Trump and the Mexican tariffs: How far is this administration willing to go to achieve their protectionist, anti-humanitarian goals? Maybe farther than we thought.

May 31st, 2019 at 9:54 am

As you know if you’ve looked at any morning paper, the Trump administration has proposed an escalating tariff on all imports from Mexico, starting at 5 percent on June 10th and rising by five percentage points each month until it reaches 25 percent. The tariffs are intended to force Mexico to take actions to reduce the flow of migrants into the U.S. Trump said the tariffs will remain in place until Mexico “substantially stops the illegal inflow of aliens coming through its territory.”

Here’s a Q&A on this proposed action. Initially, it may not look like a big deal for us (much more so for Mexico). But if it doesn’t fizzle quickly, and I don’t think it will, it could turn out to be important along various dimensions.

Q: Isn’t this is an unusual use of tariffs?

A: It is. The majority of tariff cases stem from countries arguing about trade, as is the case with China. Country A objects to country B “dumping” a specific export (“rubber tires, grade c”) at below cost in order to corner market share and Country A imposes a “countervailing duty” to level the playing field. Or, as with China, we object to their trade practices (though I’ve argued this attack is somewhat overblown).

Yes, tariffs have been used as a geopolitical tactic, to protect what Hamilton called “infant industries,” and to support the buildup of domestic industries to achieve import substitution (tariffs were also the main source of government revenue in early America). But I’m not aware of a case where tariffs have been used to block immigration.

Q: Ok, it’s an unusual idea. But is it a bad idea?

A: Yes, for two broad reasons. First, I have the same objection to this tariff as to any other sweeping tariff (versus the more targeted “dumping” example above): by disrupting broad trade flows and indiscriminately raising costs on swaths of industries and consumers, it is a blunt policy tool that may have been useful in Hamilton’s day but is no longer so. Trump envisions widespread import substitution, but his vision is atavistic. Trade flows and inter-country commerce are too far advanced to be wholly rewired. I don’t think the globalization omelet can be unscrambled but even if it could, the victory would be a Pyrrhic one on all sides of the borders.

We’re especially integrated with Mexico. The WSJ reports that “about two-thirds of U.S.-Mexico trade is between factories owned by the same company.” Those are largely auto manufacturers, as we import $93 billion in cars and parts from Mexico (as a share of our imports, that’s 5x our China share), computers, food, and hundreds more goods. According to Goldman Sachs researchers, 44 percent of our air conditioners and 35 percent of our TVs are imported from Mexico. After China, Mexico was our largest source of imports last year (we imported $350 billion from them last year, and exported $265 billion).

Second, it is a well-documented fact that unauthorized immigration from the Mexico has declined in recent years. What’s gone up is asylum seekers from Central American countries torn by violence and gangs. In this regard, the “crisis” at the border is of the Trump administration’s own making. Suppose this tariff got Mexico to do more to shut its southern border to asylum seekers. On legal, humanitarian grounds, that should be no one’s definition of success.

Q: What about the economic costs?

A: The direct costs start out too small to matter to our economy, but indirect costs could be steeper. Initially, $17 billion (5% * $350bn) is less than 0.1% of U.S. GDP. Tariffs work like a sales tax on U.S. consumers, but few would notice this initial installment. It is, however, worth pausing for a second to consider the weirdness of this aspect of the proposal: U.S. consumers are paying an anti-asylum-seeker tax. But as the Trump administration is aware, the U.S. is much more insulated from trade than those with whom we wage trade wars. We import 15 percent of GDP and export 12 percent. Those shares are much larger for our trading partners.

This could, however, be a bigger direct problem for Mexico, as their economy is already flat; Mexican GDP growth was about zero in the first quarter of this year, and their exports to the U.S., their largest trading partner, account for about 37 percent of their economy. It’s true that U.S. consumers pay the direct costs of tariffs, but it’s also true that exporters targeted by tariffs will also feel some pain, especially when we’re talking about such deep, large (from Mexico’s perspective) supply chains that cannot be handily redirected.

But there’s also a plausible scenario where this Mexico tariff seriously dings our economy, through at least two related channels: financial markets and investment. Equity and bond markets are initially reacting predictably negatively to the proposal, with auto shares taking a beating. I don’t worry about day-to-day market swings, but worse financial conditions, if they persist, clearly bleed through to growth, and thus to jobs, wages, and especially investment, where investors have increasingly been complaining about the “uncertainty engendered by the escalating trade war.

Relative to many economists, I’ve downplayed the “uncertainty” card; economies, like life itself, are always uncertain. But while I haven’t done the analysis (I will), I think there’s a signal building from trade uncertainty to the weak numbers we’ve been posting on business investment. This is especially the case given factors pushing the other way, such as low borrowing rates, strong consumer demand (albeit with recent hiccups), and high corporate profitability.

I’m not predicting recession, of course. Economists cannot reliably do so and the unemployment rate remains at a 50-year low. But the trade war was already a headwind and if this Mexican tariff goes through, that wind will gain velocity.

Q: Wait a minute. Trump may be crazy, but surely, he doesn’t want to undermine the economy, especially with a reelection campaign in the offing.

A: You’d think so—I certainly have—but this is yet another thing many of us have gotten wrong about him. The Trump recipe, according to observers including myself, has been: create chaos, capture the media, propose a nothing-burger solution, claim victory. And do all this before the sh__ hits the fan, i.e., before there’s real economic damage. And, in fact, there’s some evidence that Trump largely plays with house money, meaning he creates economic chaos when the economy and markets are strong enough to shake it off.

But lately, he and his team seem more committed to sticking with their interventions, even when there are clear costs, as in the market and investment data. True, labor markets, job growth, real wages—those most fundamental indicators—remain solid. If that were to change, perhaps we’d see the same outcome as when the air-traffic controllers said, “it’s over,” re the government shutdown.

But those of us whose theory of the case is that when it comes to damaging the U.S. economy, Trump will only go so far, may need to update our priors. If this Mexican tariff goes into place and then escalates, we may be looking at an administration that is willing to sustain a lot more damage to achieve their wrongheaded, protectionist, anti-humanitarian goals.

The Trump administration’s proposed “update” to the poverty threshold is a wolf in sheep’s clothing

May 22nd, 2019 at 1:37 pm

The Trump administration’s proposal to change the way the poverty line is annually adjusted for inflation is the policy equivalent of a wolf in sheep’s clothing. Sounds technical and weedy, but a new paper by CBPP’s Aviva Aron-Dine and Matt Broaddus shows just how damaging the change will be for the health coverage and benefits of millions of low- and moderate-income people. (An earlier CBPP report focused on other forms of assistance that would be less accessible under the change.)

Because the change will make the poverty line grow more slowly than it would otherwise, fewer people will be counted as poor and thus, fewer will benefit from government programs whose eligibility or benefits are keyed to the poverty line. Over time, millions will lose health coverage or face benefit reductions.

Importantly, note that none of these people will be better off due to the proposed change. Their actual (nominal) income will grow however it’s going to grow, regardless of the change in the price index. But because the new index will make the poverty threshold grow less quickly, some who would have been counted as poor or near-poor by the current system will no longer be so under the new system.

In other words, the Trump administration is proposing to lower the poverty rate without lifting a finger to help the poor.

In so doing, as Aviva and Matt point out, eligibility and benefits for many health programs would be cut, including:

–A Medicare subsidy that helps “low-income seniors and people with disability afford prescription drugs.”

–Medicaid and CHIP coverage, including maternal/child health and family planning.

–Premium tax credits that help people afford ACA marketplace coverage.

The table below shows how, after being in place for a decade (since its damage builds over time) at least hundreds of thousands of people would lose coverage or benefits from the change. Millions buying coverage in the exchanges would lose receive smaller credits against the cost of their premiums. Relative to today’s cost-sharing levels, “more than 50,000 people who would see their deductibles increase from about $850 to about $3,200.”

Source: Aron-Dine, Broaddus.

The switch to the slower-growing price index is being pitched as an innocent attempt to make the poverty line more accurate. But the phoniness of that argument is immediately apparent. The official poverty line is already too low and this change makes it even lower. The official threshold is based on an outdated methodology derived in the 1960s, and as such, it hasn’t evolved to incorporate the costs faced by low-income families today, like child care costs or the increase in housing relative to other costs. For these reasons, as Aviva and Matt report, “households just above the poverty line have high rates of material hardship: for example, high uninsured rates and difficulty affording health care, as well as high rates of food insecurity.”

Right now their proposal is in a 45-day comment period. We’re tracking this closely and will keep folks posted on its progress.

For now, just recognize that far from a benign, technical adjustment, this change threatens the economic and health security of millions of vulnerable people. I guess I should be inured to their regulatory (i.e., non-legislative) actions in this space (e.g., work requirements to hassle people off of SNAP or Medicaid rolls), but once again, the Trump administration is laser focused on solving the problem that America’s poor have too much and the rich have too little.

Pushing back gently but firmly on Michael Strain’s non-stagnation argument

May 16th, 2019 at 2:08 pm

A few folks have asked me about my friend Michael Strain’s recent Bloomberg piece where he argues against wage stagnation (it’s “more wrong than right”). It’s an old argument but one worth having, and Michael makes some important points and misses some big ones too (5, to be precise).

Larry Mishel and I counter a much shorter-term version of Michael’s case here but similar issues pertain. Certainly, the evidence he presents doesn’t change the basic wage story that I and many others carry around in our heads.

I think Michael’s most germane point is that nobody defines “stagnation.” If you think stagnation means real wages for low-wage workers have never gone up in the past four decades, you’re wrong. The figure below, from a recent piece I published (one I’ll get back to re a key point Michael misses), shows real wages for low and moderate wage workers stagnated through the 1970s, 80s, and 2000s.

But, in periods of very tight labor markets—the latter 1990s and now—they grew at a decent clip. This is key insight #1 about real wage growth for too many workers. It’s not that they’ve never grown. It’s that their growth periods in recent decades have been few and far between. And it’s largely dependent of achieving persistent full employment, a condition that’s also been too rare in recent years (see this exciting new paper on precisely this point!).

Key insight #2 is that, sure, switching to a slower-growing deflator leads to faster wage growth and there are good arguments for various choices (see Mishel/Bivens’ cautions re Michael’s choice of using the PCE for wages). But it doesn’t wipe out long periods of stagnation. Here’s the real 20th percentile wage (2018 $’s) using both the CPI-RS (used in the figure above) and the PCE. Just like the above figure: periods of growth, but longer periods of stagnation.

Key insight #3 is especially important and I’d urge fair-minded conservatives to think more about it. If you’re trying to understand why a lot of people have long been unhappy about their paychecks, you can’t just look at wage trends, you must look at their wage levels. That’s what I do here, and I argue that given what a lot of people are taking home in their paychecks, it’s awfully hard for them to make ends meet when paying for child care, health care, housing, and maybe even saving a little afterwards.

Insight #4 is that non-wage benefits don’t change the story, and probably make it less favorable for the “no stagnation” argument. We know, for example (because Larry Mishel always tells us), that the average benefit share of compensation has not accelerated over the stagnation periods shown above. Thus, non-wage comp cannot have offset slower real growth.

But it’s also likely the case—we don’t have long time series on this—that low- and moderate wage workers are no more likely, and I suspect are less likely, to have improved benefit packages over time. That is, if the average hasn’t accelerated, my bet is that the median and below have done worse.

Insight #5 provides what I suspect is another big reason that many workers feel left behind: the rise of wage inequality. As Larry shows here, from 1979-2017, real earnings of the top 1% grew 135% faster than those of the bottom 90%. And such disparities would remain no matter which deflator you use (because both low and high wages would be deflated by the same values).

Finally, I’d urge the no-stagnation crowd to consider why, as Michael notes, stagnation is frequently asserted as fact, by “[p]residential candidates,” “commentators and other opinion leaders….” Why does this resonate with audiences, especially in places feeling the pinch of globalization and deindustrialization?

It could be that they’re using the wrong deflator. But I’ll bet it cuts a lot deeper than that. I’ll bet it’s because they’re right.

Jobs report: no one wants to be incautious re inflation, but…Laissez les bon temps rouler!

May 3rd, 2019 at 9:43 am

Payrolls rose by a larger-than-expected 263,000 last month and unemployment rate ticked down to a 49-year low of 3.6 percent. Yearly wage growth held steady at 3.2 percent, which is also its average over the past 12 months (raising the question: are wage gains on pause?). Since consumer inflation is running at around 2 percent, this implies real wage gains of a bit more than 1 percent, a welcome development for workers who are clearly benefiting from the persistently tight job market (see more on the wage story below).

The tick down in the unemployment rate is not, however, as positive a sign as it appears to be, because it fell in April for the “wrong” reason: people leaving the labor market, not people getting jobs. This negative change should be discounted because the household survey (from which the unemployment and labor force rates are derived) carries a lot more statistical noise than the payroll survey (the 90 percent confidence interval for payroll employment is 110,000; for the HH survey, it’s over 500,000).

Our monthly smoother, which averages monthly job gains over 3, 6, and 12 month intervals, shows that the recent trend in monthly gains is a relatively low 169,000, but because this value is influenced by the unusually low February gain of 56,000, the other bars are more representative of the underlying trend of a bit north of 200,000 per month.

That’s a very solid number for this stage in our 10-year-old expansion, suggesting a virtuous cycle wherein strong labor demand is providing many working families with jobs and wage gains, which in turn fuels robust consumer spending. Remember, such spending comprises about 70 percent of our GDP, meaning that barring an unforeseen negative shock, these solid labor market dynamics should keep the recovery rolling for the near/medium term. It is also important to recognize that employers’ demands for more workers are being met by ample labor supply (again, discounting the April HH labor force decline). That implies less inflationary pressure, supporting the patient stance by the Federal Reserve. That is, jobs, wage, and inflation numbers all point to an economy that is certainly closing in a full capacity but still has “room-to-run.”

There’s been renewed attention on wage gains in recent weeks, as tight labor markets and, at the low end of the pay scale, higher minimum wages in some places, have helped boost worker pay. The next two figures show the yearly percent gains in hourly wages for all private sector workers and for middle-wage workers (the 82 percent of the non-government workforce that hold production, non-supervisory jobs). They clearly show the aforementioned acceleration but if you look carefully at the end of each series (i.e., the series themselves, not the smoothed trend) they haven’t accelerated in the past 6 months. This bears watching as it could suggest a ceiling on wage growth of around 3 percent. In theory, that ceiling be explained by the sum of productivity growth of 1 percent and inflation of 2 percent. However, truly strong worker bargaining clout would mean faster wage gains supported by a squeeze on corporate profits, i.e., diminished inequality.

Here are some aspects of the wage story I find most germane:

–The key point is well understood: tight labor markets boost worker pay. Why? Because, especially in an economy where just 6.4 percent of private-sector workers are union members, most U.S. workers have low bargaining clout, meaning unless employers are forced to compete for them, there’s little to channel much of the gains from growth their way.

–But research finds that it’s not just tight labor markets that makes a difference to wage growth: it’s persistently tight labor markets. It wasn’t until year 10 of this expansion that we began to see notably stronger wage gains. In other words, the goal for creating high-pressure labor markets isn’t just getting to full employment. It’s staying there!

–Productivity growth, as noted, is a constraint on wage growth. Right now, it’s running at a trend rate of about 1 percent, compared to around 2.5 percent in the last full employment economy of the latter 1990s. That’s one reason real wage gains are slower now versus then.

–Also as noted, the share of national income going to workers remains low given where we are in this cycle and the tightness of the job market. Re-balancing “factor shares”–shifting income from profits to wages–is another source of non-inflationary wage gains.

–That said, as I’ve shown in lots of places, and as this next figure shows, there’s been virtually no evidence of wage gains bleeding into price gains. Again, this is critically important from the Fed’s perspective.

Thus, while one obviously doesn’t want to be incautious regarding the possibility of future inflationary pressures, the correct monetary policy for the moment is the one they talk about down in New Orleans: Laissez les bon temps rouler!

Sen. Warren’s debt cancellation plan: Should progressive policy aim for narrow targets or structural change?

April 29th, 2019 at 9:25 am

Introduction

Sen. Warren’s college debt cancellation plan, which I explain here, has gotten a mixed reception. While many progressives and, predictably, student debt holders give it high praise, it has taken flak from two broad groups: those who just don’t like cancelling debt and those who view it as insufficiently progressive. The latter group objects to the extent to which it helps higher income debtholders who, in their view, don’t need the help relative to those with lower incomes.

Their critique provides a microcosm of a major policy debate for Democrats between progressive targeting on one side versus a broader approach aimed at reducing structural inequalities that have grown to historical proportions. It’s an important debate, as it plays out in Medicare for All versus Medicare for More, subsidized jobs for targeted groups versus guaranteed jobs for all, universal income support versus targeted wage subsidies, and so on.

This essay starts by examining the rationale for college debt relief and then uses Warren’s higher education plan to try to garner some insights into the narrower-versus-broader policy debate. Warning: I do not conclude that one approach dominates the other. In the spirit of full disclosure, I’ll admit that as an older, technocratic, incrementalist who gives significant weight to opportunity costs, I’m congenitally more familiar and comfortable with narrow targeting. But as someone who has, for decades, watched increasingly concentrated wealth and power distort economic and particularly racial outcomes, I’m increasingly open to questioning my priors.

I’ll say little about those who can’t stomach debt cancellation. While I understand where they’re coming from, I wouldn’t let such resentment block useful public policy. Should the government not subsidize health coverage for those without it because the rest of us have long paid our premiums? Was the introduction of Social Security and Medicare unfair to those who had to retire without them? That’s not saying student debt relief is useful public policy or that Warren’s plan is the way to go. It’s saying that the fact that the introduction of any public benefit may be viewed as unfair to those who won’t receive it tells you little about the extent to which that benefit will improve social welfare.

Is college debt reduction good public policy?

Whether debt relief is good public policy and if so, how best to do it, is a more interesting question. The rationale for helping student borrowers is strong. First, K-12 education has long been viewed as a public good, meaning absent government support, the population would under-invest in it with negative economic, social, and political consequences. But, as I said in my earlier piece, 12 is no longer the right number for the high end of that range. Workplace skill demands have steadily increased, driving up the need for a more educated workforce (note that this is a different argument than the ubiquitous, and suspect, claims of skill shortages by many employers).

Second, college tuition (and the ancillary costs, like boarding and textbooks) has increased a lot faster than typical household income incomes (the BLS price index for college tuition and fees rose 63 percent, 2006-16, while nominal median income rose 22 percent). Yes, grants improve affordability, but at public four-year colleges, annual costs increased by $6,300 since 2000, while annual aid increased by less than half that amount. Meanwhile, states have significantly disinvested in higher education (the average state spent 16 percent less—inflation adjusted—per student on public colleges and universities in 2017 than in 2008).

At the same time, the return to college has also gone up and the evidence shows that for many students who complete their degrees, even with loans, college pays off. Still, these two facts—higher ed as a public good and the affordability challenges it poses for many families of limited means, especially for racial minorities—provides a rationale for helping at least some group of student borrowers. A third rationale is that the extent to which the historically large stock of student debt is a negative for the macroeconomy.

Here’s how (my old Obama-era pal) James Kvaal, now the president of The Institute for College Access & Success, recently put it (italics added):

For college to be affordable, students must be able to both make ends meet while enrolled and successfully repay their loans after leaving school. Unfortunately, for many students, one or both of those goals are not possible today. Financial barriers still keep many students from earning college degrees and—while the returns to college are high for those who succeed— there is a crisis for the many students who struggle to repay their loans. A million students a year default.

For these reasons, various debt relief programs already exist, though they are, as Kvaal’s comments suggest, insufficient. Few experts in this area of education policy view the status quo as adequate, and thus, we need to do more.

Critics of Warren’s plan argue it is not progressive enough

And yet, many criticized Warren’s plan for providing more debt relief than is necessary to too many debtors who don’t need the help. That is, they judged the plan to be too generous and not progressive enough because too much debt cancellation goes to upper income borrowers.

The claim is reflected in numbers released both by Warren and outside analysts. An Urban Institute analysis finds that 32 percent of the cancelled debt would go to the bottom 40 percent while 45 would go to the top 40 percent (a Brooking analysis yields similar results). Warren’s materials show that at least 80 percent of all borrower households up to the 80th percentile get full debt cancellation, though this share falls to about half of those in the top fifth.

Given that distribution, columnist David Leonhardt, who has long advocated for helping the neediest in their pursuit of higher ed, worries that the plan will help “a 24-year-old in Silicon Valley making $90,000” thereby confusing “the mild discomforts of the professional class with the true struggles of the middle class and poor.”

To be clear, even by these numbers, because its top benefit ($50,000 applied to debt cancellation) begins to phase down at $100,000 of household income, the plan maintains some degree of progressivity (to which Leonhardt gives a nod) and racial equity. The Urban analysis finds that 56 percent of the debt relief goes to families in the bottom 60 percent, with incomes below $65,000. Warren’s materials show total cancellation for about 90 percent of those with an associate degree or less compared to 25 percent of those with a professional degree or doctorate. Since student borrowing rises with income, and the plan cancels 40 percent of the outstanding debt of 75 percent of borrowers, the 60 percent it doesn’t cancel is mostly held by higher-income families (above the plan’s $250,000 cutoff) with high amounts of debt. Urban’s analysis finds the plan disproportionately helps African-American borrowers (black households are 16 percent of all households, but they receive 25 percent of all cancelled debt).

Still, the plan’s design could be tweaked so that more of its benefits would reach low versus higher-income borrowers. Because higher income families borrow more for college, lowering both the $50,000 forgiveness threshold—say, to $20,000—and more so, starting the phaseout lower—maybe at $60,000 instead of $100,000—would boost progressivity and lower the cost.

The challenge is that when you’re cancelling student debt, because high-end households are more likely to borrow for college and to borrow larger amounts, it’s hard to achieve high progressivity. That’s one reason why many critics of the plan prefer income-based repayment options (where borrowers pay 10 percent of their disposable income to service their debt, which is forgiven after 20-25 years of such payments) and/or, as Leonhardt argues, “an enormous investment in colleges that enroll large numbers of middle-class and lower-income students.”

Is the goal of college debt reduction to help low-income borrowers or to pushback on structural inequality?

Is targeting debt reduction to poorer households clearly the better policy choice in this space? The critics argument—a resonant one—is: in a world of limited resources, why aid “mild discomfort” when you can help those with “true struggles?”

But Warren is coming at the issue from a different perspective. Her purpose is not to parse these two groups. It is the more ambitious (and thus, more expensive and interventionist) goal of resetting the imbalances driven by the vast increase in wealth inequality. Her motivation comes from her oft-stated belief that concentrated wealth equals concentrated power, political influence, and the stripping of opportunities from broad swaths of Americans, most notably racial minorities, and not just the poor.

It is thus not incidental that her higher ed plan (which, as I discuss below, includes a lot more than debt relief), is financed by a tax on extreme wealth that hits the top 0.1 percent of wealth holders. The goal is to claw back some of this narrowly concentrated wealth to provide more opportunities for all the families who face some of costs of these extreme imbalances. No question, it will help some computer engineers and lawyers. But in so doing, the hope is that by reducing that engineer’s debt burden, she will have the freedom to start her own business. A lawyer who benefits from her plan will have the economic space to shun the corporation in favor of public service law.

Viewed through that lens, the Warren plan is not designed to target debt relief to the least well-off. It is instead designed to return some measure of economic security and freedom of choice to 42 million people from across the income distribution who, by dint of their current debt burdens, face economic constraints that she believes public policy should address.

There’s more to the plan, most importantly making two and four your public colleges tuition free. That’s a whole other discussion, though it raises all of these same issues. Re progressive targeting, I’ve seen too few references to the fact that her plan also calls for $100 billion in higher funding for Pell Grants—the program Kvall called “the most important federal commitment to college opportunity.” Given free tuition, these grants would pay non-tuition costs, which for many students outpace their tuition costs.

But none of that negates the opportunity costs invoked by this and other plans with such broad scope. A dollar spent on a $100,000 household is one that isn’t spent on a $20,000 household, and it’s undeniable that the latter needs more help than the former, especially when we consider those students whose upward mobility is most elastic to a quality, higher education are the ones least able to afford it.

But it is also undeniable that, in the face of levels of inequality that we haven’t seen in this country since the 1920s (which, for the record, did not end well), it will take more than narrowly targeted corrections to reset the balance of power and opportunity in America. I don’t know if this or any other big idea is part of the solution. Also, I’ve ignored politics, which I’ve argued elsewhere may be more conductive to targeted incrementalism than sweeping reforms. But those of us who seek economic and racial justice must entertain the possibility that relative to the sorts of ideas we’ve long promoted, it may take a policy agenda that’s bigger, more disruptive, and more ambitious, to start to repair the damage.