Category Archives: Economics

J.B. Say on Wealthy Politicians

Jean-Baptiste Say’s Treatise on Political Economy holds up very well for a book whose most recent edition came out in 1821 (the first was published in 1803). For example, see this quotation on p. 427:

“Besides, there is some danger, that a man, who gives his services for nothing, will make his authority a matter of gain, however rich he may be. The wealth of a public functionary is no security against his venality: for ample fortune is commonly accompanied with desires as ample, and probably even more ample, especially if he have to keep up an appearance, both as a man of wealth and a magistrate.”

Tit-for-Tat Tariffs Don’t Work: Boeing and Airbus Show Why

A 16 year-long aerospace subsidies dispute between the United States and the European Union began another round this week. The U.S. claims that the EU’s Airbus subsidies are unfair. The EU argues that America’s Boeing subsidies are unfair. Both sides are right. But neither wants to admit that the other side has a point, too. The result has been tit-for-tat tariff increases and no subsidy reforms.

Today, the World Trade Organization (WTO) ruled that the EU may impose tariffs on up to $3.99 billion of American goods, because Boeing’s favorable tax treatment violates WTO rules.

This follows a 2019 decision allowing the U.S. to impose tariffs on up to $7.5 billion of EU goods due to the EU’s Airbus subsidies.

Boeing called today’s decision “irrelevant.” Last year, Washington state repealed the tax provision at the center of this decision. However, the larger sticking point in the dispute remains. Yes, this one tax break is gone, but Boeing still receives massive subsidies. That means the EU will not stop pressing the matter. Nor has the EU reformed Airbus’ special treatment. That means the U.S. won’t stop, either.

In addition to being ineffective, the tariffs are causing collateral damage to other industries that have nothing to do with the dispute, from French wines to American motorcycles. This deadweight loss matters at a time when the world economy is already hurting due to COVID-19.

The lesson both sides need to learn is, don’t copy other people’s mistakes. Instead, set a better example. Subsidized companies grow soft and lose their competitive edge. There is a reason why so much aerospace innovation these days, from space travel to supersonic flight, is happening outside of Boeing and Airbus’ subsidized comfort.

The right thing to do is for governments to stop subsidizing private businesses—even if the other side doesn’t. Set the right example. Boeing would likely do just fine without subsidies. They would certainly have far more incentive to improve their products and address their safety concerns than they do now.

And if Boeing can’t survive without subsidies, there is no shortage of entrepreneurs capable of unleashing engineering and manufacturing talent.

Either way, consumers and taxpayers win. Europe and Airbus can then either follow America’s positive example or be content with subsidized mediocrity. Realistically, they will very likely choose the subsidies. But we cannot let Europe’s mistakes be our own. The U.S. has been doing that for at least 16 years now, and we know it doesn’t work.

A modest starting point on the U.S. side would be closing the Export-Import Bank, which often devotes half of its business to securing below-market financing rates for Boeing’s customers, many of whom are state-owned. Boeing set record profits while Ex-Im was mothballed from 2014-2019, so we already know the company will do just fine without that multi-billion-dollar program.

For more on that idea, see my most recent Ex-Im paper.

The House Judiciary’s Antitrust Reports and Predatory Pricing

It is human nature to fear what we do not understand. And if there is anything politicians do not understand, it is markets. This is clearly shown in the 449-page report issued this week by the House Judiciary Committee’s antitrust subcommittee, headed by Democratic Rep. David Cicilline, and its 19-page companion report from Republican Rep. Ken Buck.

The current state of affairs in Washington reflects what the Nobel economist Ronald Coase wrote in his 1972 paper “Industrial Organization: Proposal for Research,” before the revolution in law and economics scholarship became mainstream:

If an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation frequent.

In that spirit, the Democratic report advocates for breaking up the biggest tech companies, expanding antitrust laws with new legislation, banning most tech mergers, and flipping the burden of proof to presumption of guilt in many instances. The Republican report doesn’t go quite that far, but as is often the case in the Trump era, the difference between Republican and Democratic policies is pretty small.

This post will focus on predatory pricing. My colleagues and I will discuss other facets of antitrust policy elsewhere.

Predatory pricing involves selling products deliberately at a loss in order to force competitors out of the market. When the predator has the market to itself, it can then raise the price to unfair levels. Apple, Google, Facebook, and Amazon have all been accused of predatory pricing at some point.

Predatory pricing is already illegal. But the Supreme Court admitted in the 1986 Matsushita case that it has never been able to find an instance of it. After that, courts essentially gave up on their quest. The law in that area is now unenforced, on purpose.

The Democratic report seeks to bring it back by amending the Sherman Act to specifically ban predatory pricing. The Republican report shares the Democrats’ goal, but only recommends “a thoughtful plan,” which it does not specify, and “further committee hearings.”

There is a reason the Supreme Court has never found proof of predatory pricing. That reason is math. A predator has to lose money. The larger that predator’s market share, the more money it has to lose before driving competitors out. And as soon as the predator raises its prices, it also raises an opening for competitors to come back into the market.

It’s easy for many former competitors to reenter the market when the predator’s price goes back up. They already know what they’re doing, and have the infrastructure. And if the predator raises its prices super-high in order to make back its losses, the door opens to even more new competitors who take note of the predator’s unusually high profit margins.

In order for the predator to take back its monopoly, it will once again have to lose money, then raise prices to recoup the losses, which lets competitors back in. And on it goes in a potentially endless loop.

The counterargument goes that a company can sustain predatory prices forever if it subsidizes its losses with profits from elsewhere in the company. But this makes the company less competitive in those other markets. And taking resources away from a profitable product to subsidize a loss-making product is not exactly a profit-maximizing strategy.

So, despite progressives and populist conservative wishes, the Supreme Court’s Matsushita decision’s despair at the lack of predatory pricing is unlikely to change. That is, unless the definition of “predatory pricing” itself is changed via new legislation or what the Nobel economist Oliver Williamson called “creative lawyering” in the courts. That is what to look out for.

For more on antitrust policy, see Wayne Crews’s and my paper, and CEI’s dedicated antitrust site at antitrust.cei.org.

Jean-Baptiste Say on Manufacturing Nostalgia and Industrial Policy

There is a reason the classics never go out of style. For example, on page 62 of Charles Robert Prinsep’s translation of Jean-Baptiste Say’s 1803 A Treatise on Political Economy, Say writes:

Production is the creation, not of matter, but of utility.

That one sentence captures one of today’s major debates: the decline of manufacturing. Which matters more: output for its own sake, or the value people get from that output? Most economists agree with Say that utility matters more. It doesn’t matter how much steel a factory can crank out if people don’t get value from it. On the opposite side are economic populists such as Oren Cass on the right and Sen. Sherrod Brown on the left.

Many politicians are convinced that manufacturing is in decline, and are advocating far-reaching industrial policies from Washington to save it. Unlike Say, they seem to believe that there is something intrinsically better about creating physical goods, rather than services, ideas, or technologies. To them, matter is what matters most. This is not a reductio ad absurdum. Cass, in his book The Once and Future Worker, advocates subsidizing industries and even entire towns engaged in manufacturing, even if their products create so little value that few people want to buy them. Rather than doing more with less, Cass argues for the opposite.

This view is mistaken in two ways. First, according to the data, U.S. manufacturing is in good health. Second, the size of this or that sector doesn’t matter anyway. What does matter is that people are able to create as much value for each other as they can. Sometimes that involves manufacturing, and sometimes it doesn’t. Policy makers in Washington will never be in a place to correctly decide that ever-changing mix.

Pre-COVID manufacturing output in the U.S. was at near-record levels, though dented a bit by President Trump’s trade policies. It is still too early to tell what COVID’s impact will be, but it almost certainly will not be good. Fortunately, economic fundamentals remain strong. While recovery will likely take a few years, manufacturing will likely resume its long-term steady climb.

Even when populists do acknowledge the data, they worry that manufacturing output growth is slower than in other sectors of the economy. This is why manufacturing’s share of GDP is smaller than it used to be. This is just a more nuanced version of the same mistake. The percentage of GDP taken up by this or that industry does not matter. What matters is that consumers are free to spend on what gives them value.

The ongoing shift from manufacturing to services is hardly at the same level as the earlier shift from farming to manufacturing. But the impulse to oppose the change is the same. Even Adam Smith, who was no Luddite, distinguished between “productive” labor, which was agricultural, and “unproductive” labor, which was most non-agricultural. Today, Cass and other industrial policy advocates draw a similar distinction between productive manufacturing and less productive non-manufacturing jobs.

The data have a problem with this argument, too. Even back in the 1940s and 1950s, the service sector had roughly triple manufacturing’s GDP share. The populists’ fixation on ratios, rather than how much wealth people are creating, is a similar mistake to the one in the inequality debate Iain Murray and I pointed to in our paper “People, not Ratios.”

Say’s Treatise was published in 1803, about a generation after Adam Smith and right at the point in history when industrialization was becoming noticeable in Say’s native France. This was the beginning of the Great Enrichment that has raised incomes in the richer countries by 30-fold or so, and is still operating today.

This brings up the second flaw in today’s economic populism. Not only do populists often get the data wrong, they make a fundamental error about what people value.

Say’s insight is that if people value something, it doesn’t matter if it was made this way or that way, or on a farm or a factory, or even whether it is a physical product that a person can hold, or sit on, or drive. This is true regardless of an industry’s NAICS code, which is an artificial distinction anyway.

The whole point of labor is to create value for people, not to create it only in ways that Peter Navarro or Elizabeth Warren approve of. As Say says, what matters isn’t matter; it’s utility.

September Brought Uptick in Jobs – Will Next Government Steps Help or Hurt?

This is a press release originally posted at cei.org.

Employers added 661,000 jobs in September, and the unemployment rate declined to 7.9 percent from 8.4 percent, the U.S. Bureau of Labor Statistics said today in its monthly report. CEI experts expressed encouragement that deregulatory policies and re-openings are helping people recover financially from pandemic lockdowns and shutdowns this year but warned that more government action is needed – to deregulate and to reject a return to lockdowns.

Statement by Sean Higgins, CEI research fellow:

“Friday’s Labor Department report that the economy added 661,000 jobs, dropping the official unemployment rate to 7.9 percent, is welcome news but also a reminder the economy has a long way to go to fully recover. The good news is the data suggest people are eager to go back work and shop, eat in restaurants, and go to theaters. But they cannot and that’s holding the recovery back.

“If we want the economy to recover, we cannot revert to locking everything down in reaction to a recent surge in coronavirus cases. We must find better ways to allow people to safely interact, instead. Doling out more stimulus funds to businesses or extending unemployment relief is placing duct tape over the problems, while piling on more debt that taxpayers will eventually have to pay off.

“The department’s report found the sector with the largest growth was leisure and hospitality, which added 318,000 jobs in September. That accounted for about half of the overall employment gains in the last month. Bars and restaurants accounted for the largest part of that, adding 200,000 jobs, with the rest in gambling, amusements, and hotels. These gains are dramatic because hospitality was the sector hardest by the outbreak. Since February, that sector of the economy has recovered 3.8 million jobs but remains down more than 2.3 million from where it was at the beginning of the year. That’s about a third of the total 6.8 million jobs lost since February.

“Retail trade grew by 142,000 jobs over the last month, the largest part of it (40,000 jobs) coming from clothing outlets, indicating more people are out shopping. Retail is still down 483,000 jobs overall from February.

“The good news is these sectors can rebound quickly when given the chance. Doing that means allowing people to get out of their homes to re-engage safely with the outside world. That has to be the focus if we want the economy to recover.

Statement by Ryan Young, CEI senior fellow:

“The economy continues to create jobs, but the pace is slowing. It will be some time before the economy is back to normal, let alone everyday life. Unfortunately, there are still thousands of government-created barriers that keep people out of work. These include licenses, permits, entry barriers, excessive paperwork, and tariffs—not to mention looming antitrust threats against the very tech companies that help make remote work possible. Over-regulation is hindering virus response and economic recovery.

“President Trump and Congress should continue to eliminate never-needed regulations. Depending on how the election goes, further regulatory reform will a positive addition to the Trump legacy or the springboard for a second-term agenda. Either way, regulatory reform is the right thing to do to get people back to work.”

New Paper: Antitrust Regulation is #NeverNeeded

My colleague Jessica Melugin and I, along with our former colleague Patrick Hedger, have a new paper out today, “Repeal #NeverNeeded Antitrust Laws that Hinder COVID-19 Response: Smokestack-Era Laws Favor Established Interests and Do Not Encourage Competition.” The tech companies that regulators are targeting have made a difficult pandemic easier to endure. Antitrust lawsuits would not help the COVID-19 response. Since the real cost of antitrust policy is its chilling effect on new innovations, ramping up antitrust enforcement would leave the country less resilient against the next crisis.

Amazon has made it easy for people to get no-contact deliveries of household supplies and groceries—and spurred competitive responses from Walmart, Target, and other retailers. Facebook makes it easy for people to stay in touch while staying socially distant. Google makes it easy to find information about the virus and stay up to date. As the paper concludes:

Antitrust investigations at the federal and state level should be suspended during the COVID-19 crisis and, ideally, abandoned permanently. The unintended consequences of market distortion and chilled innovation are the last thing consumers and businesses need right now—or ever. This is no time for politicians and government lawyers to promote their own careers through the posturing of antitrust enforcement. Consumer benefit and business resiliency must be preserved and antitrust enforcement must not be prioritized or expanded.

Read the whole thing here. For more on antitrust, see Wayne Crews’s and my paper “The Case against Antitrust Law” and CEI’s dedicated antitrust site, antitrust.cei.org.

Trade News: China Tariffs Violate WTO Rules, Aluminum Tariffs Dropped, No Trade Deal with EU

Usually policy-related news slows down near elections; nobody wants to rock the boat. This has not been the case with trade policy. Three important stories have emerged in the last day or so.

First, the World Trade Organization (WTO) ruled that President Trump’s China tariffs violate the WTO’s Most-Favored Nation (MFN) rules. Those rules state that all countries with MFN status cannot be charged different tariff rates for the same goods. They must all be charged the same rate—and that rate has to be the lowest a country charges any country for a given good.

China has MFN status. So, under WTO rules, the U.S. cannot charge China higher tariffs than it does other countries for MFN-eligible goods. This is exactly what Trump has done with hundreds of billions of dollars’ worth of Chinese goods.

While this is a big headline, it likely means little in terms of policy changes. China retaliated in kind, and roughly in proportion to Trump’s increase, so the WTO will likely consider the matter settled, and thus will not endorse further action against the United States. And as my colleague Iain Murray has pointed out, Trump, ironically, is unable to appeal the decision because he has essentially dismantled the WTO’s dispute resolution system.

It is ultimately up to Congress to right President Trump’s wrongs on trade policy. And the administration needs to get through its head that tariffs are not going to convince Beijing to enact needed reforms on economic policy, human rights, and political repression. The data are in, and the tariff approach does not work. A better approach will use consistent, long-term multilateral diplomatic pressure.

In the short term, the China tariffs should be rescinded anyway, regardless of what the WTO says. Taxing needed goods is terrible policy during a pandemic and a recession.

Second, President Trump had announced in August that he would reinstate national security tariffs against Canadian aluminum—about a month after the United States-Mexico-Canada Agreement (USMCA) came into effect. Canada announced it would retaliate, as countries nearly always do when tariffs are raised against them. On Tuesday, Canadian officials were set to announce what the retaliations would be. Hours before the press conference was to begin, the U.S. announced it would drop the tariffs.

This is more damage control than an actual positive policy change—tariffs are not going down, they are merely not going up. But backing off represents at least a tacit admission that more tariffs will not help the economy during a pandemic and a recession. Even if tariffs would help the aluminum industry itself, which is a questionable assumption, higher prices would hurt aluminum-using industries ranging from autos to beer to construction, as well as consumers.

Third, the European Union apparently will not negotiate a trade deal with the U.S. anytime soon—even if Biden wins the 2020 election. At a conference, EU trade official Sabine Weyand said Europe would rather work with the U.S. on shared problems, such as China policy, in the WTO, where they can also build coalitions with other allies. Europe would also rather settle other issues in piecemeal fashion, such as the ongoing dispute over Airbus and Boeing subsidies, and various Trump tariffs.

An EU trade agreement is one of the “big three” that were expected to completed in the next few years, along with China and the Brexited UK. President Trump has been mulling further tariffs against European goods for some time. Hopefully this news does not spur him to raise tariffs in hopes of forcing the EU to the negotiating table. If the USMCA is any precedent, such an agreement would be filled with trade-unrelated provisions for labor, environment, regulation, intellectual property, and whatever else rent-seekers can cook up. It would also, as with the USMCA, likely do more to manage trade than to free it.

Since Democratic candidate Joe Biden’s trade protectionism is uncomfortably similar to Trump’s, it is just as well that there will likely be no U.S.-EU trade agreement anytime soon. This will give both sides time to fully digest the lessons of the Trump administration’s failed protectionist experiment, and to pursue smaller policies such as regulatory mutual recognition, and at least some lowering of tariffs and other trade barriers.

Trump Administration Backs Down on Tariffs on Canada Aluminum, But Long-Term Problems Unfixed

This is a press release originally posted at cei.org.

In another high stakes trade matter today, the Trump administration decided to back down from plans to impose tariffs on Canadian aluminum. Just before Canadian Prime Minister Justin Trudeau was set to announce retaliatory tariffs against the United States, U.S. Trade Representative Robert Lighthizer announced the U.S. would drop the tariffs. CEI Senior Fellow Ryan Young praised Lighthizer’s decision:

“United States Trade Representative Robert Lighthizer did the right thing by dropping the planned reinstatement of aluminum tariffs against Canada. The tariffs violated the spirit, if not the letter, of the just-enacted USMCA trade agreement. The agreement and its predecessor exist in large part to avoid the sort of brinksmanship between allies we just witnessed.

“The administration may finally be learning that other countries retaliate against tariffs. Just in case the lesson has not yet sunk in, Congress should pass legislation taking back the tariff-making powers it granted to the President under Section 232 of the Trade Expansion Act of 1962. Taxing power properly belongs with Congress, and this administration has proven it will not use its power responsibly.​”

WTO Rules Against Trump’s China Tariffs, but the Problem Remains the Tariffs Themselves

This is a press release orginally posted at cei.org.

The World Trade Organization ruled today that President Trump violated global trade rules by unilaterally imposing tariffs on over $350 billion worth of Chinese goods. CEI Senior Fellow Ryan Young says, while the WTO decision is not a surprise, the bigger problem remains the economic and personal toll of the tariffs themselves.

“It is no surprise the WTO found that President Trump’s China tariffs violate its rules. Ironically, the President cannot appeal this decision because he continued the Obama-era policy of crippling the WTO’s Appellate Board. 

“The China tariffs are still bad policy. The purpose of the tariffs was to force the Chinese government to reform its illiberal policies ranging from trade barriers to technology theft to its human rights record. Not a single reform has been credibly made.

“In the short term, the Trump tariffs are raising prices and limiting access to important goods during a pandemic and a recession. There are even tariffs on needed personal protective equipment such as face masks. There is no justification for such measures.

“In the long term, President Trump’s blatant disregard of a rules-based trading system means countries like China will be less likely to follow the rules themselves. His policies are contrary to the national interest and harm the pandemic response. President Trump should rescind the tariffs regardless of what the WTO says.”

In the News: Antitrust and Amazon

Over at Digital Commerce 360, Don Davis has a thorough writeup about the potential antitrust case against Amazon. He also quotes me a few times. Read the whole thing here.