(What’s Left of) Our Economy: The CCP Virus is Also Killing the Economic Case for Free Trade

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CCP Virus, China, corona virus, COVID 19, economics, economists, free trade, GDP, Goldman Sachs, gross domestic product, health security, inflation-adjusted output, intellectual property theft, Morningstar, offshoring lobby, Oxford Economics, Trade, U.S. International Trade Commission, U.S.-China Business Council, USITC, World Trade Organization, WTO, Wuhan virus, {What's Left of) Our Economy

In a nutshell, the mainstream economics case for the freest possible flows of international trade holds that, whatever losses may be suffered by individual parts of the economy and their workers, overall national (and global) wealth will grow – and that that’s an unmistakable good. A logical follow-on is also important: Since overall wealth increases, so does the capacity to compensate those who have lost out from trade expansion.

True, this compensation may not be dispensed. But don’t blame greater trade, most economists would insist (with not inconsiderable justification). Instead, blame national political systems or societies that fail to take advantage.

Let’s assume all these claims for the economic case (as opposed to the longstanding national security or emerging health security cases) for free trade are true. It’s noteworthy, then, that it looks like they’ve been blown out of the water by the almost certain impact of the CCP Virus emergency on the U.S. economy. At least there’s now an impressive case that trade expansion with China, anyway, has started reducing the nation’s GDP (gross domestic product – the standard measure of the economy’s size).

After all, the virus originally broke out in China, and spread to the United States because of the mushrooming of economic ties between the two countries that freer trade and commerce with the People’s Republic has produced. Some might counter that virus impact has nothing to do with trade expansion with China per se, and instead is due to the disease itself. But given the evidence that China is pandemic prone (arguably because of safety and hygiene standards that remain dreadful throughout the country despite its phenomenal recent economic progress, along with its regime’s obsession with secrecy), and the related likelihood that this problem won’t go away, it’s getting harder and harder to argue that the bilateral trade and investment boom and pandemic threats have nothing to do with each others. In other words, it’s at least reasonable to contend that rising pandemic threats have been an integral feature of freer trade and broader commerce with China.

For some specific numbers (uncertain as they inevitably remain), let’s look at a recent examination of the CCP Virus’ likely economic impact from the investment research and analysis firm Morningstar. Its take on the subject is worth highlighting because it’s the most bullish I’ve seen,

According to Morningstar, the virus’ spread as such is going to reduce the U.S. economy’s size by five percent this year in inflation-adjusted terms (the most closely followed GDP figures). That would amount to a loss of nearly $954 billion. The firm doesn’t explicitly quantify the long-term hit to the U.S. economy. But based on its assessment of the long- and short-term tolls on the global economy, and its belief that these short-term losses in percentage terms will be about half those for the United States itself, it appears that Morningstar expects the inflation-adjusted GDP losses to be some two percent. Using 2019 as the pre-virus baseline, that adds up to $381.46 billion during the (unspecified) first year of long-term effects. But since the economy would be in growth mode by then (although from a lower starting point), the yearly losses in absolute terms would grow each year, since they would represent some two percent of an ever larger pie as long as they lasted.

And remember – these forecasts are on the optimistic end. Another financial firm, Goldman Sachs, anticipates that this year, real U.S. GDP will plunge by as much as 3.8 percent this year. If correct, the national output shrinkage would be nearly $725 billion. (Unlike Morningstar, Goldman doesn’t isolate the specific CCP Virus share of these losses, but if its methodology is comparable, it could top $1 trillion.)

So those are (admittedly ballpark) figures for China trade-related losses for the whole economy. Have the claimed or estimated economic gains been greater? Not even close.

During the late-1990s, when it appeared likely that China would enter the World Trade Organization (WTO), and therefore trigger a surge in its trade with the United States and the entire world, Congress asked the U.S. International Trade Commission (USITC) to model the economic effects of the kinds of major tariff cuts to which China would agree. In its 1999 report, the Commission forecast a “minor” lift to real GDP – meaning an ongoing boost of less than 0.05 percent annually on an ongoing basis.

In 1999, that would’ve meant a $63 billion constant dollar GDP gain for the first year following China’s entry

To be sure, the USITC also tried to estimate the impact of the elimination of the multitude of non-tariff barriers China has long thrown up to the outside world – rules and regulations, often developed and carried out in secret, that can block or slow the growth of imports more effectively than tariffs. The Commission’s findings suggested that success on this crucial front – also predicted by supporters of China’s WTO entry – would double the U.S. GDP gains produced by expected tariff cuts. If correct, the ongoing American yearly output increase would be 0.10 percent of after-inflation GDP, or $126 billion, in the first year after these reforms were made.

Because of subsequent GDP growth, these annual gains would increase in absolute terms, and over the nearly two decades between China’s year-end 2001 WTO entry and today, could easily total trillions annually.

But many of these China tariff and especially China non-tariff barrier promises are still unkept, as even the Obama administration – a strong supporter of U.S. participation in the WTO – admitted in its final report to Congress on the subject. Maybe that’s why the private economic research firm Oxford Economics (in a study for the U.S.-China Business Council, a major pillar of the U.S. corporate Offshoring Lobby) pegged the annual GDP gains of U.S. business with China at $216 billion as of early 2017. That’s not much of a compounding gain.

Moreover, consistent with Offshoring Lobby practices, the Oxford report completely ignores the economic impact of U.S. imports from China – which have greatly exceeded exports for decades. And since China’s WTO entry through last year, the growth of the goods trade deficit has been a vigorous 235.36 percent. Nor did I see anything in its study about China’s massive theft of U.S.-owned intellectual property. Estimates vary, but even these China pollyannas admit it could amount to $600 billion each year. 

As with pandemics, you could argue that intellectual property theft’s growth isn’t a built-in feature of trade with China or any other country.  But since China has been far more theft-prone than it’s been pandemic-prone, and since its thieving ways were well known to Washington as WTO entry was being orchestrated, these costs clearly belong in the “costs of free trade” category – at least with China.      

Finally, of course, these purely economic arguments for free trade overlook non-economic arguments for trade curbs and national self-sufficiency that have always been compelling and that the virus outbreak has now turned into slam-dunk winners. Think “national security” and “healthcare security” – unless you’re thrilled with America’s current dependence on foreign sources of vital medicines, their building blocks, and medical devices.

Predictions understandably are abounding the the CCP Virus emergency will change some lasting behaviors and ideas nationally and globally. If the above, arguably realistic, view of the economic case is correct, free trade practice and ideology belong near the top of this list.

(What’s Left of) Our Economy: So You Think Trade is an Engine of Productivity Growth?

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economics, economists, European Central Bank, exports, free trade, GDP, gross domestic product, imports, International Monetary Fund, labor productivity, productivity, productivity growth, total factor productivity, Trade, trade openness, World Bank, {What's Left of) Our Economy

The idea that the more international trade a country engages in, the more strongly its productivity will grow, is widely accepted among economists. Indeed, no less than the World Bank, the International Monetary Fund, and the European Central Bank (the eurozone’s version of America’s Federal Reserve) say so.

How then, can these august institutions and other believers explain the following: On the one hand according to the United Kingdom’s Royal Statistical Society, the country’s feeble annual average labor productivity growth of 0.3 percent over the last ten years was its “statistic of the decade”? Worse, it was the poorest decade for British productivity growth since the early 19^th century.

Yet on the other hand, during this period, the United Kingdom’s openness to foreign trade – a data point created by adding a country’s imports and exports and then expressing this sum as a percentage of its entire economy, or gross domestic product (GDP) – has for the most part been hovering near post-1960s highs. In other words, the more foreign trade the UK has been engaging in, the lower its productivity growth seems to have become.

Nor is this phenomenon restricted to the UK. The same pattern can be seen in the United States, although the country’s openness to trade is much lower than the United Kingdom’s in absolute terms (not surprising, since we’re comparing an island with a continental sized economy). RealityChek regulars shouldn’t have to be reminded about America’s discouraging collapse in labor productivity growth.

What about trade? In fairness, America’s openness to trade has been falling recently. But no, that’s not President Trump’s “fault.” The decline began in 2011, when trade’s share of GDP hit a post-1960 high of 30.79 percent. As of 2017 (the latest data year available according to this source), it still stood at 27.09 percent – much higher than the period average of 19.29 percent.   

Also in fairness: Simply because openness to trade for these two big national economies has coincided with lousy productivity growth doesn’t mean that openness to trade causes the problem (or vice versa). It doesn’t even mean that openness to trade is the main productivity culprit, for many different characteristics of an economy influence any single characteristic.

But certainly in light of the American and British experiences, even if the conventional wisdom is right and trade openness does encourage productivity growth, it’s clearly a policy choice that’s often overwhelmed by other features of that same economy. P.S. – it ain’t just the Anglo-Americans. The World Bank’s databases also portray global trade at only slightly off its all-time high as a share of the global economy. And guess what? It turns out that global productivity growth has been crappy lately, too, whether we’re talking labor productivity or total factor productivity (a broader gauge that measures output from the use of many different inputs, not just labor).

As a matter of fact, it’s not difficult to think of ways in which more trade can undermine productivity growth – e.g., if import floods decimate the sectors of the economy that have historically been its manufacturing leaders, or if trade policy fosters their offshoring. (Strong cases can be made for both propositions when it comes to American domestic manufacturing.) 

So the case that trade fosters productivity growth is hardly a slam dunk.  And that’s one more reason to believe that the broader case for free trade isn’t, either.

Im-Politic: Has a Major U.S. Economist Secretly Been in China’s Pocket?

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China, donors, economists, globalization, Huawei, Im-Politic, Isaac Stone Fish, Jeffrey D. Sachs, national security, Project Syndicate, technology, telecommunications, think tanks, trade war, Trump, Trump Derangement Syndrome, Washington Post

I’ve always been skeptical of claims that money explains everything about where prominent folks stand on policy debates. Sure, money talks loudly, and that’s why, for example, I’ve so consistently reported on how leading U.S. think tanks are lavishly funded by corporate interests (e.g., here) and even by foreign governments (e,g, here) with huge stakes in matters on which they regularly comment, such as trade and globalization issues.

But I’ve believed that for the most part, their positions are also at least partly sincerely held – reflecting either an inability even to question what they’ve learned in school, or the power of group-think in their professional and social circles (inside the Washington, D.C. Beltway in particular these realms tend to overlap substantially), their honest convictions, and typically some combination of the above.

I still refuse automatically to write off analysts who disagree with me as simple donors’ mouthpieces, but a recent incident has reminded me that – in the words of a close long-time friend – when seeking to understand political behavior, the most cynical explanation is rarely wrong.

The story begins with an article on the Project Syndicate website – a sort of digital global op-ed page (which, to be sure, overwhelmingly publishes writers with globalist/establishment viewpoints) – by economist Jeffrey D. Sachs.

Sachs is a world-renowned figure in his field, but as with many of his colleagues, seems to assume that mastery of conventional economic concepts translates into expertise on all other subjects. (Google “Krugman, Paul” for perhaps the leading example of this phenomenon.) So I wasn’t entirely surprised to see him writing on the recent American arrest, on sanctions-busting charges, of a senior executive from the Chinese telecommunications entity Huawei – even though he has no special credentials on China, or technology, or national security.

I was very surprised by the nature of Sachs’ attack on the U.S. action, which ran on December 11. Most criticisms of the arrest focused on whether it would escalate the U.S.-China trade war – whether because it signaled a more aggressive turn in Washington’s approach, or because it would trigger Chinese retaliation – or whether the United States ultimately could curb China’s technological development, or whether the American tech industry could continue excelling after a cutoff of its access to Chinese markets or parts and components.

But according to Sachs, the Huawei arrest mattered most because it showed that “The Trump administration, not Huawei or China, is today’s greatest threat to the international rule of law, and therefore to global peace.” That’s pretty out there given that Huawei’s largest shareholder is a Chinese telecommunications company owned outright by the Chinese state, that its close relationship with Beijing has caused governments the world over to limit its presence in their markets for national security reasons, and that the Chinese regime itself has been challenging international law, and in turn peace and security, in the South China Sea region.

Still, I was inclined to write off Sachs’ diatribe as yet another example of Trump Derangement Syndrome, or the outgrowth of idolatry of the globalization status quo fanatical enough to fuel (sincere) outrage at any development threatening to change it – e.g., President Trump’s decision to confront China’s trade predation.

As a result, I was inclined to dismiss as off-base the reaction of one of my Twitter followers to Sachs’ article: “I guess we know who is signing Jeffrey Sachs’ paycheck these days.”

So imagine my surprise when, on December 12, Washington Post columnist Isaac Stone Fish reported that Sachs had written the forward to a big report put out by Huawei in November.

Nothing necessarily improper there. Academics engage in such activities all the time. And if Sachs genuinely believes that an entity that clearly is an arm of the repressive Chinese government deserved “kudos” for “producing… a timely and clear roadmap to help governments, businesses and civil society [emphasis added] to create digital nations on the path to sustainable development,” well that’s his business.

What is massively improper has been Sachs’ reactions to Fish’s questions about Sachs’ relationship with Huawei in light of his glowing praise of the entity both in the report and in his Project Syndicate piece: “Did Huawei pay you for that [the forward]? If so, don’t you think you should disclose that?”

Rather than respond to Fish, Sachs stonewalled – in fact, going so far as to delete his Twitter account.

In the process, he not only made it difficult to avoid the conclusion that he has something to hide when it comes to Huawei. He’s also unavoidably created shadows over two respected organizations with which he’s been closely affiliated: Columbia University’s Earth Institute (which he headed between 2002 and 2016), and that Institute’s Center for Sustainable Development (which he heads now).

I’ve been looking for evidence of Huawei or other Chinese funding for these organizations, and haven’t found any yet. But that doesn’t mean that there hasn’t been any (perhaps funneled through third parties?), and that it hasn’t colored their work. Because like I said, when seeking to understand political behavior, the most cynical explanation is rarely wrong.

Following Up: Woodward’s Globalist Bias

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Alan Greenspan, Bob Woodward, economists, establishment, Fear, Financial Crisis, Following Up, globalism, Mainstream Media, manufacturing, North Korea, nuclear weapons, Robert Costa, South Korea, steel tariffs, Trade, Trump, Washington Week

I’m a long-time admirer of Bob Woodward, and so it’s disappointing to say the least that he’s just provided more evidence that his sensational (literally) new book Fear is as much of a Hail Mary to restore the (deservedly) shredded reputation of the nation’s bipartisan globalist policy establishment as an effort to portray “the real inside” story of the President Trump’s White House.

At this point, I should confess that I still haven’t read the book. But enough of it had come out through about a week ago that I felt justified in analyzing Woodward’s treatment of Korea-related trade and security issues and arriving at the above conclusion. The new evidence comes from the long-time Washington Post reporter’s interview this past Friday night on PBS’ Washington Week talk show, so it seems as an equally sound basis for judging Woodward’s thinking.

Korea issues again come into play, but so does the President’s recent decision to impose tariffs on most of the foreign steel attempting to enter the U.S. Market. Let’s look at Woodward’s assessment of the steel situation first.

The author’s first problem with the levies is his belief that they represent an instance of Mr. Trump’s alleged habit of “just [doing] what he wants; and he’ll listen up to a point, then he will dismiss….” This disquiet is easily dismissed itself, as it sounds like the President seeks advice from his advisers and then, after a finite period of time, decides what course he’ll take. What does Woodward think Mr. Trump is supposed to do? Listen indefinitely? Or until he’s convinced he’s wrong?

But the Woodward’s second problem with the steel tariffs is much more revealing of his own blinders – and therefore much more disturbing. Here it is:

“Now, if you took a thousand economists and say do steel tariffs make sense – and I quote a document in the book where experts on the left, the right, the economists, Nobel Prize winners, Alan Greenspan, Ben Bernanke, leading Democratic and Republican economists, send him a letter saying don’t do this; this will not work.  And, of course, he does it….

“But now we are in the world of these trade wars, which he says he thinks he can win.  Wow.  Danger, danger.”

In other words, Mr. Trump’s great crime is failing to listen to the supposed experts. I say “supposed” because the two he mentioned specifically – former Federal Reserve Chairs Alan Greenspan and Ben Bernanke – have little enough claim to minimal competence in their own economic specialty, monetary affairs. The former spearheaded the disastrous monetary and regulatory policies that helped trigger the world’s worst financial crisis and depression in decades. The latter was caught with his pants below his ankles when the crisis struck, and “solved” it by flooding the economy with so much new credit that it was bound to stay afloat. You needed a Ph.D. to pretend that money “does grow on trees”?

But according to Woodward, the President should have followed their recommendations on trade policy, about which they have no special credentials? For good measure, Greenspan knows about as much about manufacturing industries like steel as Hillary Clinton knows about winning presidential elections. After all, he’s the genius who once referred to manufacturing as “something we were terrific at fifty years ago,” and “essentially a nineteenth- and twentieth-century technology.” So please, Mr. Woodward, spare us the experts worship.

By contrast, Woodward’s latest Korea example warrants more concern about the President’s competence on the job and knowledge of the issues – but unwittingly exposes the status quo as just as worrisome. Woodward had reported that last December, Mr. Trump wanted to tweet that the dependents of the 28,000 U.S. troops stationed in South Korea would be evacuated. The problem with this tweet? In th author’s words:

“[J]ust at the time, the top North Korean leader had sent a message through intermediaries to H.R. McMaster, the national security adviser, on December 4th of last year saying if you start withdrawing dependents, we will take that as a signal that war is imminent.  Now, you have a volatile leader, Kim Jong-un.  He’s got these nuclear weapons and there’s no predictable path for understanding how he might respond.  And the Pentagon leadership went nuts about this and just said, you – and the tweet never went out, but had it, you know, God knows.”

If you actually start thinking about the Korea crisis, however, you recognize that the current situation is even more dangerous. For as I’ve repeatedly written, these U.S. forces are deployed to South Korea not to help South Korean forces repel a North Korean attack. They’re deployed to South Korea to serve as a tripwire whose impending defeat will create overwhelming political pressure on an American president to save the day by using nuclear weapons. And the presence of these soldiers spouses and children is being counted on to make this pressure completely irresistible.

As I’ve also written, when North Korea was unable to strike American territory with nuclear weapons of its own, this strategy arguably made sense. For the nuclear threat was likely to succeed in preventing that North Korean attack in the first place because carrying it out pose no risk to America’s core security.

Now, with the rapid recent (and apparently continuing) development of North Korean nuclear forces capable of reaching North America, those days of U.S. invulnerability are unmistakably nearly over, and the American troops’ presence in South Korea are putting U.S. cities in the line of nuclear fire. Worse, they are the only recognizable source of this danger – unless you believe that North Korea has a reason to launch an unprovoked nuclear attack on the United States, and sign its literal nuclear death warrant.

In other words, because the Korean peninsula remains such a powderkeg, and because the North’s leaders are so little known and unpredictable, the danger that Woodward’s Pentagon sources allegedly are so terrified President Trump might have created exist right now, have existed ever since North Korea’s progress toward producing nuclear weapons platforms with intercontinental capabilities became known, and will continue to exist as long as Mr. Trump keeps following the Pentagon’s advice and keeps any American military presence on the peninsula.

Ironically, moreover, the best guarantee of preventing a North Korean nuclear warhead from landing on American city or two is for the President to follow his instincts, pull the troops and their dependents out, and let the local countries take the lead in dealing with North Korea’s nuclear ambitions.

Something else disturbing about the Woodward Washington Week interview: Anchor the clear reverence for the globalist Washington establishment demonstrated also by the show’s moderator, Robert Costa, who, like Woodward, works for the Washington Post. It came through when Costa told Woodward that what most surprised him about the book was “the effort that’s being made by so many people around him to bring him back into the mainstream, back towards certain norms.” It came through in his reference to “keeping President Trump in line” and “keep Trump moving toward the center.” And it came through in his question to Woodward,

“Do the people around [Trump] who are taking documents off of his desk, different trade agreements the president’s trying to rip up, do they see themselves, when you talk to them, as heroes?  Or do they know they are, in a sense, mounting, as you call it, an administrative coup d’etat?”

What Costa, Woodward – and so many other Mainstream Media journalists – need to understand is that the “norms” reportedly being protected in Woodward’s book aren’t the Ten Commandments or any other code of decency, justice, or democracy. The administration officials reportedly defying the President’s wishes aren’t some modern collective embodiment of Moses. And the center isn’t ipso facto the location of policy wisdom, or even sanity.

Instead, the norms are positions developed by flawed and often self-interested human beings. More specifically, the administration’s Never Trump-ers could also be motivated by simple desires to protect and restore the positions of power, privilege, and wealth their kind enjoyed almost unchallenged until the Trump Revolution. And fetishizing the center amounts to judging these positions only by their relationship to other alternatives that may be widely voiced but also equally off-base, not by their relationship to realities on the ground.

That is, Woodward’s globalist sources for Fear need to be scrutinized just as thoroughly as the President they oppose – especially since their often catastrophic failures did much to put Mr. Trump in power. You could even write a book.

(What’s Left of) Our Economy: What Free-Trading Economists Can Learn from Main Street

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Alan S. Blinder, consumers, debt, economists, free trade, income, producers, Trade, {What's Left of) Our Economy

So you think that, even after the global financial crisis and ensuing painful recession predicted by hardly any leading economists, American leaders should keep taking this profession seriously on key issues like trade? Then you need to check out this new article by Alan S. Blinder.

It’s especially striking because Blinder is about as big in economic circles as they come, occupying a full professorship at Princeton University and having served as second in command at the Federal Reserve. But if he’s right – and by definition, someone like him should know – the consensus among economists about trade  stems from views about national economies that should disqualify those holding them from shaping policy.

According to Blinder, here’s how economists generally view an economy’s purpose: “to churn out the goods and services that people want, efficiently and at low prices, so that standards of living will be high. That’s why, for example, the Soviet Union failed and we succeeded.”

What about the public at large? “[T]he citizenry seems more attracted to the producers’ perspective: The fundamental purpose of an economy is to provide jobs.”

Thus when it comes to international trade, “Almost all economists favor open trade. It gets Americans cheaper and sometimes better goods, and enhances the efficiency of our economy. Trade isn’t, we insist, mainly about creating jobs or destroying them. It’s about deploying the labor of every nation where it is most productive. Economists see imports as the rewards for trade, exports as the cost.

“Public and political opinion often takes just the opposite perspective. Exporting is seen as the good part of trade—it creates jobs. Importing is a problem—it destroys jobs.”

The key term here is “producers’ perspective” – which, if you think about it for more than a moment, inescapably entails far more than the “jobs” on which Blinder somewhat condescendingly fixates. Of course, workaday folks are thinking first and foremost of their ability to earn income (overwhelmingly through jobs, since most aren’t wealthy heirs and heiresses). But a genuine producers’ perspective must involve all of the institutions and wherewithal needed to create jobs – i.e., a nation’s wealth-creating base.

Blinder does state that economists prize a nation’s ability “to churn out…goods and services…efficiently and at low prices, so that standards of living will be high,” and that by “deploying the labor of every nation where it is most productive,” trade contributes to this goal. But the consumers’-first devotion he attributes to economists points to a crucial truth: Such economists count heavily, at least, on low prices, not incomes, to create and even increase those high living standards.

Which is largely why, as Blinder and so many of his economics colleagues have written, they’re so indifferent to trade balances, and especially to trade deficits. Otherwise, they’d have to explain how economies significantly and/or chronically in the red – and thus by definition way short of earned income – can secure the resources needed to keep living standards at an acceptable level, much less raise them, without heavily borrowing, or selling off big chunks of their assets.

In other words, what Blinder is really saying is that economists believe that the consumption-led model of a national economy is sustainable, independent of whether that economy can generate enough income (from production) to pay for its spending responsibly (i.e., without running up excessive debt). What the public believes is that, without adequate sources of earned income (from a healthy production base), an economic system not only can’t produce jobs or high living standards. It can’t be viable in the first place.

Blinder is famous in part for what he calls “the Lamppost Theory, which holds that “Politicians use economics the way a drunk uses a lamppost—for support, not for illumination.” But their consumer-centric views raise the question of why responsible policymakers would use free trade-cheerleading economists for any reason.

(What’s Left of) Our Economy: A Big New Hit to Free Trade Theory

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Adam Smith, Bruce R. Scott, comparative advantage, David Ricardo, economics, economists, factors of production, free trade, Great Britain, machinery, manufacturing, Portugal, protectionism, Ralph E. Gomory, Steve Keen, technology, textiles, The Wealth of Nations, Trade, William J. Baumol, wine, {What's Left of) Our Economy

OK, time for some good news – at least if you’d like the economics community to come up with more realistic views of trade policy and its impact on the national and global economy. As made clearest by a (sadly overlooked) journal article by Steve Keen of Kingston University in London, some noted academic economists have identified fatal-looking flaws in comparative advantage theory – the 18^th century concept that ever since has anchored mainstream scholarly thinking about the entire discipline, along with justifying the virtues of the freest possible trade flows.

As Keen writes, comparative advantage identified benefits flowing from economic specialization, and was first advanced by British economist Adam Smith in his seminal The Wealth of Nations to explain the superiority of laissez-faire, free market practices within industries. His compatriot David Ricardo extended the concept to relationships between industries and countries. The core idea in its trade theory version is that all countries and their peoples will reap maximum gains if they limit themselves to those tasks that represent their own best efforts – even if they’re laggards by international standards in that particular sector.

I first encountered a compelling objection to comparative advantage in the early 1990s, in the form of a sharp observation by Harvard Business School professor Bruce R. Scott. As he noted, Portugal, one of two countries in Ricardo’s classic description of comparative advantage’s virtues, basically hewed to the Ricardian prescription, specialized in turning out relatively simple products (in this case, wine) – and remained a poor country for centuries. The second country was Great Britain. It specialized in higher value goods (epitomized, in that era, by textiles), and became the world’s greatest and richest empire.

More fundamentally, Portugal specialized in activity that could generate good levels of growth in the short-term, but whose long-term wealth creation potential was limited by low levels of productivity growth, capital and technology intensiveness, by limited potential for innovation, and by deficiencies in other closely related indicators of dynamism. Great Britain specialized in activity whose positive spinoffs were bound to be far greater.

Other major Ricardo blind spots have been pointed out since then – for example, his skepticism that capital would ever easily move across borders. But his central insights have continued commanding pervasive respect among professional economists. Just as important, they’re still revered by political leaders and opinion molders who find these theories convenient for portraying their often self-interested trade policy preferences as indisputable truths, or who learned in a freshman economics class that they’re gospel.

Keen’s big addition to comparative advantage critiques has to do with unfettered free trade’s likely effect on an economy’s diversity and growth potential. As he notes, Ricardo’s case for liberalizing trade flows hinges on a completely unrealistic assumption about its impact on a national productive base, and hence on national output and incomes. The assumption: that countries will wind up better on net if they abandon those activities that don’t meet the comparative advantage test, and refocus their efforts on activities that can pass it, and that such a transition is feasible in the first place.

In other words, Portugal would scrap all of its textile factories (and presumably all its other industries as well), and become for all intents and purposes a mono-economy devoted to wine. Great Britain would abandon whatever wine-making and other non-textile work it was engaged in, and turn into a big cloth-making facility. What of the other necessities of national and individual life, at least those that are in theory trade-able? They would be imported – and paid for by the earnings from exports of the national champions.

Simply articulating this scenario reveals how completely fanciful it is. For example, what about supplying needs before the envisioned transitions are completed? How long will they last? And even over decades under a free trade regime, could the global economy possibly be expected to turn into the kind of exquisitely complex but perfectly functioning mechanism that could enable a large number of mono-economies from securing the full range of traded goods and services that are either needed or simply wanted?

Keen, however, identifies what he reasonably seems to view as a more fundamental problem: The sectors of the economy in which Ricardians want countries to specialize are relatively strong because they efficiently use various factors of production (chiefly, according to Keen, machinery). The Ricardian transition entails other parts of the economy switching to that strong sector (again, wine-making and textile-making in Portugal and Great Britain, respectively), and essentially becoming just as good as wine-making – largely because all the kinds of machinery used in that economy can easily, and indeed seamlessly be redeployed in the strong sector.

If this assumption was valid, as Keen observes, then it would be reasonable to suppose that each rejiggered national economy could produce even more output, and generate higher incomes for its population, than before. But as the author also observes, this outcome makes no sense because “machinery is specific to each industry, and the crucial machines in one industry cannot simply ‘move’ to another without loss of productivity.” And if you believe, as is the case with mainstream economics, that rising productivity is a key – and over the long run, the biggest key – to rising incomes, then you should recognize this Ricardian transition also as a recipe for worsening national impoverishment.

That is, in the kind of mono-economy Ricardo hoped would eventually comprise the global economy, most of the populace would be struggling with inappropriate capital stock and other assets to earn a living engaged in activity with which it boasted little, if any, experience.

Why did Ricardo overlook something so obvious? In Keen’s words, it’s an example of “a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry….”

However, Keen continues, “The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.”

Here’s another example of the same delusionality that will be familiar to everyone who’s followed the U.S. trade policy debate for the last few decades: the claim by supporters of current trade policies that trade-related production and job losses are no big deal because America’s real edge in the global economy going forward is, say, services. So the best response is to train all those displaced auto workers to become nurses (and, pace Keen, to use all that surplus auto production machinery to write software).

Just as interesting, Keen points to a small but growing body of research touting the advantages of industrial and other economic diversity – the opposite of Ricardo’s aim. A broad-based manufacturing and technology base has of course long been supported by critics of current trade policies for national security reasons (to ensure the ability to produce an adequate range of defense assets), and to avoid potentially dangerous dependence on foreign supplies of civilian goods as well.

Similarly, it’s been contended that too many linkages exist among manufacturing industries, and between manufacturing and many kinds of services, to assume that entire sectors can be lost without major collateral damage.

Keen’s piece, however, also spotlights evidence that the world’s least successful national economies tend to possess narrow – at best – productive bases and to generate a comparably narrow range of exports, and that the most successful turn out a wide variety of goods for both domestic and foreign markets.

Keen’s theoretical critique of Ricardo is by no means the only one that’s come from the ranks of economists themselves. In 2001, William J. Baumol (a former President of the American Economic Association no less) and Ralph E. Gomory, one of the nation’s leading technology authorities, produced this study purporting to show that explicitly promoting national industries and technologies via various forms of government intervention (including tariffs) can produce better results for individual countries that toeing the free trade line.

But the Baumol-Gomory case has (so far) failed to dent confidence in Ricardian trade theory notably. And certainly the Mainstream Media never displayed much interest. In that vein, of possible import is the appearance this week on Bloomberg.com of this follow-up of sorts to Keen-like analysis. More steps on a  journey of a thousand miles?

(What’s Left of) Our Economy: Let’s Get Real About Tariffs and Consumer Prices

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Arthur Taylor, automotive, Black Dog Manufacturing, Carlos Ghosn, consumers, economists, Fox Business, Maria Bartiromo, markets, Mitsubishi, Nissan, prices, Renault, tariffs, Trade, Trump, {What's Left of) Our Economy

Surely the most politically powerful argument against any American trade policies that involve tariff-ing imports holds that such moves will raise the prices consumers pay for goods and services directly and indirectly, imported and U.S.-made alike. That’s why the claim is made constantly both by domestic interests who favor the trade status quo (like offshoring-happy multinationals and retailers), and by American trade partners whose growth heavily depends on exporting to the United States. And let’s not forget most of the world’s economists. 

But now an admission has just come from a major multinational manufacturer that the real pricing impact of tariffs would surely be much less dramatic – to say the least.

The source is no less than Carlos Ghosn, who chairs both Japan’s Mitsubishi Motors and Nissan Motor Co., as well as France’s Renault. On a Fox Business program last Friday, Ghosn expressed his expectation that the global automotive sector would “adjust” to any new trade restrictions put in place by President Trump.

That’s not terribly newsworthy. After all, per the tariff critics, that could simply mean that Ghosn’s companies will raise consumer prices in order to compensate. Nor, given the corporate rush to curry favor with Mr. Trump, was it particularly newsworthy that Ghosn told anchor Maria Bartiromo that “All car makers today are paying attention to what the president is saying” (his words) and that “companies are looking at adding capacity and hiring more workers in the U.S. as a result of Trump’s plans” (as an accompanying Fox Business post put it).

What was terribly newsworthy was Ghosn’s prediction that “I don’t think anybody can sit comfortably with a price hike.” In other words, the head of an enormous worldwide automotive “alliance” has just made clear that new tariffs probably won’t lead to higher consumer prices – at least not on any sustained basis.

Ghosn didn’t specify why the industry would likely hold the line, but leading reasons aren’t tough to imagine. In particular, the U.S. automotive playing field would remain filled with players and therefore highly competitive, and American consumers these days don’t have access to infinite amounts of money, either in the form of paychecks or credit. If he’s right, then there’s no reason to suspect that these limits on pricing power are restricted to the auto industry.

Another business voice has just offered some other insights into why automatic price hikes can’t be assumed to result from tariff hikes. Arthur Taylor founded and runs Black Dog Manufacturing in Hyde Park, Utah, a producer of custom wood and metal fixtures and other products used by retailers and other vendors in malls and stores. He’s also one of the sharpest observers of the globalization and manufacturing scene I’ve met.

As Taylor reminded me in a Facebook message over the weekend, automatic price hikes can’t be assumed after tariffs because, contrary to what’s apparently believed by most economists (and argued by those business and other interests with big stakes in preserving the trade status quo), there is no pat formula businesses employ to determine the prices they charge. More specifically, they don’t use any of their costs – whether of labor, or of any domestic or foreign inputs – in any predetermined way to calculate what they charge to customers (whether individual consumers or other businesses).

Instead, “price is determined by what the buyer will pay and in business, the majority of our efforts are dedicated to getting the highest price we can for the volume we’ll accept.” In this vein, “Businesses always start with ‘how much can we get for this?’”

Of course, costs always factor significantly into pricing decisions. But they generally are not seen or treated by producers as considerations that either justify giving customers a break when they are low or falling, or entitle them to pass-throughs when they are high or rising. Rather, sellers make judgments about what buyers will pay. If necessary, they try to make the adjustments needed to produce revenues and profits that they and/or their investors consider acceptable. If their performance is unsatisfactory, sellers either try to make further changes in pricing or production techniques, or in their sales and promotional efforts; or they modify their revenue and profit expectations; or they conclude that their business is not viable and abandon the venture.

In other words, prices are produced by the functioning of an ultimately psychological system of value identification by both buyers and sellers that’s called a market. And one of the key elements of value identification for a seller has always been what a market will bear. Executives like Ghosn and Taylor recognize markets’ complexity and subjectivity, as well as their inescapability (that is, if markets are indeed viewed as the best basis for organizing economic activity).  Is it too much to ask that economists – and the politicians, journalists, and think tank hacks they influence – develop and/or purvey equally realistic views?

Following Up: Why Economists & Establishment Media Should be a Little More Humble on Trade

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Adam Davidson, Donald Trump, economics, economists, Federal Reserve, Financial Crisis, Following Up, Global Imbalances, Great Recession, Janet Yellen, Korea, Peter Navarro, The New Yorker, TPP, Trade, Trans-Pacific Partnership

A fascinating and revealing coda has just been provided to my brief brush with fame last week, when The New Yorker deemed my views on trade issues not worthy of consideration.  And the source was, of all people, Fed Chair Janet Yellen.

As I wrote on October 13, in a profile of Donald Trump economic adviser Peter Navarro, New Yorker writer Adam Davidson made clear that he considered one glaring weakness of the Republican candidate’s views on trade and other economic policies to be their lack of support among professional economists. As a result, Davidson was completely unimpressed when Navarro noted that I have endorsed them in general – since I lack an economics degree. Nor was his interest piqued when I reminded him by email that my predictions about the outcomes of major trade policy initiatives, like admitting China into the World Trade Organization, were much more accurate than those of most Ph.Ds .

Enter Chair Yellen. In a speech in Boston the very next day, she focused on “some ways in which the events of the past few years [since the outbreak of the financial crisis and Great Recession] have revealed limits in economists’ understanding of the economy….” And despite her understatement, these limits look awfully important. The subjects to which they apply include how demand influences supply, the makeup of the groups of actors economists study (which these scholars’ models assume are completely homogeneous), how finance affects the real economy, and “what determines inflation.”

Indeed, Yellen’s list raises the question of where economists’ knowledge really is solid – at least in terms of ideas that affect economies’ performance in the real world. And so does the economy’s abysmal performance on net since the outbreak of a near-financial cataclysm that virtually none of its members foresaw.

Yellen did add an international question that she believes deserves much more research: how changes in American monetary policy affect the rest of the world and then feed back to the United States. But even though other aspects of the nation’s relationship with the global economy strictly speaking don’t fall under the Fed’s purview, she still might have noted that major gaps still exist in her profession’s understanding of international trade.

Even more disturbing: Although the trade-fueled global imbalances that built up during the bubble decade have been identified as bearing great responsibility for the crisis’ outbreak, as Davidson’s attitude suggests, international commerce is the one area of economics where no significant thinking has been called for at all since the disaster. Indeed, judging from the reactions to Trump’s trade proposals, the conventional wisdom is more entrenched than ever.

Of course, none of this is to say that economists know nothing useful, whether on trade or elsewhere. But with evidence that those global imbalances are once again nearing pre-crisis peaks (albeit with a somewhat different composition), and with President Obama seemingly more determined than ever to win passage of a trade agreement (the Trans-Pacific Partnership) modeled on a Korea deal that has supercharged the U.S. merchandise deficit, you’d think that both economists and journalists would react to proposals for fundamentally new approaches with at least minimal humility.

(What’s Left of) Our Economy: New Yorker Coverage that Follows the Crowd

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Adam Davidson, China, Donald Trump, economists, Financial Crisis, Mainstream Media, media, Peter Navarro, The New Yorker, Trade, {What's Left of) Our Economy

Since yesterday brought my first appearance in that supposed paragon of journalistic excellence, The New Yorker, it’s important to present all the context that staff writer Adam Davidson left out, and that was somehow ignored by the magazine’s legendary but evidently slipping fact-checking staff.

The occasion was a Davidson article on Peter Navarro, the University of California, Irvine economist who has been a leading adviser to Republican presidential candidate Donald Trump. Davidson’s main theme was that the input on China-related trade issues being provided to Trump by Navarro (a professional and personal friend of mine for several years) is “wrong and dangerous.” Major evidence for this proposition, according to the author, was his failure to find more than one other professional economist who shares these positions.

While researching the piece, Davidson asked Navarro for some examples to the contrary, and in an email response, Navarro suggested that the author “Start at least with Peter Morici and Alan Tonelson, two leading authorities.” Davidson pointed out (correctly), “I know Alan and he is not an academic economist. I will reach out to Peter Morici. Please do let me know of other academic economists, by which I mean PhD economists who have published peer-reviewed journal articles.”

Navarro contended in a rejoinder on which I was copied, “Tonelson is a fine economist.” I certainly appreciated the vote of confidence, but felt obligated to confirm to Davidson that “It’s true that I do not hold an economics degree. Nor do I write for peer-reviewed scholarly journals.” But I also added three points that I thought created at least some credibility, noting “At the same time, I wasn’t completely blindsided by the financial crisis” – unlike virtually all of the PhDs in whom Davidson places such stock. To document the claim, I provided a link to this article I wrote in early 2006.

In addition, I observed “Nor did I predict that liberalizing trade with China would prove an unalloyed success for the American economy” – unlike virtually all of the PhDs in which Davidson places such stock even though they proved sadly mistaken on this point as well.

Finally, I told Davidson, “Although I don’t know the full scope of your planned article, I do hope if appropriate it makes note of the many Ph.D. economists down the — literally centuries — who have dissented from Smithian-Ricardian trade theory in whole or in part, from Mill to Keynes to Samuelson.” (Abundant material along these lines can be found in a book review I wrote for The New York Times in 1996 of a history of the idea of free trade which unfortunately is not on-line, but which a friend did find in the Times‘ own archives. I would be happy to furnish a copy to anyone interested.)

I never heard back from Davidson on any of this, and learned yesterday when his article came out that his only apparent interest was my acknowledgment that I lack an academic degree in economics. In particular, he judged my track record in predicting damaging consequences from China-related and similar recent trade policy decisions as far less important than my lack of a Good Housekeeping Seal of Approval from a profession that as a whole has been whoppingly and even disastrously wrong on the most important issues it claims to analyze effectively.

Davidson is hardly alone in this media practice of worshiping the authority of a discipline that has been seriously discredited recently by the real-world standard of results. But it was more than a little dispiriting to see that this version of the herd instinct has even spread to The New Yorker – yes, The New Yorker.

Finally, for truth-in-advertising purposes, I have been asked to do research on trade policy by both the Trump and the Bernie Sanders presidential campaigns.  I have not endorsed either candidate for president, though I do support many of Trump’s proposals and have criticized others as being overly timid.  

 

(What’s Left of) Our Economy: The Times’ History of Free Trade is Bunk

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Adam Smith, Binyamin Appelbaum, Donald Trump, Douglas A. Irwin, economics, economists, free trade, I.M. Destler, Jagdish Bhagwati, John Maynard Keynes, John Stuart Mill, mercantilism, protectionism, Republicans, Richard Nixon, Robert Torrens, Ronald Reagan, Smoot-Hawley Tariff, strategic trade theory, tariffs, The New York Times, Trade, {What's Left of) Our Economy

It’s easy to imagine the thought processes responsible for The New York Times running last week’s article describing Donald Trump’s views on trade policy as “Breaking with 200 Years of Economic Orthodoxy”:

“We are the newspaper of record.”

“The public needs vital context to make intelligent decisions.”

“We can flaunt our matchless knowledge of history.”

What a shame, then, that economic correspondent Binyamin Appelbaum’s piece failed so badly on so many counts.

Let’s be charitable and start off by accentuating the positive. Appelbaum deserves credit for characterizing trade concerns as “among his oldest and steadiest public positions.” That’s a healthy corrective to media-wide reporting portraying the Republican presidential front-runner as motivated solely or mainly by – nativist and even racist – hostility to immigration.

It was also encouraging that Appelbaum acknowledged (though in an excessively narrow way, as will be demonstrated below) that “economists have oversold their case.” And he helpfully quoting a leading voice in the profession as noting not only that foreign protectionist practices are all too common, but that “It might be that the threat of tariffs or other trade sanctions could cause American trading partners to open up their markets or drop their barriers to trade.”

Unfortunately, nothing else Appelbaum wrote met standards of current or historic accuracy. First, although he correctly described mercantilism’s focus on amassing trade surpluses, he never pointed to a Trump statement endorsing such a goal. Conversely, the author errs when he contends that the orthodoxy calls for maximizing international trade flows. Instead, it calls for permitting global trade to reflect patterns of comparative advantage to the greatest extent possible.

As for Appelbaum’s brief history of American trade politics, it omits crucial facts. Specifically, he quotes as gospel the view of the University of Maryland’s I.M. Destler that “For most of the last century…skepticism about trade had been relegated to the fringes of the Republican Party.” But no significant Republican shift toward trade liberalization took place until after World War II. Indeed, legislators Reed Smoot and Willis Hawley, sponsors of the 1930 tariff, were both Republicans.

And even after most of the party warmed toward freer trade positions, major tariffs were imposed in 1971 by President Richard M. Nixon and throughout the 1980s by President Ronald Reagan – hardly fringe figures.

Finally, Appelbaum also seriously distorts the economics profession’s position on trade liberalization. Why, for example, didn’t he point out that, like one of the contemporary he cited, Adam Smith himself endorsed the threat and use of tariffs to open foreign markets. He also left out all the major loopholes in standard free trade theory pointed out by some of the biggest names in economic history. This history of the idea of free trade by Dartmouth’s Douglas A. Irwin makes clear how significant they have been. Here’s a summary drawn from my (New York Times) review of Irwin’s 1996 study – which unfortunately has not been digitized:

“Robert Torrens and John Stuart Mill explained how countries could use tariffs to enhance national wealth by stimulating the production of more profitable exports. Mill showed that tariffs protecting ‘infant’ industries could help them survive competition with more established rivals and eventually become self-supporting — without exacting larger costs from that country’s consumers or other economic sectors.

“During the 1920’s, Frank Graham of Princeton theorized that tariffs could provide permanent help for national economies by encouraging a shift from agriculture into manufacturing, thereby increasing a country’s total wealth. In the wake of the Great Depression, John Maynard Keynes insisted that free trade policies could impoverish individual countries during periods of already high unemployment, deflation and fixed exchange rates, particularly when the deflation was caused by a central bank’s determination to keep interest rates up. And in the 1980’s, a school of ”strategic trade” theorists contended that the special characteristics of certain industries (particularly those dominated by a few producers) could allow governments in some instances to use export subsidies to create national advantage.”

Irwin was correct in noting that “these arguments simply represent exceptions to a still-enthroned free trade rule — not new rules themselves (my paraphrase).” But it’s also true that these exceptions are so substantial that they call the theory’s validity into question.

In fact, Columbia University economist Jagdish Bhagwati, a leading free trade champion for decades, put it best when he observed, ”One cannot assert that free trade is ‘the policy that economic theory tells us is always right’ . . . certain developments make the case for free trade more robust whereas others make it less so . . . the latter are subject to many difficulties as one passes from the classroom to the corridors of policy making.”

I suppose that Appelbaum and The Times should be praised to trying to convey the idea that a high profile current campaign issue has deep roots in the past. But is it so unreasonable to hope that they could do the story anything close to justice?