economists and imposed a bunch of tax increases on trade.

We now have some hard evidence about the wisdom of this approach. Economists at the Federal Reserve crunched the numbers as part of a new study.

While there are already vast theoretical and empirical literatures documenting the effects of changes in trade policy, …there are virtually no modern episodes of a large, advanced economy raising tariffs in a way comparable to the U.S. in 2018-2019. …these tariffs…were imposed, in part, to boost the U.S. manufacturing sector by protecting against what were deemed to be the unfair trade practices of trading partners, principally China. …This paper provides the first comprehensive estimates of the effect of recent tariffs on the U.S. manufacturing sector. …We measure the import protection channel as the share of domestic absorption affected by newly imposed tariffs. We account for declines in competitiveness associated with increased input costs as the share of industry costs subject to new tariffs.Finally, we measure an industry’s potential exposure to retaliatory tariffs by U.S. trading partners as the share of industry-level exports subject to new retaliatory tariffs. …We then relate the measures for these three channels of tariff exposure to monthly data on manufacturing employment, output, and producer prices.

And what did the experts find?

We find that tariff increases enacted in 2018 are associated with relative reductions in manufacturing employment and relative increases in producer prices. In terms of manufacturing employment, rising input costs and retaliatory tariffs each contribute to the negative relationship, and the contribution from these channels more than offsets a small positive effect from import protection. For producer prices, the relative increases associated with tariffs are due solely to the rising input cost channel. …we find that shifting an industry from the 25th percentile to the 75th percentile in terms of exposure to each of these channels of tariffs is associated with a reduction in manufacturing employment of 1.4 percent, with the positive contribution from the import protection effects of tariffs (0.3 percent) more than offset by the negative effects associated with rising input costs (-1.1 percent) and retaliatory tariffs(-0.7 percent).

In other words, the small benefits that go to the industries that are sheltered from competition are very much outweighed by the damage to other sectors of the economy (a lesson that Trump could have learned if he studied real-world evidences, such as the Great Depression).

The Wall Street Journal opined about the Fed’s study.

One mystery of the Trump -era economy has been why U.S. manufacturing slumped sharply in late 2018 and 2019 after surging the year before. The Occam’s razor culprit is the onset of trade war… Federal Reserve economists Aaron Flaaen and Justin Pierce examine the impact of the tariff outbursts of 2018 on U.S. manufacturing employment, output and prices. This is important work because 2018 marked the start in earnest of President Trump’s campaign to change the world trading order, using tariffs as his preferred bludgeon. …Mr. Trump justified his campaign in part as a way to revive American manufacturing while protecting against unfair trade practices. So how has that worked out? …the economists have bad news for tariff lovers. …the higher costs from tariffs swamped benefits to specific firms from import protection. The tariffs cost more jobs than they created. …As the Fed economists conclude, “We find the impact” from protection “is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries.” ….A previous Fed study looked at uncertainty and found it has cut U.S. GDP growth by about a percentage point, which explains the deceleration to 2% from 3% in the last year.

At the risk of sounding like a dogmatic libertarian, we now have additional confirmation that it’s not a good idea to expand the footprint of government.

That’s true about taxes. That’s true about spending. That’s true about regulation. And it’s true about trade.

P.S. Wonky readers may be interested in this chart from the Fed study, which shows the impact of Trump’s trade war on employment, production, and producer prices.

P.P.S. Trump is right when he asserts that other nations have bad protectionist policies. Unfortunately, he wrongly thinks that reducing trade deficits somehow will address those bad policies. Instead, he should have targeted the specific bad policies (such as Chinese cronyism), ideally by utilizing the World Trade Organization.

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Yesterday’s column was my annual end-of-year round-up of the best and worst developments of the concluding year.

Today I’ll be forward looking and give you my hopes and fears for the new year, which is a newer tradition that began in 2017 (and continued in 2018 and 2019).

With my glass-half-full outlook, we’ll start with the things I hope will happen.

Supreme Court strikes down civil asset forfeiture – It is nauseating that bureaucrats can steal property from citizens who have never been convicted of a crime. Or even charged with a crime. Fortunately, this disgusting practice already has attracted attention from Clarence Thomas and other sound-thinking Justices on the Supreme Court. Hopefully, this will produce a decision that ends this example of Venezuela-style government thuggery.

Good free-trade agreements for the United Kingdom – This is a two-pronged hope. First, I want a great agreement between the U.S. and the U.K., based on the principle of mutual recognition. Second, I want the best-possible agreement between the U.K. and the E.U., which will be a challenge since the political elite in Brussels has a spiteful desire to “punish” the British people for supporting Brexit.

Maduro’s ouster in Venezuela – I already wished for this development in 2018 and 2019, so this is my “Groundhog Day” addition to the list. But if I keep wishing for it, sooner or later it will happen and I’ll look prescient. But I actually don’t care about whether my predictions are correct, I just want an end to the horrible suffering for the people of Venezuela.

Here are the things I fear will happen in 2020.

A bubble bursts – I hope I’m wrong (and that may be the case since I’ve been fretting about it for a long time), but I fear that financial markets are being goosed by an easy-money policy from the Federal Reserve. Bubbles feel good when they’re expanding, but last decade should have taught us that they can be very painful when they pop.

A loss of economic liberty in Chile and/or Hong Kong – As shown by Economic Freedom of the World, there are not that many success stories in the world. But we can celebrate what’s happened in Hong Kong since WWII and what’s happened in Chile since the late 1970s. Economic liberty has dramatically boosted prosperity. Unfortunately, Hong Kong’s liberty is now being threatened from without and Chile’s liberty is now being threatened from within.

Repeal of the Illinois flat tax – The best approach for a state is to have no income tax, and a state flat tax is the second-best approach. Illinois is in that second category thanks to a long-standing provision of the state’s constitution. Needless to say, this irks the big spenders who control the Illinois government and they are asking voters this upcoming November to vote on whether to bust the flat tax and open the floodgates for an ever-growing fiscal burden. By the way, it’s quite likely that I’ll be including the Massachusetts flat tax on this list next year.

I’ll also add a special category for something that would be both good and bad.

Trump gets reelected – Because Trump is producing better tax policy and better regulatory policy, and because of my hopes for judges who believe in the Constitution’s protections of economic liberty, it would be good if he won a second term.

Trump gets reelected – Because Trump is producing worse spending policy and worse trade policy, and because of my concerns never-ending Keynesian monetary policy from the Federal Reserve, it would be bad if he won a second term.

Happy New Year, everyone.

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I wrote yesterday that the Trump tax plan is yielding significant benefits, but one of my caveats at the end of the column warned that Trump’s weak record on spending undermines the long-run sustainability of lower tax rates.

The latest example of Trump’s profligacy is the $1.4 trillion spending bill for the 2020 fiscal year that was just approved (this is the “discretionary” money for the parts of the budget that are annually appropriated, so keep in mind that there’s also more than $3 trillion of “mandatory” spending for entitlement programs in 2020).

This pork-filled spending bill became inevitable when Trump surrendered to the Democrats this summer and agreed to bust the spending caps (something politicians also did in 2013, 2015, and 2018).

It’s hard to capture the utterly reckless nature of the new spending bill.

Here’s how Senator Rick Scott described the legislation.

…a giant spending package — 2,313 pages long — that was…negotiated in secret, spends $1.4 trillion, and is chock full of member projects and special-interest giveaways. …more than $4,200 for every man, woman, and child in America. …This package includes $25 million for the “operation, maintenance, and security” of the Kennedy Center in Washington, D.C. It includes a $7.25 million increase in funding for the National Endowment for the Arts, the largest increase in a decade. …It includes more than $1 billion in new foreign-aid funding without any discussion about what we’re getting for this funding. …This bill spends $1.4 trillion, with no cuts or reforms. …How many more trillions of dollars do we need to spend before we wake up to the danger…? We need to reform the way Washington works, and we need to do it now.

The Wall Street Journal was similarly dismayed, opining about the bipartisan spending orgy and pointing out the real problem is that all this spending violates the Golden Rule of fiscal policy.

Congress has left town for the year but alas not before another bipartisan spending party that has typified the Trump Presidency. …The budget problem isn’t a shortage of revenue. CBO says tax receipts grew 4% last fiscal year, through September, and 3% in the first two months this year. Economic growth is feeding the Treasury. But spending is growing much faster: 8% last fiscal year, more than four times the inflation rate, and 6% in October and November this year. In addition to the latest discretionary bills, spending on Social Security (6%), Medicare (6.1%) and Medicaid (9.2%) continue to soar this year. Neither party shows any inclination to do anything about those programs, except expand them. Mr. Trump may yet join Barack Obama in the spending record books.

Regarding the final sentence in the above excerpt, I will predict now that Trump will exceed Obama’s profligacy.

And I’ll have the numbers to prove that early next year when I update my data on presidential spending.

In the meantime, I’ll close with this very depressing chart from the Committee for a Responsible Federal Budget.

The bottom line is that Republican big spenders are enablers of Democratic big taxers.

  • In a couple of years, when there’s a big fight to get rid of the Trump tax cuts, every Republican who supported this awful deal (including Trump) will be responsible.
  • When there’s a Democratic president and a big push for class-warfare taxes, every Republican who supported this awful deal (including Trump) will be responsible.
  • When there’s a big fight after that to impose a European-style value-added tax, every Republican who supported this awful deal (including Trump) will be responsible.

Gee, isn’t bipartisanship wonderful?

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The Trump tax plan, which was signed into law right before Christmas in 2017, had two very good features.

The former was important because the federal tax code was subsidizing high tax burdens in states such as New Jersey, Illinois, and California.

The latter was important because the United States, with a 35 percent corporate rate, had the highest tax burden on businesses among developed nations.

The 21 percent rate we have today doesn’t make us a low-tax nation, but at least the U.S. corporate tax burden is now near the world average.

There were many other provisions in the Trump tax plan, most of which moved tax policy in the right direction.

Now that a couple of years have passed, what’s been the net effect?

In a column for today’s Wall Street Journal, former Trump officials Gary Cohn and Kevin Hassett make the case that the tax plan has produced good results.

…the tax cut reduced the cost of installing new plant and machinery by about 10%, suggesting that capital spending would jump by the same amount. This would increase the amount of capital per worker and drive up productivity and wages. …This predicted increase in capital has materialized, and has translated into additional economic growth. …Capital spending was 4.5% higher in 2018 than pre-TCJA blue-chip forecasts, and this trend continued in 2019. This extra capital improved productivity and wages… Over the past year, nominal wages for the lowest 10% of American workers jumped 7%. The growth rate for those without a high-school diploma was 9%. …when President Obama hiked marginal tax rates, …labor-force participation dropping 0.7% after the tax increase for workers 35 to 44, but dropping 1.5% for workers over 55. After passage of the TCJA, the opposite pattern emerged, with labor-force participation for those between 35 and 44 increasing 0.4%, and labor-force participation for those over 55 increasing 1.3%. … Before Mr. Trump took office in January 2017, the Congressional Budget Office forecast the creation of only two million jobs by this point. The economy has in fact created seven million jobs since January 2017. …the U.S. is the only Group of Seven country that will post growth above 2% this year.

And the White House has been publicizing some positive numbers.

Such as an increase in investment.

I suppose one can argue that the Blue Chip consensus forecast was wrong and that the Trump tax plan had no effect, but that seems like an after-the-fact rationalization.

The White House also has been touting an increase in prime-age labor force participation.

These are impressive numbers. I’ve argued, for instance, that the employment/population ratio may now be a more important variable than the unemployment rate.

Regardless, the best numbers I’ve seen aren’t from the White House.

Andy Puzder recently shared this chart showing that workers in low-wage industries (the blue line) are enjoying the biggest gains.

I want everyone’s wages to increase, which is why I’m a big supporter of reforms that boost investment and productivity.

But I especially applaud when those reforms increase wages for those with modest incomes.

I’ll close with three caveats.

  1. Because Trump has been very weak on the issue of government spending, it’s quite likely that his tax cuts eventually will be repealed or offset by other tax increases.
  2. Trump obviously was talking nonsense when he claimed his tax plan would produce annual growth of 4 percent or higher. That being said, even more-modest increases in growth are very desirable.
  3. Trump’s tax increases on trade are bad for prosperity and therefore are offsetting some of the benefits of his tax reductions on corporate and household income.

The bottom line is that Trump has made tax policy better (or less worse), but always remember that tax policy is just one piece of a large puzzle when looking at economic policy.

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When I was in London last week for Boris Johnson’s landslide victory, many people asked me whether Trump would win again in 2020.

Since I was wrong about 2016, I told them I wasn’t the right person to ask.

That being said, Trump has some positive economic tailwinds.

For those of you who care about political outcomes, there’s a new CNN poll of battleground states.

It’s good news for Republicans, particularly if one assumes that there are some people who don’t want to admit that they will vote for Trump (which seems to have been true in 2016).

Political betting markets also are pointing to a Trump victory.

Here’s a screenshot showing the 2019 odds of success for the various candidates. As you can see Trump’s numbers are trending upwards – including a positive bump after the House voted for impeachment!

Both polls and betting markets were wrong in 2016, so take all this data with a grain of salt.

For those who care about economic policy, I’ll simply regurgitate my usual comment that Trump is good on some issues (taxes and regulation) and bad on other issues (trade and spending).

I expect this pattern to continue if he’s reelected.

The big wild card is monetary policy.

As I said in the interview, I worry there’s a bubble caused by an easy-money approach. And bad things happen when bubbles pop.

P.S. I should have mentioned that the employment-population data is not as positive as the unemployment-rate data.

P.P.S. I mentioned macroeconomic political forecasts in the interview. I wrote about those predictions back in October.

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One of my big 2018 worries was that Trump would wreck NAFTA.

We dodged that bullet, but my two cents is that the new deal is underwhelming.

The bottom line is that his revisions to the pact – which is now called USMCA – create some new barriers to trade.

But there also are a few good parts of the deal.

And at least a source of economic uncertainty is now in the past. Indeed, that’s the real victory. There’s now presumably no risk that Trump will cause a meltdown of North American trade.

The Wall Street Journal‘s editorial hits the nail on the head.

Donald Trump is the most protectionist American President since Herbert Hoover, so one of our trade-policy goals of the last three years has been damage control. That’s the best case now for supporting Mr. Trump’s revisions to the North American Free Trade Agreement…  the new U.S.-Mexico-Canada trade deal puts to rest Mr. Trump’s threats to abandon the 1994 agreement and blow up continental trade. The new deal preserves most of the tariff-free trade in the original Nafta. …There’s particular political value in committing both Mexico’s President Andrés Manuel López Obrador, the left-wing economic nationalist known as AMLO, and Mr. Trump, the Republican mercantilist, to open trading rules for North America.

Sadly, the Trump Administration pushed for some European-style managed trade and regulatory harmonization.

The shame is that in many respects the new deal is worse than Nafta, especially its bows to politically managed trade. …This raises the cost of manufacturing, making North American products less competitive worldwide. Also reducing North American competitiveness is a new rule mandating that 40% of an auto qualifying for tariff-free trade in the region has to be produced by workers earning $16 an hour. Mandating wage rates ignores the relationship between productivity and output and sets a bad precedent for future trade deals. …The unions battered Mexico to allow a new enforcement process that will give American unions a new way to intrude in Mexican labor disputes. …North American auto production costs will also rise thanks to a new layer of protection for U.S. steel. The new deal mandates that 70% of steel used in North American vehicles must be made on the continent… Our concern now is that the deal’s concessions to politically managed trade will become the new baseline for future negotiations. …Senators will have to consider whether these bad precedents are worse than the benefit of saving most of the original Nafta.

I mentioned in the interview that the International Monetary Fund did an analysis of USMCA.

Here’s what the IMF set out to measure.

This paper uses a global, multisector, computable-general-equilibrium model to provide an analytical assessment of five key provisions of USMCA: (1) higher vehicle and auto parts regional value content requirement, (2) new labor value content requirement for vehicles, (3) stricter rules of origin for USMCA textile and apparel trade, (4) agricultural trade liberalization that increases U.S. access to Canadian supply-managed markets and reduces U.S. barriers on Canadian dairy, sugar and sugar products, and peanuts and peanut products, and (5) trade facilitation measures. In the context of successful ratification of USMCA, the paper also examines the effect of the removal of U.S. tariffs on steel and aluminum imports from Canada and Mexico and their reciprocal withdrawal of surtax countermeasures.

And what are the results?

Mostly nothing. There are  few good provisions and a few bad provisions, so the net result is trivial.

Indeed, it’s worth emphasizing that the the most unambiguously positive result will be the removal of Trump’s anti-growth taxes on imports of steel and aluminum.

At the aggregate level, effects of the USMCA are relatively small. According to the analysis of this paper, key provisions in USMCA would lead to diminished economic integration in North America, reducing trade among the three North American partners by more than US$4 billion (0.4 percent) while offering members a combined welfare gain of US$538 million. Effects of the USMCA on real GDP are negligible. …The results show that the tighter rules of origin in the auto sector and the labor value content requirement would not achieve their desired outcomes. The new rules lead to a decline in the production of vehicles and parts in all three North-American countries, with shifts toward greater sourcing of both vehicles and parts from outside of the region. …The three countries would gain much from ending the dispute triggered by the U.S. tariffs on steel and aluminum. USMCA scenario is extended to include the removal of U.S. steel and aluminum tariffs and a reciprocal elimination of Canadian and Mexican retaliatory import surtaxes. The extension would increase the welfare gain for the Canada, Mexico and the United States by $2.5 billion.

P.S. I mentioned an ideal free trade agreement in the interview. I also should have pointed out that unilateral free trade also is a good option. Assuming, of course, one understands the benefits of trade.

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This week featured lots of angst-ridden headlines about the annual budget deficit for the 2019 fiscal year (which ended on September 30) jumping to $984 billion, an increase of more than $200 billion.

For reasons I’ve previously outlined, I don’t lose too much sleep about the level of government borrowing. What’s far more important is the burden of government spending.

Whether the budget is financed by taxes or borrowing, the level of spending is what really matters. Simply stated, that number measures the amount of money that politicians divert from the economy’s productive sector.

That being said, it’s sometimes very illuminating to look at why red ink goes up and down.

So I went to the Treasury Department’s most-recent Monthly Treasury Statement and looked at the raw numbers. What did I find?

Lo and behold, the deficit jumped to $984 billion because outlays are increasing twice as fast as revenue.

Perhaps even more discouraging, the burden of spending is rising more than four times faster than needed to keep pace with inflation.

These are very discouraging numbers, especially when you keep in mind that this is the calm before the storm. Because of poorly designed entitlement programs and an ageing population, our fiscal situation will deteriorate even faster in the future.

Unless there’s much-needed reform.

But I’m not holding out much hope. Trump is a big spender and Congress is filled with big spenders.

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