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Archive for the ‘Economics’ Category

The crowd in Washington has responded to the coronavirus crisis with an orgy of borrowing and spending.

The good news is that the legislation isn’t based on the failed notion of Keynesian economics (i.e., the belief that you get more prosperity when the government borrows money from the economy’s left pocket and then puts it in the economy’s right pocket).

Instead, it is vaguely based on the idea of government acting as an insurer for unforeseen loss of income.

Not ideal from a libertarian perspective, of course, but we can at least hope it might be somewhat successful in easing temporary hardship and averting bankruptcies of otherwise viable businesses.

The bad news is that the legislation is filled with corrupt handouts and favors for the friends and cronies of politicians. Simply stated, they have not “let a crisis go to waste.”

The worst news, however, is that politicians have plenty of additional ideas for how to exploit the crisis.

An especially awful idea for so-called stimulus comes from House Speaker Nancy Pelosi, who wants to restore (retroactively!) the full federal deduction for state and local tax payments.

Pelosi suggested that reversing the tax law’s $10,000 cap on the state and local tax (SALT) deduction… The cap on the SALT deduction has been strongly disliked by politicians in high-tax, Democratic-leaning states such as New York, New Jersey and California… But most Republicans support the SALT deduction cap, arguing that it helps to prevent the tax code from subsidizing higher state taxes.

I’ve written many times on this issue and explained why curtailing that deduction (which basically existed to subsidize the profligacy of high-tax states) was one of the best features of the 2017 tax reform.

Needless to say, it would be a horrible mistake to reverse that much-needed change.

The Wall Street Journal agrees, opining on Pelosi’s proposal to subsidize high tax states.

Democrats are far from finished using the crisis to try to force through partisan priorities they couldn’t pass in normal times. Mrs. Pelosi is now hinting the price for further economic relief may include expanding a regressive tax deduction for high-earners in states run by Democrats. …In the 2017 tax reform, Republicans limited the state and local tax deduction to $10,000. …Democrats have been trying to repeal the SALT cap since tax reform passed. …Blowing up the state and local tax deduction would…also make it easier for poorly governed states to rely on soaking their high earners through capital-gains and income taxes, because the federal deduction would ease the burden. …Mrs. Pelosi’s remarks underscore the potential for further political mischief and long-term damage as the government intervenes… When Democrats next complain that Republicans want to cut taxes “for the rich,” remember that Mrs. Pelosi wants to cut them too—but mainly for the progressive rich in Democratic states.

Maya MacGuineas of the Committee for a Responsible Federal Budget also denounced the idea.

This is not the time to load up emergency packages with giveaways that waste billions of taxpayer dollars… Weakening or eliminating the SALT cap would be regressive, expensive, poorly targeted, and precisely the kind of political giveaway that compromises the credibility of emergency spending. …Retroactively repealing the SALT caps for the last two years would mean sending a check of $100,000 to the household making over $1 million per year, and less than $100 for the average household making less than $100,000 per year. …During this crisis, the Committee implores special interest lobbyists to stand down and lawmakers to put self-serving politics aside.

By the way, I care about whether a change in tax policy will make the country more prosperous in the long run and don’t fixate on whether the change helps or hurts any particular income group. So Maya’s point about the rich getting almost all the benefits is not what motivates me to oppose Pelosi’s proposal.

That being said, it is remarkable that she is pushing a change that overwhelmingly benefits the very richest people in the nation.

The obvious message is that it’s okay to help the rich when a) those rich people live in places such as California, and b) helping the rich also makes it easier for states to impose bad fiscal policy.

Which is why she was pushing her bad idea before the coronavirus ever became an issue. Indeed, House Democrats even passed legislation in 2019 to restore the loophole.

Professor John McGinnis of Northwestern University Law School wrote early last year why the deduction was misguided and why the provision to restrict the deduction was the best provision of the 2017 tax law.

…the best feature of the Trump tax cuts was the $10,000 cap on the deductibility of state and local taxes. It advanced one of the Constitution’s most important structures for good government—competitive federalism. Deductibility of state taxes deadens that competition, because it allows states to slough off some of the costs of taxation to citizens in other states. Moreover, it allows states to avoid accountability for the taxes they impose. Given high federal tax rates in some brackets, high income tax payers end up paying only about sixty percent of the actual tax imposed. The federal government and thereby other tax payers effectively pick up the rest of the tab. …the ceiling makes some taxpayers pay more, but its dynamic effect is to make it less likely that state and local taxes, particularly highly visible state income taxes, will be raised and more likely that they will be cut.

For what it’s worth, I think the lower corporate tax rate was the best provision of the 2017 reform, but McGinnis makes a strong case.

Perhaps the best evidence for this change comes from the behavior of politicians from high-tax states.

Here are some excerpts from a Wall Street Journal editorial from early last year.

New York Gov. Andrew Cuomo…is blaming the state’s $2.3 billion budget shortfall on a political party that doesn’t run the place. He says the state is suffering from declining tax receipts because the GOP Congress as part of tax reform in 2017 limited the state-and-local tax deduction to $10,000. …the once unlimited deduction allowed those in high tax climes to mitigate the pain of state taxes. It amounted to a subsidy for progressive policies. …The real problem is New York’s punitive tax rates, which Mr. Cuomo and his party could fix. “People are mobile,” Mr. Cuomo said this week. “And they will go to a better tax environment. That is not a hypothesis. That is a fact.” Maybe Mr. Cuomo should stay in Albany and do something about that reality.

Amen.

The federal tax code should not subsidize politicians from high-tax states. Nor should it subsidize rich people who live in high-tax states.

If Governor Cuomo is worried about rich people moving to Florida (and he should be), he should lower tax rates and make government more efficient.

I’ll close with the observation that the state and local tax deduction created the fiscal version of a third-party payer problem. It reduced the perceived cost of state and local government, which made it easier for politicians to increase taxes (much as government subsidies for healthcare and higher education have made it easier for hospitals and colleges to increase prices).

P.S. Speaking of fake stimulus, there’s also plenty of discussion on Capitol Hill (especially given Trump’s weakness on the issue) about squandering a couple of trillion dollars on infrastructure, even though such spending a) should not be financed at the federal level, b) would not have any immediate impact on jobs, and c) would be a vehicle for giveaways such as mass transit boondoggles.

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In the past couple of weeks, we’ve discussed a bunch of coronavirus-related issues, ranging from big-picture topics such as the proper role of government and the catastrophic downsides of excessive bureaucracy to more-focused topics such as how gun control puts families at risk, why laws against “price gouging” are misguided, and how government-encouraged debt makes the economy more vulnerable.

The crisis even led me to unveil a new theorem. And I also shared some amusing cartoons in hopes of lightening the mood.

The latest chapter in the coronavirus saga is that people are beginning to question how much economic damage we should be willing to accept in order to get the disease under control.

Public health experts argue that isolation and lockdown are critical if we we to “flatten the curve” so that new cases don’t overwhelm the ability of the system to treat patients (thus resulting in unpalatable forms of triage, with older and sicker patients set aside to die so that limited resources can be utilized to save others).

But if the economy is put on hold for several months, the economic damage will be catastrophic. At some point, policy makers won’t have any choice but to relax restrictions on people and businesses.

So how do we assess the costs and benefits of various options?

Eline van den Broek-Altenburg and Adam Atherly, both from the College of Medicine at the University of Vermont, explain the necessary tradeoffs.

While a growing number of people are starting to understand the message of the intuitive picture of “Flattening The Curve”, some health economists are starting to wonder how flat the curve should actually be for the benefits to exceed the costs. …how does the economic cost of the flattening fit into the discussion? …we use publicly available data to calculate the cost effectiveness of the flattening the curve. …When considering the value of a healthcare intervention to inform decision-making, benefits are usually measured in terms of life years gained, with the life years adjusted for the “quality” of the life (using standard formulas) to create a “Quality Adjusted Life Year” or QALY. …interventions in younger populations will typically yield more QALYs than interventions in older populations: because younger people have longer life expectancy. …Heath systems then compare the QALYs gained to the cost and calculate a cost per QALY gained. In the United States, interventions that cost less than $100,000 per QALY gained are often considered “cost effective,” although the precise number is somewhat controversial.

What you just read is the theoretical framework.

The authors then apply the model to the current situation.

…is the current “stay at home” and social isolation-policy, with school closed and businesses shuttered, cost effective using the standard health economics framework? …The years of life-gains are relatively straightforward. …statistics on the people who died of COVID19 in China and Italy are the best source of currently available data. …The average 80-year old in the United States has a life expectancy of about 9 years, suggesting that on average, a death averted will “buy” 9 extra years of life. …If we use diabetes as a reasonable proxy for the many chronic diseases, we would adjust the 9 years down to 7.8 years or QALYs. In other words: the average loss per person of quality-adjusted life years is 7.8. …This implies the pandemic, if unchecked, will lead to a loss of between 1.56 million and 13.26 million QALYs. …What, then, is the cost of the intervention of social distancing? One easy estimate would be to use the cost of the current stimulus bill before congress — 1 trillion dollars. This is likely an underestimate of the true cost, but is a reasonable starting place. …the cost per QALY gained from the current approach to be somewhere between approximately $75,000 and $650,000.

So what’s the bottom line?

Here’s a graphic they prepared.

And here’s their explanation.

…the key variable is the expected number of deaths. A pandemic that is likely to lead to 1.7 million deaths can justify the enormous public costs. However, if the pandemic is in the lower end of the predicted range, then the public funds would have been more valuable if spent elsewhere. …Some claim it is impossible or even unethical in times of a crisis, to think about cost when lives are involved. But in a world of finite resources, it’s necessary to make choices. Why not use a framework that has been defended by governments and scientists for decades?

Richard Rahn, former Chief Economist for the U.S. Chamber of Commerce, is very explicit about the downsides of an economic shutdown for future generations.

Some government officials, politicians and commentators keep saying words to the effect, “we need to spend whatever it takes to stop the coronavirus deaths.” They, of course, do not literally mean the government should spend an infinite amount of money to save a life — because, if they did, we would not let people drive more than five miles an hour in order to save more than 35,000 Americans who die on the roadways each year. …What is missing in this discussion is what American taxpayers and workers in terms of job losses should spend to save each life… Such calculations are necessary for insurance companies to price their products correctly, and for all of those government agencies involved in health and safety to determine both the proper form and degree of regulation. …If we learn that a 35-year-old MD has unexpectedly passed away, we are likely to feel far worse about the tragedy than if we hear her 90-year-old grandfather has died.

That’s Richard’s conceptual framework.

Here are his calculations.

Let’s assume that the low-cost measures will result in 50,000 more deaths (which is almost certainly on the very high-side given the experience of other countries). If we value the average death at…$2,000,000 figure… (which is high, because of the advanced age of most of the coronavirus victims), then policies that cost taxpayers, and the hit to GDP, more than $100 billion are counterproductive. Even if you assume that my figures are off by a magnitude of three, the mitigation policies should not cost more than $300 billion — not trillions.

Jeffrey Polet, a political scientist at Hope College, also explores the adverse consequences of an economic lockdown.

A panicking public will produce bad consequences, and we are already seeing its destructive effects on our economy. …While the elderly and infirm are the most vulnerable populations, small businesses, low wage laborers, and less healthy social institutions are the most likely to succumb to the economic consequences of the reaction to the virus. …The result will be, as we already see, a call for more government programs to aid those made destitute by the government’s reactions. …collective overreacting has profound social, economic, and political effects. …Good leadership neither overreacts nor under-reacts but reacts sensibly. …Calling something a “pandemic” excites public fear, even if the majority of the population is unlikely to be either directly or indirectly harmed. …For many people in this country, the prospect of losing their business or their job is far more frightening and harmful than the prospect of getting infected with the virus. An already insolvent government is hardly in a position to get this economy up and running, particularly if its policies create massive economic dislocations. …One of the appeals of utilitarianism is that it actually provides a functioning calculus, however imperfect in implementation.

I’ll close with the observation that I want to err on the side of public health in the short run, though I confess I’m not even sure what that means in terms of public policy since we not only need to agree on how much a life is worth (an unpleasant number to consider), but also get a handle on how many lives might be at risk (a very speculative number).

The goal of today’s column is simply to point out that the tradeoffs are real and to applaud the people who have the honesty to write about the issue.

In the long run, we should all appreciate the overlooked point that there is no tradeoff between health outcomes and economic outcomes.

That’s because wealthier societies are healthier societies. Here are a couple of chart from an article I wrote for the Journal of Regulation and Social Costs way back in 1992.

I’ve written about this correlation many times, both as a general concept, and also when addressing specific topics such as the adverse impact of President Obama’s anti-growth policies (and I cited one of Obama’s top economic appointees, Cass Sunstein, who explicitly agrees about the link between health and wealth).

P.S. There’s a very amusing Remy video about health-and-wealth tradeoffs at the end of this column.

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After Hitler’s National Socialists were defeated in World War II, the allies imposed price controls on the German economy for the ostensible purposes of fighting inflation and preventing “price gouging.”

That policy led to massive shortages, black markets, and hoarding. Fortunately, as described in this video, a very clever economist abolished those controls, thus setting the stage for Germany’s post-war economic miracle.

The lesson to be learned is that politicians should let markets determine prices. Price controls of any kind, as indicated by the cartoon, will cause people to withhold goods, services, and/or labor from the marketplace.

Unfortunately, many people overlook that lesson when there’s some sort of disaster.

In a column for Bloomberg, Scott Duke Kominers asserts that sellers should not be allowed to increase prices when there’s a sudden increase in demand.

One might think that steep prices for disinfectant in the middle of an epidemic are just markets at work — a way of getting scarce goods to the people who value them the most. I’m sure that’s what price gougers tell themselves. …But that’s not the right way to think about disinfectant at this particular moment. …if you can pay $87 for a bottle of Purell instead of the usual $2 that probably doesn’t mean you’re more concerned about the risk of infection than your neighbor; it just means that you have more disposable income. Thus buying low-priced disinfectant and selling it at steep markups effectively transfers disinfectant supplies from lower-income people to wealthier ones. …in situations such as this it may be best for society to force prices below market-clearing levels in order to make sure everyone has access; that’s exactly what laws prohibiting price gouging attempt to do. …There’s a serious consequence to keeping the price low, of course: we end up with rationing, since there’s not enough to go around. But that hits everyone — rich or poor — more or less equally.

Politicians obviously like this argument. Most states have laws against “price gouging.”

That may be smart politics, but it’s bad economics.

J.D. Tuccille of Reason explains why such laws are misguided.

…as common as accusations of “price gouging” are, the term has no fixed meaning. Asked when rising prices cross the line to become criminal, New York Attorney General Letitia James told NPR, “there’s no definitive answer to that question, but you know it when you see it.” …Someincluding Alabama, Florida, and Maineforbid selling at an “unconscionable” price. Idaho and Texas ban sales at an “exorbitant or excessive price.” And New York splits the difference with restrictions on “unconscionably excessive price” increases during an emergency… Laws can’t change the market conditions that drive prices up. Prices for hand sanitizer, face masks, and easily stored food are rising right now not because sellers are mean, but because demand is rising relative to the immediately available supply. Those rising prices tell…manufacturers and distributors that they should increase production, and where they should send the goodsif they’re allowed to. …Sure enough, GOJO industries is “operating around the clock” to produce hand sanitizer, 3M has “ramped up production” of respirators, and many other companies are responding to the messages they’re getting from the market. Allowed time, goods will get to where they’re needed, and prices will drop as supply meets demand. …Price-gouging laws, by contrast, falsely tell the public that politicians are watching out for them even as they extend shortages and the resulting pain. Crises like the COVID-19 pandemic come and go, but “price-gouging” laws demonstrate that intrusive politicians are a recurring plague.

Art Carden, an economics professor at Samford University, shows why anti-gouging laws backfire on consumers.

You’ve seen the pictures on your social media feeds: Empty shelves across America. Panic-buying. Hoarding. …this is exactly what the supply-and-demand model we teach in introductory economics courses predicts when we actively prevent the free market from functioning. The shelves are…empty because…governments aren’t letting prices change to reflect new market conditions. …“price gougers”…get tarred as villains while it’s actually the politicians who are making the problem worse by interfering with prices. …the fact remains that we get a lot more hand sanitizer, toilet paper, and other supplies when we make room for people who are just in it for the money. You may not like their motivations, but they’re doing something your state’s governor and attorney general aren’t doing. Namely, they’re getting valuable emergency supplies into your hands.

Veronique de Rugy of the Mercatus Center warns about adverse consequences in her syndicated column.

It’s normal for people to stock up on supplies during crises. The immediate results are empty store shelves, soon followed by higher prices. When this happens, politicians around the globe demand an end to the price hikes. …such heavy-handed intervention is a mistake… If prices are kept artificially low, there’s little incentive for shoppers not to buy as much as they can. …The fact is there’s no better means of slowing the rising demand — and, especially, reducing excessive hoarding — than allowing the very price hikes that governments are trying to prevent. But price hikes have another important advantage: They create the necessary incentives for entrepreneurs to shift resources toward activities that increase the supply of these goods. The higher prices encourage higher levels of production for goods like masks and hand sanitizers, which then increases supply. …When governments prevent price hikes, they unwittingly create shortages of vital supplies. …Aren’t we better off when products are actually on the shelves and available for purchase, even if only at higher prices? When no such products are to be found, except by the politically and socially connected, ordinary citizens lose out.

John Hirschauer’s piece in National Review cites some academic research on this topic.

The unintended consequences of price controls have been confirmed…in empirical literature. Take, for instance, the study published by three scholars in the Journal of Competition Law and Economics who examined the merits of proposed price-control laws in the wake of Hurricanes Katrina and Rita. …The researchers reviewed the historical data on gasoline price hikes and found that “price increases were due to the normal operation of supply and demand and not price manipulation.” Upon reviewing the body of gasoline price-control studies, the group found that “neither consumers nor the economy benefit [from price controls], because the apparent monetary savings to consumers are transformed into costs of waiting or other forms of nonmarket rationing that exceed the monetary savings.” Through econometric analysis, they estimated that the “economic damages would have been increased by $1.5–2.9 billion during the two-month period of price increases” if the federal government had instituted price controls.

The only thing I’ll add to this discussion is that people are sympathetic to anti-gouging laws because of a belief in social equality. We think that everyone – rich and poor – should be treated equally during a disaster.

And in some cases, such as a group of people stranded on a lifeboat, that’s the right approach. Nobody would argue that scarce supplies (limited emergency provisions of fresh water and food) belong to the person with the biggest bank account .

But the economy isn’t a lifeboat. As explained in the above excerpts, it’s possible to get more provisions with the right incentives. Higher prices will encourage entrepreneurs to produce more scarce supplies (in this case, everything from toilet paper and hand sanitizer to respirators and ventilators).

So what’s the bottom line? Price gouging is no fun if you need to buy supplies in an emergency. But a free market is better than the alternative of government controls that lead to shortages, black markets, and hoarding.

I’ll close with this cartoon, which Art Carden included at the end of his AIER column.

And I’ll also add this joke that Mark Perry shared on twitter.

P.S. This video explains why the price system is so important and these three videos explain why anti-gouging laws backfire because they hinder the price system.

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The coronavirus is a genuine threat to prosperity, at least in the short run, in large part because it is causing a contraction in global trade.

The silver lining to that dark cloud is that President Trump may learn that trade is actually good rather than bad.

But dark clouds also can have dark linings, at least when the crowd in Washington decides it’s time for another dose of Keynesian economics.

  • Fiscal Keynesianism – the government borrows money from credit markets and politicians then redistribute the funds in hopes that recipients will spend more.
  • Monetary Keynesianism – the government creates more money in hopes that lower interest rates will stimulate borrowing and recipients will spend more.

Critics warn, correctly, that Keynesian policies are misguided. More spending is a consequence of economic growth, not the trigger for economic growth.

But the “bad penny” of Keynesian economics keeps reappearing because it gives politicians an excuse to buy votes.

The Wall Street Journal opined this morning about the risks of more Keynesian monetary stimulus.

The Federal Reserve has become the default doctor for whatever ails the U.S. economy, and on Tuesday the financial physician applied what it hopes will be monetary balm for the economic damage from the coronavirus. …The theory behind the rate cut appears to be that aggressive action is the best way to send a strong message of economic insurance. …Count us skeptical. …Nobody is going to take that flight to Tokyo because the Fed is suddenly paying less on excess reserves. …The Fed’s great mistake after 9/11 was that it kept rates at or near 1% for far too long even after the 2003 tax cut had the economy humming. The seeds of the housing boom and bust were sown.

And the editorial also warned about more Keynesian fiscal stimulus.

Even if a temporary tax cuts is the vehicle used to dump money into the economy.

This being an election year, the political class is also starting to demand more fiscal “stimulus.” …If Mr. Trump falls for that, he’d be embracing Joe Bidenomics. We tried the temporary payroll-tax cut idea in the slow growth Obama era, reducing the worker portion of the levy to 4.2% from 6.2% of salary. It took effect in January 2011, but the unemployment rate stayed above 9% for most of the rest of that year. Temporary tax cuts put more money in peoples’ pockets and can give a short-term lift to the GDP statistics. But the growth effect quickly vanishes because it doesn’t permanently change the incentive to save and invest.

Excellent points.

Permanent supply-side tax cuts encourage more prosperity, not temporary Keynesian-style tax cuts.

Given the political division in Washington, it’s unclear whether politicians will agree on how to pursue fiscal Keynesianism.

But that doesn’t mean we can rest easy. Trump is a fan of Keynesian monetary policy and the Federal Reserve is susceptible to political pressure.

Just don’t expect good results from monetary tinkering. George Melloan wrote about the ineffectiveness of monetary stimulus last year, well before coronavirus became an issue.

The most recent promoters of monetary “stimulus” were Barack Obama and the Fed chairmen who served during his presidency, Ben Bernanke and Janet Yellen. …the Obama-era chairmen tried to stimulate growth “by keeping its policy rate at zero for six-and-a-half years into the economic recovery and more than quadrupled the size of the Fed’s balance sheet.” And what do we have to show for it? After the 2009 slump, economic growth from 2010-17 averaged 2.2%, well below the 3% historical average, despite the Fed’s drastic measures. Low interest rates certainly stimulate borrowing, but that isn’t the same as economic growth. Indeed it can often restrain growth. …Congress got the idea that credit somehow comes free of charge. So now the likes of Elizabeth Warren and Bernie Sanders think there is no limit to how much Uncle Sam can borrow. Easy money not only expands debt-service costs but also encourages malinvestment. …when Donald Trump hammers on the Fed for lower rates, …he is embarked on a fool’s errand.

Since the Federal Reserve has already slashed interest rates, that Keynesian horse already has left the barn.

That being said, don’t expect positive results. Keynesian economics has a very poor track record (if fiscal Keynesianism and monetary Keynesianism were a recipe for success, Japan would be booming).

So let’s hope politicians don’t put a saddle on the Keynesian fiscal horse as well.

If Trump really feels he has to do something, I ranked his options last summer.

The bottom line is that good short-run policy is also good long-run policy.

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Early last year, I shared a video explaining that trade deficits generally don’t matter. I even suggested trade deficits might be a sign of economic strength because foreigners who earned dollars were anxious to invest them in the American economy.

I’m recycling this video to make a point about trade and the economy for both Trump supporters and Trump critics.

For Trump supporters, I want them to understand that the trade deficit has increased under his policies. The data from the latest Commerce Department report show that the yearly trade deficit has increased from about $500 billion at the end of the Obama years to a bit over $600 billion during the Trump years.

And the reason I’m making this point is that I want Trump supporters to realize that they shouldn’t be upset about trade balances. Indeed, they should be happy because there’s a strong argument that the trade deficit is increasing in large part because Trump’s pro-growth tax reform and regulatory reform and making America more attractive for foreign investors.

For Trump critics, I want them to understand the same point, though from a different perspective. Many of them have been (correctly) critical of Trump’s protectionism. And they’ve been happy to point out that his taxes on foreign goods haven’t reduced the trade deficit.

But I would like them to contemplate why the economy has continued to grow. Hopefully, they will realize that pro-market policies in other areas are offsetting the damage of protectionism and therefore be more supportive of capitalism.

The Wall Street Journal opined on this topic last year.

President Trump can take a bow that his tax reform and deregulation are working as intended. …The trade deficit grew… This is not bad economic news. Imports grew faster than exports as the U.S. economy accelerated and much of the world slowed. The dollar grew stronger as capital flowed into the U.S., and the trade deficit grew to offset the larger capital inflows as it must by definition under the national income accounts. …a larger trade deficit is a benign byproduct of a healthier American economy. Supply-side policies revived animal spirits and gave the economy a second wind. …The best way to respond to a trade deficit is to ignore it.

From a left-of-center perspective, Fareed Zakaria made the same point in a recent column for the Washington Post.

Trump campaigned relentlessly on the notion that America’s economy was being ruined by large trade deficits. …He promised on the campaign trail in June 2016, “You will see a drop like you’ve never seen before.”In reality, the trade deficit has risen substantially under Trump. …when the United States has grown robustly, its trade deficit has tended to rise. If you want to achieve a sharp decline in the trade deficit, it’s easy — just trigger a recession. …while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). …The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, “the trade deficit should be something to brag about rather than denounce.” …Trump’s trade policy has been an enormously costly exercise, forcing Americans to pay tens of billions in taxes on imported goods, then using tens of billions of dollars in taxpayer funds to compensate farmers for lost income (because of retaliatory tariffs)… All to solve a problem that isn’t really a problem.

Veronique de Rugy of the Mercatus Center, writing for Reason, summarizes the issue.

President Donald Trump hates the trade deficit. …If elected, he promised, he would “end our chronic trade deficits.” …free traders…explained, a country’s trade balance is determined overwhelmingly by factors such as the U.S dollar serving as a reserve currency, the ratio of savings to investment opportunities at home and abroad, and the relative attractiveness of that country’s investment climate. As long as the United States is growing and remains an attractive place to invest, we Americans will continue to run trade deficits with the rest of the world. …They want these dollars, in part, to buy American exports. …More important, and often overlooked: Foreigners want dollars also to invest in America’s powerful economy. …the current-account deficit is a mirror image of the capital-account surplus. This is why Mark Perry of the American Enterprise Institute describes imports as “job-generating foreign investment surpluses for a better America.” It is thus no surprise that as the American economy grew, the trade deficit also grew.

I’ll close with a chart that’s in the video because it reinforces the three columns cited above.

As you can see, the link between the trade deficit and an investment surplus isn’t just a theoretical construct. It’s an accounting identity.

The bottom line is that people on both sides of the political debate should ignore the trade deficit and instead focus on the tried-and-true recipe for generating prosperity.

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Back in 2014, I compared Hong Kong’s amazing growth with Cuba’s pitiful stagnation and made the obvious point that free markets and limited government are the right recipe for prosperity.

Especially if you care about improving the lives of the less fortunate.

Communists claim that their ideology represents the downtrodden against the elite, yet the evidence from Cuba shows wretched material deprivation for most people.

In Hong Kong, by contrast, incomes have soared for all segments of the population.

Today, let’s update our comparison of Cuba and Hong Kong. Law & Liberty has posted a a fascinating review of Neil Monnery’s book, A Tale of Two Economies, authored by Alberto Mingardi from Italy’s Bruno Leoni Institute.

As Alberto explains, the book is about how developments in both Hong Kong and Cuba were shaped by two individuals.

How important are key individuals in shaping the success or failure of economies? …Neil Monnery’s A Tale of Two Economies is in some sense a polemic against historical determinism, at least insofar as promoting economic reforms is concerned. It stresses the importance of two single individuals, one a great man for many, one an obscure official and political unknown to the most, in shaping the destiny of their respective countries. …Ernesto “Che” Guevara and John Cowperthwaite. …Monnery insists that both of them were “deep and original thinkers.” …The key difference between the two was perhaps that Cowperthwaite had a solid education in economics… Neither the way in which Hong Kong progressed, nor Cuba’s, were thus inevitable.

I’ve written previously about the noble role of John Cowperthwaite.

Here’s what Alberto culled from the book.

Monnery points out that Hong Kong’s success happened not because Cowperthwaite and his colleague were trying “to plant an ideological flag,” but because they were “professional pragmatists.” …Then the success of relatively libertarian arrangements in Hong Kong perpetuated itself. …Cowperthwaite tested what he knew about classical economics when he “first arrived in Hong Kong, in 1945” and “was put in charge of price control.… He soon realized the problems with attempting to set prices low enough to meet consumer needs but high enough to encourage supply, and in a dynamic environment.” He opposed subsidies that he saw as “a brazen attempt to feed at the trough of government subsidies.” …Cowperthwaite is a hero to Monnery, who emphasises his competence, and even more, his integrity.

And I’ve also written about Che Guevara, but only to comment on his brutality.

It turns out he was also a lousy economic planner.

Guevara held office in a variety of capacities related to economic matters and took them seriously. In 1959, he took a three months trip to countries as different as India, Japan and Burma, to learn “how they managed their economy.” He was struck by examples of countries that succeeded in developing heavy industries and thought Cuba could do the same. …Guevara, who, once converted to Marxism, had swallowed the whole thing. Since he maintained that “the sine qua non for an economic plan is that the state controls the bulk of the means of production, and better yet, if possible, all the means of production,” he acted accordingly.

So what’s the bottom line?

Hong Kong and Cuba were roughly equal at the start of the process. Today, not so much.

To the reader of A Tale of Two Economies, it is rather obvious which lessons ought to be taken: “in the late 1950s, both economies had a GDP per capita of around $4,500 in today’s money. By 2018 Cuba had slightly more than doubled its GDP per capita to around $9,000 per person. But Hong Kong reached $64,000 per capita”—seven times Cuba’s, and even exceeding the UK’s as well.

Here’s my modest contribution to the discussion, based on the Maddison database.

P.S. Hong Kong still ranks as the world’s freest economy, though there are increasing worries about whether China will allow economic liberty in the long run.

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About 10 years ago, the Center for Freedom and Prosperity released this video to explain that America’s real fiscal problem is too much spending and that red ink is best viewed as a symptom of that problem.

I wrote a primer on this issue two years ago, but I want to revisit the topic because I’m increasingly irked when I see people – over and over again – mistakenly assume that “deficit neutrality” or “budget neutrality” is the same thing as good fiscal policy.

  • For instance, advocates of a carbon tax want to use the new revenues to finance bigger government. Their approach (at least in theory) would not increase the deficit. Regardless, that’s a plan to increase to overall burden of government, which is not sound fiscal policy.
  • Just two days ago, I noted that Mayor Buttigieg wants the federal government to spend more money on health programs and is proposing an even-greater amount of new taxes. That’s a plan to increase the overall burden of government, which is not sound fiscal policy.
  • Back in 2016, a columnist for the Washington Post argued Hillary Clinton was a fiscal conservative because her proposals for new taxes were larger than her proposals for new spending. That was a plan to increase the overall burden of government, which is not sound fiscal policy.
  • And in 2011, Bruce Bartlett argued that Obama was a “moderate conservative” because his didn’t raises taxes and spending as much as some on the left wanted him to. Regardless, he still increased the overall burden of government, which is not sound fiscal policy.

To help make this point clear, I’ve created a simple 2×2 matrix and inserted some examples for purposes of illustration.

At the risk of stating the obvious, good fiscal policy is in the top-left quadrant and bad fiscal policy is in the bottom-two quadrants.

Because of “public choice,” there are no real-world examples in the top-right quadrant. Why would politicians collect extra taxes, after all, if they weren’t planning to use the money to buy votes?

P.S. In 2012, I created a table showing the differences on fiscal policy between supply-siders, Keynesians, the IMF, and libertarians.

P.P.S. I also recommend Milton Friedman’s 2×2 matrix on spending and incentives.

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