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Posts Tagged ‘Donald Trump’

Earlier this year, I shared a short video about the benefits of the World Trade Organization.

Here’s a more substantive version (though still only four minutes).

I wanted to keep the video short, so I focused primarily on how the United States disproportionately benefits because other nations are pressured to reduce their trade taxes down to American levels.

Though I also pointed out that all countries benefit as global trade increases.

This is particularly relevant when you ponder President Trump’s trade spat with China. Yes, it would be good for the United States if China liberalized its economy and got rid of its mercantilist policies.

But it also would be good for China.

That’s why free trade is a good idea. It’s good if it’s unilateral free trade. It’s good if it’s bilateral free trade. And it’s good if it’s multilateral free trade.

Since we’re discussing the WTO, let’s look at some scholarly evidence.

An article by three Stanford political scientists for International Organization finds that the WTO has been beneficial for global trade.

The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) have been touted as premier examples of international institutions, but few studies have offered empirical proof. This article comprehensively evaluates the effects of the GATT/WTO and other trade agreements since World War II. Our analysis is organized around two factors: institutional standing and institutional embeddedness. We show that many countries had rights and obligations, or institutional standing, in the GATT/WTO even though they were not formal members of the agreement. We also expand the analysis to include a range of other commercial agreements that were embedded with the GATT/WTO. Using data on dyadic trade since 1946, we demonstrate that the GATT/WTO substantially increased trade for countries with institutional standing, and that other embedded agreements had similarly positive effects. Moreover, our evidence suggests that international trade agreements have complemented, rather than undercut, each other.

Meanwhile, a French think tank looks at some of the evidence in favor of the WTO’s rules-based approach to reducing trade taxes.

…the World Trade Organisation (WTO) which held a dominant position after WWII with its multilateral rules has lost influence…. From the point of view of a consumer or producer, the higher volatility of trade policy is nothing positive. …Handely and Limao (2015), Handley (2014), Pelc (2013) as well as Bacchetta and Piermartini (2011) also find empirical support for welfare gains from a rules compliant trade policy. …After WWII the average level of tariffs decreased constantly and predictably as part of the General Agreement on Tariffs and Trade (GATT), and its successor the WTO, which are based on member commitment and reciprocity. …multilateral agreements such as the WTO offer mechanisms which provide incentives even for mercantilist politicians to reduce barriers of trade.

Here’s a chart from the study, which shows how trade taxes have been falling in the post-World War II era.

In other words, the WTO process has been successful. President Trump’s tactic of escalating tariffs, by contrast, has not worked.

By way of background, the WTO is actually nothing more than a dispute-resolution forum for the GATT system (General Agreement on Tariffs and Trade) that was created back in the late 1940s.

And, unlike the International Monetary Fund or Organization for Economic Cooperation and Development, this is a part of the “post-war order” that’s worth preserving.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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At the risk of understatement, I’ve been rather critical of Trump’s protectionism.

But not always. Last year, I praised him for floating the idea of zero taxes on trade between nations (even if I didn’t think he was serious).

And I point out in this interview that he is right about protectionism hurting financial markets.

Just in case you don’t believe me, here’s what Trump actually said, as reported by Business Insider.

President Donald Trump said Wednesday that the Dow Jones Industrial Average would be thousands of points higher if it weren’t for the trade war with China, which he started last year in an attempt to address trade practices that officials said put the US at a disadvantage. “Let me tell you, if I wanted to do nothing with China, my stock market, our stock market, would be 10,000 points higher than it is right now,” Trump told reporters at the White House. “But somebody had to do this. To me, this is much more important than the economy … It was out of control. They were out of control.”

Incidentally, what Trump is saying at the end of the excerpt could be true. There are times when growth should be a secondary concern.

To take an obvious example, it’s perfectly reasonable to have laws prohibiting companies from selling advanced military technology to potentially hostile governments.

My concern is that the president is too fixated on China’s largely irrelevant bilateral trade deficit. After all, that’s simply the flip side of America’s enormous investment surplus with China.

Instead, Trump should be pressuring Beijing to get rid of subsidies, cronyism, and other mercantilist policies (ideally by using the WTO).

Such reforms would help American companies since they would be competing on more of a level playing field.

And China’s economy would benefit even more since there would be less government intervention.

In other words, there’s a potential win-win conclusion to this trade war. But I’m not overly confident that President Trump or President Xi have the right goal in mind.

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I wrote two days ago about how the White House is contemplating ideas to boost the economy.

This is somewhat worrisome since “stimulus” plans oftentimes are based on Keynesian economics, which has a terrible track record. But there are policies that could help growth and I comment on some of them in this interview.

The discussion jumped from one idea to the next, so let’s makes sense of the various proposals by ranking them from best to worst.

And I’m including a few ideas that are part of the discussion in Washington, but weren’t mentioned in the interview.

  1. Eliminate Trade Taxes – Trump’s various trade taxes have made America’s economy less efficient and less productive. And, as I explained in the interview, the president has unilateral power to undo his destructive protectionist policies.
  2. Index Capital Gains – The moral argument for using regulatory authority to index capital gains for inflation is just as strong as the economic argument, as far as I’m concerned. Potential legal challenges could create uncertainly and thus mute the beneficial impact.
  3. Lower Payroll Tax Rates – While it’s always a good idea to lower the marginal tax rate on work, politicians are only considering a temporary reduction, which would greatly reduce any potential benefits.
  4. Do Nothing – As of today, based on Trump’s statements, this may be the most likely option. And since “doing something” in Washington often means more power for government, there’s a strong argument for “doing nothing.”
  5. Infrastructure – This wasn’t mentioned in the interview, but I worry that Trump will join with Democrats (and some pork-oriented Republicans) to enact a boondoggle package of transportation spending.
  6. Easy Money from the Fed – Trump is browbeating the Federal Reserve in hopes that the central bank will use its powers to artificially reduce interest rates. The president apparently thinks Keynesian monetary policy will goose the economy. In reality, intervention by the Fed usually is the cause of economic instability.

In my ideal world, I would have included spending cuts. But I limited myself to ideas that with a greater-than-zero chance of getting implemented.

I’ll close with some observations on the state of the economy.

Economists have a terrible track record of predicting twists and turns in the economy. This is why I don’t make predictions and instead focus on analyzing how various policies will affect potential long-run growth.

That being said, it’s generally safe to assume that downturns are caused by bad economic policy, especially the Federal Reserve’s boom-bust monetary policy.

Ironically, some people then blame capitalism for the damage caused by government intervention (the Great Depression, the Financial Crisis, etc).

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When I talked to CNBC on Wednesday, I was very critical of Trump and other Republicans for promoting protectionism, Keynesian monetary policy, and wasteful spending.

Yes, I give Trump and the GOP credit for improvements in regulatory policy and tax policy. And I used to think that the pro-growth effect of those reforms was enough to balance out the anti-growth effects of the bad policies.

But I now think the net effect of the Trump presidency is to expand the overall burden of government.

In early July, my report card on Trump’s economic policy (based on the five key indices in Economic Freedom of the World) had him slightly above a C average.

Now, as you can see, he’s slightly below. And since Republicans in Congress are largely going along with Trump’s policies, they also deserve blame.

I realize that people also care about other matters, such as social issues, the judiciary, and foreign policy, so it’s not my goal to influence how anyone votes.

But I do want people to understand that economic policy matters. And for readers who like Trump (or at least think he’s a less-worse alternative than Sanders, Harris, Warren, etc), be forewarned that Trump’s big-government policies are increasing the probability of having Democrats win in 2020.

The lesson Republicans should have learned from Ronald Reagan is that good policy is good politics (my Fourth Theorem of Government).

George H.W. Bush didn’t learn that lesson. George W. Bush didn’t learn that lesson. And now Trump is demonstrating that he didn’t learn that lesson.

P.S. Some of us knew ahead of time to expect bad policy from Trump.

P.P.S. Since my 2016 election prediction was wrong, feel free to ignore my political prognosticating.

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In this interview with Fox Business, I make my usual points (trade barriers are misguided, China is protectionist, Trump’s not responding wisely, etc).

For today’s column, though, I want to discuss who actually bears the burden of Trump’s trade taxes.

All of us (including the host) pointed out that consumers will pay more. To be sure, the tax technically is paid by importers as goods enter the country, but there’s near-universal agreement that the cost is largely passed along.

But keep in mind that American consumers are not the only victims. As I pointed out last year, as well as earlier this year, there’s lots of secondary damage. Taxpayers, workers, retailers, exporters, manufacturers, and investors in the United States also suffer.

And in other nations as well.

From an economic perspective, the key thing to understand is that there are direct costs and indirect costs. The importer bears the direct costs of the trade tax (i.e., they’re the folks who actually send money to the government).

The rest of us bear the indirect costs because the economy is less efficient and productive.

  • As consumers, we pay more.
  • As workers, we get paid less.
  • As investors, we earn lower returns.

There also are added costs on specific trade-dependent sectors (agriculture, for instance), as well as future victims since protectionism by the U.S. triggers protectionism by other nations.

And this doesn’t even consider the potential harm of currency devaluations. Geesh, no wonder financial markets are spooked.

The bottom line is that Trump is playing with fire. I’ve been happy to give him credit for his good policies (tax plan, regulatory easing), but what he’s doing on trade is definitely doing a lot of damage (exacerbated by the reckless spending).

To be sure, China also is suffering. But hurting ourselves to hurt China is not a smart strategy.

P.S. Taxes on trade are like taxes on business. In the former case, politicians say they’re imposing taxes on other countries, but people (consumers, workers, investors) are the victims. In the latter case, politicians say they’re imposing taxes on corporations, but people (consumers, workers, investors) are the victims.

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I point out in this interview that the 2011 Budget Control Act (BCA) was the only big victory for taxpayers this century. It imposed spending caps on discretionary spending and led to a sequester in early 2013, which was Barack Obama’s biggest defeat.

The bad news is that the BCA is merely legislation. That means politicians can conspire to bust the spending caps – which is what they did at the end of 2013, as well as in 2015, 2018, and again this year.

This most recent deal may be the worst of the worst. The Committee for a Responsible Federal Budget (CRFB) shows that it brings discretionary spending almost up to the level we reached during Obama’s pork-filled stimulus.

By the way, the chart also shows that Bush was a big spender and that we actually had a bit of spending restraint after the Tea Party-themed 2010 mid-term elections.

But let’s focus on today.

Here’s one more chart from CRFB. It shows that Trump is doing a good job of impersonating Obama with huge, across-the-board spending increases.

These charts show why I’m so depressed. And let’s not forget that they are only measures of discretionary spending. The outlook for entitlement spending is even worse!

In other words, we’re on the path to fiscal crisis. Is there a solution?

Yes, we could adopt constitutional restraints on the growth of government. I mentioned Colorado’s Taxpayer Bill of Rights in the interview, as well as the “debt brake” in Switzerland.

But there’s zero chance that today’s crop of politicians will enact this kind of sensible reform. We’ll probably have to wait until a crisis occurs. At which point it may be too late.

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