Tuesday, March 13, 2018

Nero Fiddles as Rome Burns

As I was writing last week’s post about Macroeconomic Fuzziness, it occurred to me that there are some things that are not so fuzzy. It not only made me think of Nero but also reminded me of a book written by Herman Hesse titled Journey to the East. A traveler boards a train taking him to a very clear destination. During his travels, however, the traveler gets off and on the train. Somehow the destination got obscured each time, and he found himself lost or moving in the wrong direction. Luckily, he found his way back to the train and moved again towards his destination.

Hesse was writing about spiritual things, but this story says much about macroeconomic policy. There is nothing so fundamental to survival and standard of living as economic growth. Whether the location is Catalonia or California, the truth is that economic growth makes everything easier. This should not be interpreted to say that economic growth is everything. It isn’t. But it is to say that without economic growth, everything else struggles. When the economic pie is growing, we might fight over our share of the increase, but when the economic pizza stays the same, the only way for Jim to get more is for Toni to take less. Like Hesse's traveler, we often get lost and forget that growth is so critical. 

Inasmuch, it is important to keep economic growth on the front burner. It does not have to grow at a lightning pace, but it does have to grow enough to keep us out of each other’s hair. Nowadays, we keep referring to populism. I looked at a couple of definitions of populism and they contained the words “ordinary people”. Populist policy is aimed at improving the lives of ordinary people. It follows that economic growth is a perfect part of populism because there is no way to improve the economic situation of ordinary people without it.

Yet, we hem and haw. Sometimes Republicans appear to be helping rich people at the expense of ordinary people. Sometimes Democrats appear to be assisting minorities at the expense of ordinary people. And these Republicans and Democrats often have good reasons to be doing these things. But if they go too far and ordinary people are injured, then they make their complaints known. And so, we get back on the train and head in the right direction.

That brings us to our present government. I am told repeatedly that this government is populist. But I don’t see it. I do see some smatterings of policy supporting economic growth. I applaud those. But then I see just the opposite. Most recently, the proposals relating to protectionism seem to fly in the face of economic growth. I can’t find a single rational explanation for why one would want to save a few thousand jobs (steel and aluminum) in America while at the same time destroying tens of thousands of jobs (drink and auto manufacturing and other users of steel and aluminum) in America. 

Maybe the political optics of helping some manufacturing workers seems attractive to some politicians but surely this cannot help economic growth. If other countries retaliate against the US, then the gloom spreads to many other US firms that export to those countries.

Or better said, how does protectionism fit the description of populism relating to ordinary people? Or worse, how does protectionism fit in with anything good for the USA?

This story is not hard to understand. Local manufacturers of steel and aluminum want less competition. They want to be freer to charge higher prices. To whom do they charge these higher prices? They charge these higher prices to all those companies in the US that use steel and aluminum to produce Miller Lite beer and Ram Macho Power Wagons. Then these companies pass along these cost increases to ordinary people. But let’s not stop there. Our tariffs on foreign products make countries like Canada and Mexico wonder what it means to have a free trade agreement. Any country wounded by these tariffs will ponder assessing similar taxes against products from the USA. So guess what happens to ordinary people who work to produce goods going to those countries?

The world is a tough place. Companies and countries cheat and skirt the rules of international trade. It is always easy for a politician in any country to promote protectionist policies. But do they really work? We have had subsidies against imported steel in the past. Yet steel is still not viable and needs yet more protection.

I looked at employment data from the Bureau of Labor Statistics for the primary metals industry. These numbers include employees in the production of iron, steel, and aluminum. Clearly, this is an industry with declining employment. From 1990 to 2017, the number of jobs decreased by 317,000, or 46%. During that same time, all US manufacturing jobs declined by 5.2 million, or 30%. All private sector jobs in the US, in contrast, increased by 33 million, or 36%. It makes one wonder what can be done in the way of tariffs and protectionism to an industry in job decline for more than a quarter of a century. If protectionism is our game, then how do we best help ordinary people?

That brings me to my final point. There are ways we can create growth. There are ways we can augment and develop a skilled labor force that is the envy of the world. But guess what? The more we get diverted into arguing about the pros and cons of protectionism, the more time we are wasting with respect to moving this parade forward. Is anyone seriously putting forth proposals to permanently expand employment opportunities in the USA today?

            Year               Primary Metals
                                    In thousands
            1990              689
            1995              642
            2000              622
            2005              466
            2010              362
            2015              392
            2017              372



  1. One logical argument for protecting metals is national security. But the Pentagon doesn’t want these tariffs and we buy most of our steel from allies. So it doesn’t make economic sense to do it.

    1. Good point CY -- in addition I saw a quote that a very small percentage of US steel goes to defense. So the steel is far from being endangered insofar as defense/security issues go. Have you heard the administration quote one relevant fact that relates steel to defense?

  2. Dear LSD and Senior Trzcinka, this "canned" Bud is for you. Those sympathetic to the blunt argument that downstream businesses using steel/aluminum in their products will lose jobs haven’t produced nuanced data on the steel/aluminum content in their products and the consequential price increase to consumers. The only data I’ve heard is $70 per $30,000 car and $.01 per beverage can. Econs who have no “skin in the game” say this will cost consumers billion$. Geese, that’s a lot of cars and beverage cans and seeming econ hyperbole.

    It’s commendable that Trzcinka’s brother is OK losing his job to foreign competition; likely the millions who have lost their jobs since opening U.S. markets likely are not OK. It’s one thing to lose to foreign competition that plays on a level equal field and another where the competitors are government subsidized and also dump products below their direct costs. That is the essential difference between the “learned” econs who have “no skin in the game” and those “protectionists” who want targeted remedies to close the gap between foreign competitors’ ≈ 25% tariffs on U.S. goods and the U.S. <10% tariffs on imports. It would be interesting for “learned” economists argue for no tariffs at all. That would allow the purist of competition to wean out weak industries/businesses that are “protected.”

    The 200-year history of building the U.S. economy via fair trade leaves out the part (purposely?) where the U.S. during/following WWII created a production juggernaut that rebuilt Europe and Japan selling our industrial and consumer products to them. The U.S. had no competitors; Europe and Japan had no choice but to buy from us. U.S. employment, wages, and middle class exploded. As Europe’s and Japan’s industries rebounded we opened our markets to them to grow their economies (‘cause we’re the good guys with white hats). That post-WWII period beneficial to the U.S. eventually gave way to the reversal of trade in foreigners’ favor. U.S. employment, wages, and middle class declined. That, my “learned” econ friends, is an example of macro at its finest and a brief lesson in presenting history (and chosen partial facts) in context.

    Trzcinka: “There are winners and losers for every policy decision and the protectionists need stop imaging a fantasy world where there are no trade-offs. We have built this country with free trade and there is no case for ending it with broad tariffs. Just ask my brother.”

    U.S. foreign trade since the 60s has neither been “free” nor “fair” — though T’s bro might be OK it. Just ask the millions who have lost their jobs (So I guess they are the aforementioned “losers”—unfortunate pawns in the foreign trade game?) and are getting taxpayers to pay for welfare, unemployment, retraining, food stamps, lower standard of living et. al. (although there are also contributing domestic causes). I don’t think protectionists are oblivious to trade-offs—I think they are acutely aware of the social and economic costs of foreign trade: The current “protectionists” simply want fairness and are not against trade. It appears the “learned” free-trading econs are the ones imagining there are no trade-offs and attendant costs. If trading partners were honest, abided trade agreements, etc. there would be no need for the WTO, which is a political operative and feckless. That the WTO exists evidences unfairness in international trade thus producing the winners and losers some are OK with. Eliminate all barriers—tariffs, non-tariffs, and subsidies and the WTO in one swoop—that’d be a real two-fer.

    Consumer prices rising due to steel/aluminum tariffs ironically should play to “free-trading” econs’ wheelhouse—that will force consumers to buy lower-priced foreign-made canned beverages (fortunately JD is bottled; not canned) and cars thus further increasing the U.S. trade deficit. Shifting to foreign lower-priced consumables should benefit those who are unemployed, on welfare, food stamps, etc. due to foreign competition while they look for employment. Let’s hear it for those “free traders.”

    1. Dearest Tuna, Skin in the Game, no offense to tunas is a red herring. It is possible to be right or wrong about something with virtually no skin in the game whatsoever. The issue here is not who you are but is whether or not these tariffs are a good idea. Going after academics -- Tuna -- is too easy. Shame. Shame.

      As for skin, aside from hand-wringing steel makers, I have not heard many business executives praise these tariffs. In fact most I have heard are against these tariffs. As for data -- the tariffs are supposed to be about national defense. Where is the data showing how much steel needs to be made at home for national security purposes? And with your great knowledge of history I wonder what you think of the Smoot Hawley Tariffs.

      In my research for a coming blog I found that the USA has 12,000 tariffs on imported goods. This is not an issue of free competition anymore. The WTO has not had a world agreement in a very long time. The world is happier being protectionist. The question is not if - it is how much. At what point is a new higher tariff a detriment? Seems to me this one has the potential to be at least modestly disturbing.

    2. Dear LSD. No offense taken ‘bout tunas not having skin . . . heck, many don’t have any hair, either. Tariffs have been with us since whenever, are generally—and probably reluctantly—accepted as SOP whether honestly/fairly used or not: Partners’ economies have adjusted to them; are in stasis. But that doesn’t mean tariffs (targeted?) should not be used especially where disparities and flagrant abuses of agreements have been tolerated and the consequences (e.g. lower wages, employment, standard of living, etc.) have been serious.

      True, not much support of tariffs from biz execs, but I think they’re waiting until Congress acts and/or the dust settles to weigh in. Despite econs’ prognostications for mass unemployment in downstream industries the actual effect won’t be known for some time. I think Chicken Little should return to his roost.

      Smoot-Hawley levied tariffs on 20,000 imported items in a period of global economic weakness, absence of real-time international communications, and financial turmoil. In the popular view, the Smoot–Hawley Tariff was a leading cause of the depression. However, many economists hold the opinion that the tariff act did not greatly worsen the great depression. Today’s robust global and financial situations are much different than those of the 30s and today the U.S. has tariffs on 12,000 as you say. While some would like to use S-H as backdrop to the current tariff debate I think it should be used in context.

      There is a possibility DJT is using tariffs as a negotiating ploy in a grander plan. Stay tuned.

    3. I a willing to stay tuned but I am not optimistic. You are in a small camp of people who excuse Smoot Hawley. I am willing to agree that some may have exaggerated the immediate impacts of these tariffs but if it does lead to significant retaliations -- then Katie bar the door. And worse is that if one really wanted to help American workers he would not stick his finger in the dyke but would instead work on policies to improve America's competitiveness. Protection does nothing in that regard.

    4. Work on policies to improve competitiveness? Accelerating depreciation, expensing cap ex, reg reduction, lowering health premium costs, etc. will make businesses (particularly SBEs) more cost competitive—domestically and internationally—to the extent SBEs want to export. That’s not a finger in the dyke—rather extracting the finger (middle) from policies that inhibit/suppress biz competition and growth. I see these domestic policy changes together with adjustments in trade agreements part of a grand scheme.

      OK, let’s play macro Jeopardy. With U.S. trade deficit at $566 billion (May ’17), let’s assume major retaliation to the point that we can’t afford any imports’ tariffs/retaliation and pursue organic production to supplant imports. It’d take years, but, hey, we’re in it for the long haul. Let’s further assume average wages at $50,000. That equates to creating 5.7 million jobs. Sure, we don’t have the bodies, but on a macro level wouldn’t creating millions of those $50,000 jobs domestically solve a lot of income inequality, add $500 billion to GDP, reduce the deficit/debt, food stamps, welfare, and unemployment benefits? But, retraining costs/subsidies would explode. Hey, but what the heck, there are cost/benefits, right . . . according to free traders?

      Protection does nothing in that regard? Kewel. So, what has unanswered trade agreement violations and “free” markets done for ‘merican workers? Ask the millions seeking employment due to trade partners’ government subsidies and dumping—and the U.S. taxpayers footing cost to keep those unemployed folks afloat. This skinless, hairless tuna’s mindless inquiring mind wants to know.

    5. And I thought you were a conservative. Isn't it wonderful that in your world government edit creates millions of jobs. I know, in your story our government is just offsetting the evil of other governments. Go team government. I trust you to do what is best for us. Really?

      First, yes ask the workers who have been displaced by trade. But Tuna, are you sure there are no workers who have been helped by trade? Trade and technology have always been double-edged swords. Some win and some lose. The goal is to make sure the winners greatly outnumber the losers.

      Second, in your calculations of millions of $50,000 jobs because we close our borders to imports -- you have somehow assumed that less efficient and higher priced goods will replace lower priced goods. Thus the buying power of that $50,000 --- not to mention the reduction in choice among goods is totally ignored by you. No Havana cigars... dern.

      Deregulation and some of the tax reform items are what we really need. We also need better education and training for 21st century jobs. No reason we can't compete in today's world. We just have to get smarter.

    6. Sure, some workers benefit by trade. Also by technology and innovation that capitalism facilitates. But, a consequence of capitalism is winners and losers, which reasonable folks accept. On the other hand (donning a macro econ hat for a moment) unfettered capitalism unduly creates winners and losers. We impose laws and constraints on unfettered capitalism because it is unfair/unethical and violators are punished. Similarly, honest trade is considered good/beneficial and also creates winners/losers. Trade agreements—intended to provide guidelines for partners’ behavior—are comparable to laws/policies intended to govern capitalists’ behaviors. Honest capitalism = good; honest trade = good. The problem with much of contemporary trade is that it has not been conducted honestly—as with late 19th century and early 20th century capitalism not conducted honestly/ethically. Technology and innovation—lawful—are considered beneficial in the long term despite winners and losers whereas dishonest trade—unlawful and preventable to some extent—is not beneficial. Today’s “protectionists” want to correct dishonest trade and keep honest trade just as TR wanted to correct dishonest capitalism and allow good capitalism to endure.

      I did not assume less efficient/higher priced goods vs. lower-priced goods, changes/affects to buying power or ignore reduction in choice of goods—that seems a compulsory/obligatory paradigm of economics. What’s not to say a reduction in dishonest trade would curtail innovation and technology juices that could replace imports? My point is that displacing dishonest trade with organic GNP would benefit U.S. workers just as late 19th century/early 20th century workers benefited from bridled capitalism. The dynamic of winners and losers remained.

      Yepper, better education/training is needed to support 21st century jobs. Yepper, we can compete globally by getting smarter but not righting trade wrongs is dumber.

    7. Good stuff Tuna. You almost have me convinced. Ha ha. Not really.

      You say the problem is that much of contemporary trade is not honest. Not sure where you get that from. Seems to me that most of the trade is okay. Just some of it is not. But even there -- the unfairness is often in the eye of the beholder. Proving that prices are below costs of production is generally an accountant's nightmare. And it is in the interest of any company to get policy on their side against those deviant foreign cost cutters. But I give you that some trade is truly illegal.

      Also your idea that protectionism could be a factor in favor of innovation and competitiveness seems awkward if not backward to me. Steel is not an infant industry. And this is not the 19th century.

      You have pushed me into a dark corner and now I have to reply on my big stick.

      I agree that claims about the tariffs are exaggerated. But here is the real problem. It has two parts.

      First part. The US is going the way of Europe wherein comfort is more important than growth. We don't have the stomach to compete anymore. We have peaked. We are over the hill.

      Second part. Other countries are hungry. They too want to be rich and powerful. Whether military or economic -- they will fight to win even if they have to cheat some.

      Result. We can slap on tariffs. We can not slap on tariffs. The end is easy to see. A wise colleague of mine once said about his teenage son. "He isn't working hard. He just wants to play. There is no way I can fake poverty. He knows he is going to have a rich life."

      We cannot fake poverty in the USA. The fat calf will be gobbled up by the tiger.


    8. Dear LSD. Oh no! . . . not the big stick! Curses, Robin . . . I don’t equate targeted tariffs—should they ever be levied—to European partiality for comfort: Even fear of the big stick doesn’t incline me to accept that. Neither do I accept that we’ve lost the appetite to compete—with or without some targeted tariffs, er . . . . protectionism. I doubt Kotys would have gone into the Orange Bowl against Miami High in ’63 if he knew the refs conspired to throw the game to the Singerees—despite his commitment to compete—he would have shouted foul and filed a complaint to level the playing field—but would not have lost his competitiveness.

      Yepper, developing countries are hungry and likely to cheat. We don’t have to accept that—shouldn’t—and counter cheating with corrective/retaliatory steps such as targeted tariffs—just like Kotys wouldn’t have accepted refs’ tilting the field in favor of the Stingarees.

      Faking proverty? Huh? Last I knew we’re losing the war on poverty. It’s possible some in poverty are there due to losing jobs to imports.

      Okay . . . stop waving that big stick . . . I realize you want your Havana stogie and smoke it, too.

    9. You wore me out Tuna. It is almost 5 pm here and I hear the JD screaming at me. As in our long discussions about the so-called hoped for trifecta -- I will let this tariffs thing evolve and we shall see what we shall see! As for Kotys he would have shouted Cheesncrackers and recruited Wachtel to play QB. That would have evened things out with the evil refs. Go Cavaliers.