A “truth” about trade that’s not a truth at all

April 22nd, 2016 at 11:08 am

I’ve long been a fan of the economist Alan Blinder, he of the hard head, soft heart (a great book, absolutely crying for an update, Alan!). In fact, Alan co-authored an important paper for our Full Employment Project on the policy lessons from the Great Recession.

So I was a bit blind(er)-sided by his WSJ oped this AM, 5 Big Truths About Trade, given that some of his truths are not true at all.

It’s essential to get this right as the populist campaign has elevated this trade debate in ways that can be used or misused. The latter would lead to protectionism, walls, and damaging tariffs like those touted by Trump. Alan’s right, for example, not to conflate trade agreements with trade, a theme I’ve tried to trumpet loudly in these parts.

But it also misuses the moment to argue, as Alan does, that the problem is simply that some workers are displaced and, if we only do more to help them, we’ll otherwise be fine. What this view ignores is the damage done to our and other economies through economically large and persistent trade imbalances. Alan’s “truth” #3 maintains trade imbalances “are inevitable and mostly uninteresting.”

Wait, what?!

First, we should recognize that those directly displaced by trade are not the only workers hurt by this dynamic. As displaced production workers move over to low-end service-sector jobs, the supply effect puts downward pressure on wages in that part of the job market as well. Economist Josh Bivens finds that non-college educated workers have lost around $1,800 in earnings per year through this channel. That’s a lot of money for them, and surely the root of a lot of the populist anger that’s elevating trade in the campaigns.

Persistent deficits of the magnitude we’ve had here in the U.S. have, in fact, been highly problematic, a fact recognized by Ben Bernanke back in 2005, when he recognized the extent to which the “savings glut” was contributing to large trade imbalances as surplus countries (like China then and Germany now) exported large amounts of savings to deficit countries. Far from “uninteresting,” this tactic has long been a strategy of mercantilist countries to over-save, under-consume, and under-invest, causing big problems in lots of other places.

Problems like a housing bubble, which Bernanke had the foresight to note in his 2005 paper (though he hoped it would unwind without causing much damage, which…um…didn’t quite happen); or before that, a dot.com bubble that led to the prior recession of 2001, which, while much milder in GDP terms, was also followed by a jobless and wageless recovery.

Consider these dynamics re Alan’s assertion that “…people who claim that our trade deficit kills jobs need to explain how the U.S. managed to achieve 4% unemployment in 2000, when our trade deficit was larger, as a share of GDP, than it is today.”

He might also point out—he who has written with great insight about the damage of the housing bubble and the innovative finance that inflated it—that unemployment was in the mid-4’s in 2007, right before the worst recession since the Great Recession, one we’re still climbing out of.

No one is saying that trade deficits prevent full employment. What we are saying is that the magnitude of the trade deficits we’ve run—averaging -4% of GDP since 2000 and -2.8% in the most recent quarter—must be offset if we are going to get to full employment. In recent decades, the excess savings flowing in from surplus countries, interacting with under-regulated financial markets, have turned that offsetting process into a bubble machine. (Dean Baker nicely ties these points to secular stagnation; see also this recent academic analysis tying savings glut dynamics to demand shortfalls in deficit countries.)

Alan also makes the mistake of scolding us for not saving enough. “Spendthrift nations like the U.S. have trade deficits because we don’t save much. But these saving decisions are domestic.” Nuh-uh!

When one country runs a trade surplus, another country must run a trade deficit. When Germany runs an 8 percent trade surplus (!), other countries with whom they trade–particularly those in the rest of the Eurozone–must consume that much more than they produce. If somebody’s consuming or investing less than they save somebody else must invest or spend more than they save. It is in this manner that surplus countries not only export goods to deficit countries. They also import labor demand from those countries, some of whom, like peripheral Europe, could really use that demand.

As I wrote recently, the goal here is not balanced trade, nor is it protectionism. “As long as there’s been trade, there’s been imbalanced trade, as countries invariably produce more than they consume, i.e., they’ll run a trade surplus, while others, like us, will do the opposite. To somehow insist on balanced trade for all would be a huge policy mistake, one that would preclude billions of people from the reaping the benefits of trade, both as consumers and producers.”

But to ignore the role of the international dynamics that have led to large, persistent US trade deficits, contributing to stagnant demand offset by lastingly damaging bubbles is to dismiss a force that a lot of people are justifiably pissed off about.

What to do about it is a good question, one for my next post on this topic.

Tax testimony at the JEC: Debunking supply-side mythology.

April 21st, 2016 at 10:43 am

Testified yesterday before the Joint Economic Committee–here’s my full write up.

Here are my main findings:

  • Fairness, simplicity, and revenue raising are often complementary: by closing regressive loopholes in the tax code, we reduce incentives to game the system, eliminate wasteful tax breaks that exacerbate inequality without promoting growth, and raise more revenues.
  • Based on demographics, inflation, debt service, and rising health costs (though measures in the Affordable Care Act have helped to slow that growth rate), a sustainable fiscal policy will likely require more, not less, revenues going forward.
  • I find no evidence to support the claim that supply-side tax cuts come anywhere close to paying for themselves or are even particularly pro-growth.

Let’s focus here on that last part: that supply-side tax cuts are not pro-growth. The testimony takes two angles on this point. First, citing an important paper by Bill Gale and Andrew Samwick, I point out various ways in which team trickle-down gets the theory wrong.

That is, the Republican witnesses yesterday, notably Art Laffer, assert with religious fervor, that of course cutting taxes boosts growth, based on that old chestnut that if you tax something–labor and capital in the supply-side case–you’ll get less of it. But Gale/Samwick point out that that may or may not be true, based on behavioral reactions to the cuts (“income” vs. “substitution” effects), how the tax cuts are financed, and changes in effective rates. And even if conditions are such that cuts do boost supply-side variables, there’s the question of magnitude. The supply-siders assume economically large responses.

In other words, the theory is ambiguous, which means one must look at the evidence.

With help from Ben Spielberg and Rob Cady, I made many scatterplots, featured here (see data note from the testimony below). Simple stuff, just looking under every rock we could think of to try to find the predicted negative correlation between top tax rates and jobs, GDP, productivity, investment, income, and revenues, from the 1940s to now. As the note below says, we tried levels, changes, lags…and found nothing–not one case–that supported the theory.

The testimony is very clear as per the limits of such simple analysis. The relationship between growth and taxes is far more complex than what’s captured in these figures, of course. But the absence of any correlation over time should make policymakers extremely skeptical of supply-side growth claims (as I note in the testimony, there’s evidence that temporary tax cuts are likely to be growth-inducing during recessions, but that’s through demand-side impacts).

Such consistent lack of correlation should put the burden of proof on the supply-siders to convince the rest of us of the growth effects–using empirical evidence, not model-based estimates, as another witness, Scott Hodge of the Tax Foundation did–of their proposals.

One last point. The testimony also points out that recent state experiments in supply-side growth effects, such as in Kansas, are turning out just as badly as the national scatterplots would predict.

Evidence at the sub-national level — where various states, led by Kansas, have been aggressively cutting taxes while policy officials tout the benefits of supply-side tax cuts — also tilts strongly against tax cuts as a growth strategy.  The cuts in Kansas that took effect in 2013, for example, have now blown a $400 million hole in the state’s budget.  When one of my fellow witnesses, Art Laffer, helped design these cuts, he predicted(along with Stephen Moore of the Heritage Foundation) that they would provide an “immediate and lasting boost” to the Kansas economy.  Yet not only have the cuts caused serious underfunding of the state’s education system, they’ve also coincided with weak job and GDP growth.  The Kansas Legislative Research Department’s projections suggest that the economy will remain weaker than the overall US economy for the foreseeable future.

Menzie Chinn happen to put up some useful analysis of this point yesterday, showing disappointing jobs and growth outcomes in states that have undertaken these sorts of experiments relative to those that have not.

Based on the willingness of some governors and their legislatures to anoint themselves in supply-side snake oil, I consider this a very important area of research going forward. As I’ve said in recent days, I know: if facts could kill the supply-side growth myth, it’d be long dead. But facts are all we’ve got and we must hammer away with them.

Data Note re Scatterplots

Each data point in each chart represents a calendar year.  The top federal marginal income tax rate (from the Tax Policy Center) is on the X-axis of each chart; the Y-axes represent the growth, from one year prior, of the variables in question.  Productivity is for the nonfarm business sector; real capital services come from economist John Fernald’s growth accounting dataset; GDP has been adjusted for both inflation and population size; and the 2013 value for real median family income (Census Bureau) has been imputed because of changing survey methods.

While these charts only show the non-relationship between top marginal tax rates and contemporaneous economic activity, looking two, three, or four years out does not change the findings.  In fact, longer lags often lead to an increased positive correlation with higher top marginal tax rates, a result that stands in direct contrast to what tax cut proponents typically predict.

Statistical nerds, your nation needs your help!

April 19th, 2016 at 12:57 pm

As OTE’ers know, I have long lobbied for being as explicit as possible about the uncertainty in our economic estimates and forecasts. Which is why I was very happy to get this survey from the Bureau of Labor Statistics today, asking whether they should present the monthly payroll jobs number (the net gain/loss of payroll employment) with confidence intervals. Right now, you just get the point estimate, with no information as to, say, the 90% confidence interval, i.e., the range of values around the monthly estimate for which there’s a 90% chance that the actual value is within that range.

For example, showing this interval would allow you to see whether the confidence interval around the monthly change “crosses zero,” meaning the actual change that month could have been negative or positive (the 90% interval around the overall payroll change is about plus or minus 100,000 jobs).

I would never try to influence any votes, of course, but I think this practice would constitute a real advance. The extent to which noise moves markets is…um…pretty unsettling. Of course, this won’t change that, but it’s a small step the right direction.

The Bureau offers two choices as to how to present the material. Again, the main thing is you take the survey, but I found that I had to do mental math on chart 2 to get back to the result in chart 1. Just sayin’…

BTW, don’t ya just love BLS? They’re not only constantly putting out great stuff. They’re trying to figure out how to make it better, and they’re reaching out to us users for input. Warms me wonkish heart.

Musical Interlude: Wherein Joey DeFrancesco plays his &*#$%! off

April 15th, 2016 at 3:02 pm

A friend turned me onto this Joey DeFrancesco jam wherein absolutely smokes the Hammond B-3, for which I’m a sucker anyway, on the song Find 4.605 Ways. (Whoops, I took the natural log…hee, hee!)

If you’re thinking this is the usual, melody, organ solo, guitar solo, melody and out, you’re wrong. Check out Joey’s second bite at the apple post-guitar solo. Oh, and there’s the little matter of that cadenza the end, followed by the gospel throw-down. Really, folks–this guy is a national treasure. And I say that even as his left hand, which handily takes the place of a bass player, is a job destroyer.

If this fails to rock your world, quickly get to the ER and insist they check your pulse.