Category Archives: Uncategorized

Trump Trade Tariffs Hit Ford Motor Co. Hard

This is press statement on unintended, but not unforeseeable consequences of tariffs. Originally posted at CEI.org.

Ford Motor Company just announced layoffs in the midst of a reported $1 billion in tariff-related losses. Auto sales are down due to trade tariffs that President Trump imposed on metal and other car-related materials. Competitive Enterprise Institute trade policy expert Ryan Young says this sort of economic calamity is not surprising.

“President Trump’s push towards government-managed trade is starting to show its effects. New trade barriers have already cost Ford a billion dollars, and the company, already in the midst of a reorganization, is laying off employees.

“Trump’s new taxes on foreign goods are intended to stimulate American manufacturing, but they are having the opposite effect, just as economists across the political spectrum predicted. U.S. manufacturing output was already near a record high before the new tariffs, and did not need any help, especially of this counterproductive variety.

“President Trump should repeal his new tariffs, and Congress should pass legislation preventing him from causing further damage to the economy.”

Ryan Young coauthored a recent report explaining all the economic harms caused by trade tariffs and other barriers. See:

Analysis: Common Myths and Facts about Trade

Report: Traders of the Lost Ark

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William Nordhaus, Paul Romer Win 2018 Economics Nobel Prize

Both of this year’s economics Nobel laureates have been on the short list for some time. Both are deserving, as David Henderson writes in The Wall Street Journal. Paul Romer is best known for his work on the nature of economic growth, and William Nordhaus for his environmental economics, as well as coauthoring, with fellow laureate Paul Samuelson, the 20th century’s most widely used economics textbook (a copy of the 18th edition sits on my shelf). In fact, my only surprise at hearing that Nordhaus won was that I mistakenly thought he already had.

Nominees are not always so deserving; the prize committee often uses the award to make a political statement. Paul Krugman, for example, the 2008 laureate, produced excellent scholarship earlier in his career on international trade. But he later ditched economics for political activism, to the point of famously switchingsides on policy issues based on which party proposed them. His strong partisanship almost certainly played a role in his prize—and its timing, announced in October of an election year.

More notoriously, the committee more or less had to give F.A. Hayek a prize due to the quality, quantity, breadth, and influence of his scholarship. But it felt the need to balance Hayek’s unfashionable pro-market views by co-awarding the 1974 prize to the anti-market Gunnar Myrdal, who publicly favored using eugenicsto improve the welfare state. Myrdal’s work led to more than 60,000 people being sterilized in his native Sweden, 90 percent of them women.

None of this should tar Nordhaus and Romer’s prize—I am not the only spectator who was surprised by the lack of political message their selections send. Their awards are merit-based, which speaks well both of their work and of the committee’s.

CEI scholars and fellow travelers will find much to disagree with in Nordhaus’ work—but in some ways he also echoes Julian Simon. The biggest criticism is that Nordhaus was an early advocate of a carbon tax. One sees its theoretical appeal to economists—it’s an attempt to create a missing market. But there are serious practical problems.

Nordhaus recently estimated that an ideal tax would be about $30 per ton of carbon emissions. But this sits inside a range of as low as $6 per ton to as high as $93 per ton. This 15-fold difference is a sophisticated way of saying “I have no idea.” Future estimates will also have to account for declining emissions in richer, and still-growing, countries without a carbon tax. And all this ignores public choice concerns. The politicians who would enact a carbon tax do not have strong incentives to act in the public interest, to put it mildly. Moreover, as Henderson notes, “the Nordhaus model shows that the cost of a policy to limit the temperature increase to only 2.7 degrees Fahrenheit by 2100 would have been $37.03 trillion—$16.4 trillion more than the cost of doing nothing after accounting for the damage done by carbon emissions.” So carbon tax opportunity costs are substantial, too.

But Nordhaus’ most famous article is brilliant, almost literally—it’s about light. It also captures the spirit of Julian Simon, as well as the larger reason why economics is worth understanding in the first place. In “Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not,” Nordhaus shows that macroeconomic statistics don’t capture the full spectrum of improvement in human well-being over history. His chosen example is artificial light.

Open fires were the dominant light source for most of human history. These often take a half hour for even an expert to build and require time-consuming wood foraging and chopping. The indoor air pollution wood and dung fires cause is still a leading cause of death in areas without electricity. Candles and fat- and gas-burning lamps came along later, and were a massive improvement. Electric light bulbs were even better. Even accounting for the fossil fuels they consume, these have a far lighter environmental footprint, are safer, and provide brighter, more consistent light with very low maintenance. Since Nordhaus’ 1996 article, the improvement has continued with LED technology that provides customizable color temperature and brightness, with less power consumption and longer bulb life. The process will almost certainly continue into the future.

Today’s better, safer light sources are also cheaper—much cheaper. Nordhaus calculates the first-generation compact fluorescent bulbs from 1992 were nearly 30,000 times cheaper, per lumen generated than the open fires our ancestors used. That’s not 30,000 percent, that’s 30,000-fold. And CFLs turned out to be a dud technology! Talk about first world problems. Current LED technology is even better. And this has improved the lives of more than just humans. Whales are grateful for the extinction of whale-oil lamps rather than themselves. Forests are grateful that campfires are today mostly an occasional novelty for wealthy city-dwellers, rather than the dominant global light source.

Nordhaus has often fallen into the blackboard economics trap that fells many a talented economist. But his article on the price of light teaches an important lesson that well deserves a Nobel. Official statistics understate human betterment. There is a vast tapestry of non-statistical improvements. Some of them can be quantified, such as the price of light over time. Others cannot, such as the incredible ease with which people can find music, movies, and books today, or the quality difference between a 1988 Camry and a 2018 Camry, accounting for inflation. There is a vast literature on this subject, and Nordhaus prominently influenced it.

Remember, human betterment is the core reason to study economics in the first place. People can’t become better off if they don’t know what causes the wealth of nations. GDP and other statistics are useful. But economists who focus too closely on them not only understate the amount of human betterment that sound economic policy enables, but they can misdirect their time and talents into areas that could possibly cause harm, not betterment.

Economist Don Boudreaux points to another Nordhaus article that makes a similar point about the importance of innovation and the entrepreneurial spirit that makes it possible: “nearly all—about 98 percent—of the benefits of technological innovation are captured, not by the entrepreneurs and businesses who introduce them, but by the general public.” The article, 2004’s “Schumpeterian Profits in the American Economy: Theory and Measurement,” invokes another name familiar in Competitive Enterprise Institute circles. It’s easy to see the billions of dollars that the Mark Zuckerbergs and Jeff Bezoses earn for themselves. By Nordhaus’ estimate, they create about 49 times more value than that for complete strangers such as you and me.

Paul Romer’s work, at its best, follows a similar theme. He is best known for his work on the nature of economic growth. It ties directly into what many economists, myself included, consider the most important graph of all time, pictured below.

People lived on the equivalent of three dollars a day for most of human history, from Mesopatamia through the Middle Ages and the Renaissance, up until about 1800 or so. Now, in the last one tenth of one percent of our species’ history, the average person in rich countries suddenly has fifty times that to live on. More than half of the world’s population, poorest countries included, now qualify as middle class. The proportion of people living in absolute poverty, defined as $1.90 per day or less, is now below ten percent for the first time in history. The absolute number of people in absolute poverty is declining, even as population increases. How the heck is this happening? Romer has helped improve our understanding of this important question.

Unlike cable news economists, Romer has an attention span longer than a fiscal quarter. This enables him to look at what the real engines of economic growth are, and what made today’s mass prosperity possible—and how it can continue to lift people out of poverty in the future.

Romer is not the first to say that technology, innovation, and change are the most important long-term factors driving growth. But many previous theorists, most prominently Robert Solow, thought economies tended to work towards a stable equilibrium state, until some outside technological shock, such as the electric lightbulb or the automobile, changes where that equilibrium point lies. The economy then lurches towards that new point, where it would remain mostly still until another shock comes along.

Romer argues that technological change is not an outside shock, it is built into the human condition. People innovate all the time, and always have—just look at the evolution of stone tools before anything like a modern economy ever existed. The proper concern for policymakers then, is enacting public policies that do not stifle the natural human impulse to change and innovate. Long-run institutional structures matter; whatever the Dow Jones Industrial Average did last quarter does not.

Romer prefers a government with a handsier approach than we do at CEI. But on those fundamentals, we very much agree. Property rights, freedom to trade, rule of law, limited corruption, and the usual Washington Consensus policies tend to work quite well. Countries with governments that more or less follow them are far more prosperous and free than those that don’t, as this year’s just-released 2018 edition of the Economic Freedom of the World report shows.

Romer’s shifting of technology in blackboard models from an exogenous variable to an endogenous variable seems like some ivory tower dispute of little consequence. But it is really about human nature, and human betterment. Despite our inborn tendency to innovate and exchange with each other, poverty is still our default state. A quick glance at the graph above makes this obvious enough. It is wealth and growth that need to be understood. One implication of Romer’s theory is that innovation, while impossible to predict, is very possible to suppress.

Regardless of one’s political leanings, the goal is nearly always the same: freedom and prosperity for as many people as possible. Nordhaus and Romer’s work, in their separate ways, tie into that common theme, and their Nobel reflects that. Congratulations to them both.

This Week in Ridiculous Regulations

In the news last week, the North American Free Trade Agreement (NAFTA) got a new name (USMCA) that nobody will use, and President Trump sent everyone a text message. Meanwhile, the 2018 Federal Register topped 50,000 pages and agencies issued new regulations, from farm payments to a safety zone in Cape Fear.

On to the data:

  • Last week, 76 new final regulations were published in the Federal Register, after 99 the previous week.
  • That’s the equivalent of a new regulation every two hours and 13 minutes.
  • Federal agencies have issued 2,584 final regulations in 2018. At that pace, there will be 3,330 new final regulations. Last year’s total was 3,236 regulations.
  • Last week, 1,208 new pages were added to the Federal Register, after 1,062 pages the previous week.
  • The 2018 Federal Register totals 50,380 pages. It is on pace for 64,923 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Five such rules have been published this year, none in the last week.
  • The running compliance cost tally for 2018’s economically significant regulations is a net savings ranging from $348.9 million to $560.9 million.
  • Agencies have published 84 final rules meeting the broader definition of “significant” so far this year.
  • So far in 2018, 474 new rules affect small businesses; 22 of them are classified as significant.

Highlights from selected final rules published last week:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

New NAFTA Could Have Been Much Worse

The new USMC (United States-Mexico-Canada) trade agreement isn’t very different from the old NAFTA (North American Free Trade Agreement), and that’s a good thing. Given the Trump administration’s emphasis on government-managed trade, it could have been much worse. Now President Trump can claim a political victory and hopefully turn his attention to non-trade issues, while actual trade policy remains mostly unchanged.

The agreement now goes to Congress. Passage is likely, though a possible party change in next month’s election could complicate matters. Incoming Mexican president Andrés Manuel López Obrador is the other political variable still in play. He has similar views to President Trump on foreign trade. But as a show of political good faith to current President Enrique Peña Nieto, he has indicated he will likely sign the agreement despite his misgivings. López Obrador’s populist reputation does not make this a guarantee, however. But Canada’s joining the agreement means the USMC Agreement will likely clear all political hurdles.

The 1,812-page agreement leaves intact the mostly tariff-free relationship between the U.S., Canada, and Mexico. It even has a few improvements, such as a slight liberalization of Canada’s dairy policy. U.S. agriculture policy will remain heavily subsidized and insulated from competition, however. Among the downsides are new wage and country-of-origin rules that will make cars more expensive for consumers and potentially disrupt carefully designed supply chains.

The negotiations also missed some significant reform opportunities. Oddly enough, this is actually a good thing. The current U.S. administration and the incoming Mexican administration both favor government-managed trade, so the timing was bad to open trade negotiations in the first place. While this is a sad commentary on contemporary politics, negotiators scored a victory by not letting their bosses make things significantly worse.

The most obvious missed opportunity is that recent U.S. tariffs against Canadian and Mexican steel and aluminum will remain in place, allegedly for national security reasons. As these new tariffs make themselves known throughout the supply chain, they will further increase car prices, plus other items such as houses and manufacturing equipment. There are other avenues for reforming these tariffs and the retaliations they caused, though they may have to wait until the next administration.

Hyper-complicated country-of-origin rules in the USMC Agreement run for 234 pages, and are similar to the ones in the old NAFTA. These are guides for figuring out how to apply tariffs to, say, a good designed in one country and built in a second country, from parts made in still other countries that are not even members of NAFTA/USMCA. This complexity could be avoided by simply doing away with tariffs altogether, but that was never going to happen in the current political environment. Again, the economy is better off simply for the new USMC Agreement not making things significantly worse.

Also troubling is a general NAFTA/USMCA ethos under which some countries determine other countries’ regulatory policies for them. This is generally due to trade-unrelated policies in trade agreements, mostly on labor, environmental, and intellectual property issues. Right now, it is the U.S. formulating Mexico’s regulatory policies, so there is little uproar about it, at least in the U.S. (indeed, this may have been included to increase support from labor union interests). But if the tables ever turn, this will quickly become a hot-button issue that could sink the agreement.

In short, NAFTA has a new name, but it’s still NAFTA. Pundits will just have to remember that USMC now means “United States, Mexico, and Canada” in addition to “United States Marine Corps.” There are a few marginal changes here and there in the USMC Agreement, some good and some bad. But a major bullet has been dodged between America and two of its largest trading partners. That the Trump administration is calling it a victory means that a major economic loss has been avoided for the time being. It would have been better to leave well enough alone, but under the circumstances, this may be about the best possible outcome.

This Week in Ridiculous Regulations

It was a busy week in the political world, from the bitter Supreme Court controversy to President Trump’s UN speech, to tariffs on $260 billion worth of goods in U.S.-China trade taking effect. Meanwhile, the number of new regulations this year broke the 2,500 mark and the 2018 Federal Register is on the cusp of reaching 50,000 pages. Regulatory agencies issued nearly a hundred new rules ranging from hook-on chairs to skate fishing.

On to the data:

  • Last week, 99 new final regulations were published in the Federal Register, after 69 the previous week.
  • That’s the equivalent of a new regulation every one hour and 42 minutes.
  • Federal agencies have issued 2,508 final regulations in 2018. At that pace, there will be 3,318 new final regulations. Last year’s total was 3,236 regulations.
  • Last week, 1,062 new pages were added to the Federal Register, after 1,351 pages the previous week.
  • The 2018 Federal Register totals 49,172 pages. It is on pace for 65,043 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Five such rules have been published this year, none in the last week.
  • The running compliance cost tally for 2018’s economically significant regulations is a net savings ranging from $348.9 million to $560.9 million.
  • Agencies have published 79 final rules meeting the broader definition of “significant” so far this year.
  • So far in 2018, 456 new rules affect small businesses; 21 of them are classified as significant.

Highlights from selected final rules published last week:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

Is There Such a Thing as Too Much Trade?

A common argument for free trade is that fewer trade barriers mean more trade. That argument is mostly true—there are a lot of deals people want to make but don’t, because trade barriers make them too expensive to be worthwhile. But there is more to the story.

The thinking goes like this: there is a point when enough is enough. After a certain amount of wheeling and dealing, people obtain the best possible mix of goods and services they can under the circumstances. Then they stop trading. The transaction costs of further action exceed the benefits. In a weird, non-Panglossian way, this would be the best of all possible worlds, because people could do no better.

Where exactly is that magical point? Nobody knows. But preventing people from trying to find out doesn’t do any good, and almost certainly does harm. And that’s the argument against trade barriers, even in a world with no trade (free trade in a trade-free world?). Trade barriers prevent that discovery process from getting people as close as they can get to that equilibrium point.

A skeptic could argue, correctly, that that equilibrium point will never be reached. It’s just a blackboard argument that doesn’t resemble a real-life economy.

Skeptics have another good point: that unknown, unachievable optimum is a moving target. And tariffs or not, the frictions of commerce are already easing up all the time anyway—online shopping, innovations in shipping technology, and peer-to-peer sharing services such as Uber and Airbnb are lowering transaction costs every year, making it easier than ever for people to trade. These innovations are constantly moving the equilibrium goalposts from one unknown point to another unknown point, neither of which can ever be reached anyway.

The transaction cost point in particular is especially important in today’s economy, as Michael Munger points out in his book “Tomorrow 3.0” (see my review here). But this is not an argument in favor of trade barriers. This is an example of what Harold Demsetz called the Nirvana Fallacy—real-world markets can’t achieve idealized blackboard perfection, therefore government intervention is necessary, or least indifferent. Real-world free trade will never achieve idealized perfection, therefore trade barriers matter less than free trade purists think.

This line of thinking does no one any good. As the famous Green Bay Packers coach Vince Lombardi pointed out, perfection is impossible. But in constantly chasing after it, you can achieve excellence. No realistic free trader argues that a tariff-free world would be perfectly efficient. But it would be better than the current trade regime, and is worth chasing. In doing so, we can achieve excellence as best we can in this non-blackboard world.

All this is a long-winded way of answering the question this post’s title asks. Is there such a thing as too much trade? Yes. And people should be free to try and find out where that point is.

For more, read the new CEI paper “Traders of the Lost Ark: Rediscovering a Moral and Economic Case for Free Trade” here.

Trade Goings-On: U.S.-UK Draft Agreement, New Book, and Peter Navarro’s Conversion

The Competitive Enterprise Institute is not the only group making a principled case for free trade. The UK-based Initiative for Free Trade, headed by Member of European Parliament Daniel Hannan, in conjunction with the Cato Institute’s Daniel Ikenson and Simon Lester, have released a draft for an ideal UK-U.S. trade agreement. Nine other groups contributed to the draft agreement, and CEI’s Iain Murray is a contributing author. Iain also wrote a column about the effort for National Review.

Regular readers will recall that I have a low opinion of Trump economic advisor Peter Navarro’s hawkish trade philosophy—I wrote about his policies and ideology here and here, and reviewed his book “Death by China.” In the cover story to the new issue of Cato’s Regulation magazine, Pierre Lemieux takes an in-depth look at “Peter Navarro’s Conversion,” from his four unsuccessful bids for public office, to his 1984 book-length defense of free trade, to his days as an environmental activist, to his current anti-China animus and job in the Trump administration. It’s worth a read.

For a lighter take that is just as devastating, HBO’s John Oliver recently did a segment on Navarro that is surprisingly economically literate. I could pick a few nits here and there with it about trade deficits, but overall its analysis is excellent. Oliver and his staff deserve credit for producing an excellent piece of economic education.

The Mercatus Center recently published an excellent trade primer by Lemieux, “What’s Wrong with Protectionism?: Answering Common Objections to Free Trade.” It contains probably the clearest explanation of comparative advantage I’ve read, and that alone is worth the price of admission. Countries with an absolute advantage in many industries, such as the U.S., should specialize in what they’re “more better” at, such as capital-intensive technology, aircraft, and services. Countries with an absolute disadvantage in productivity, such as China or Bangladesh, should specialize in what they’re “less worse” at—mostly labor-intensive assembly and low-skilled manufacturing.

This kind of specialization reduces opportunity costs. If the U.S. had a massive garment industry, for example, it would have to sacrifice untold billions of dollars of value it could create elsewhere. It can create more value by specializing in those high-value-added sectors, and leaving the rest to others, even if those others are less productive in absolute terms. The rest of the book is just as good, especially the chapters on manufacturing and the trade deficit. Highly recommended, especially for people new to trade policy.