The Trump Administration supports a House bill known as the “US Reciprocal Trade Act.” Before it was introduced, Peter Navarro was leading the White House effort in this area, which he called the Fair And Reciprocal Trade act. To the amusement of the rest of the White House staff, Mr. Navarro got an “F” in marketing; this was one of several occasions that the President was understandably upset with Mr. Navarro.
It seems that neither the House bill nor the FART act have any chance of becoming Federal law.
This is the humorous part of a serious analysis by University of Chicago economist Casey Mulligan, who just finished a one-year stint as chief economist with President Trump’s Council of Economic Advisers. I wrote earlier about his analysis of Trump’s deregulation.
The rest of his analysis compares Trump and Reagan on trade. Trump is not clearly worse. Casey puts it more strongly, writing:
It is clear that the Reagan administration restricted trade, and did so more than the Trump Administration has. The Reagan administration harmed consumers in doing so.
That’s actually not clear to me. Based on his qualitative analysis, I would put an 80+ percent probability on Casey’s claim being correct, but I would still want to see a quantitative estimate.
Casey does, though, have a response to Bob Barro’s claim that the Trump tariff increases pretty much vitiate the the effects of the tax cut. I’ve made that point orally though not in print, so I’ll take the hit. Casey writes:
While not making comparisons with the Reagan years, Robert Barro and many others have said that the Trump Administration has been reducing economic growth with its trade policies, and enough to fully offset the pro-growth effects of tax and regulatory reform. None of these commentators have provided any quantitative analysis to show how they conclude that the offset is full. A first pass at the numbers suggests the opposite, even if the tariff increases were permanent: the corporate tax cut alone generated static taxpayer savings of about $200 billion per year, while taxpayers would be paying about $30 billion per year more for tariffs (again, a static calculation). Yes, there is uncertainty as to whether the annual tariffs will ultimately prove to be $0 billion, $60 billion, or somewhere in between, but is there any doubt as to whether it would be less than $200 billion?
READER COMMENTS
Scott Sumner
Aug 8 2019 at 6:31pm
There’s a lot that Mulligan leaves out. Reagan imposed the temporary VER on Japanese cars reluctantly, during a period of 10% unemployment and severe stress on US producers. He had to worry about what Congress would do. Trump is launching trade wars partly because he likes tariffs, not to save a key domestic industry from bankruptcy. Reagan was one of the first to propose Nafta, whereas Trump decided not to join TPP (a group Reagan would have likely joined.) I’m also not convinced by his claim that removing environmental regulations counts as free trade. Ditto for the postal change. Almost all government policies have indirect effects on trade—why stop there?
I do agree that Trump’s protectionist actions so far have been rather modest, perhaps the biggest cost has been the effect of trade policy uncertainty on business investment. But here’s the risk—it’s pretty hard to win a trade war with actions that are “modest”. Where does Trump go next?
Alan Goldhammer
Aug 9 2019 at 8:02am
Soybean farmers might have a different view. I wonder if we will see farm bankruptcies on the level that was observed back in the mid-1980s.
Benjamin Cole
Aug 8 2019 at 7:29pm
I wonder why “free trade” has become so sacrosanct and prominent to modern-day macroeconomists.
Oh, the exalted consumer!
The consumer in Northern California pays $3,600 every month for a one-bedroom apartment. How much will that consumer pay due to Trump’s trade tariffs?
Americans devote 20% of their GDP to healthcare but get the same results as nations that devote 10% of their GDP to healthcare. No one seems to care about the exalted consumer in this case. Completely socialized systems obviously produce better results.
Recent history shows that long-worshipped totems in the Temple of Macroeconomics have been false gods. Where are the higher rates of inflation darkly forecast by so many prominent macroeconomists in recent decades? The federal government runs huge deficits, and the Federal Reserve drops interest rates to very low single-digits. The Federal Reserve even prints money to buy trillions of dollars of bonds bonds. Yet, we see scant inflation. We even have, for the first time in maybe 50 years, a decent job market. Japan stands as a refutation of everything American macroeconomists have taught.
Moreover, it is not clear that traditional macroeconomic theories pertain in a world of dirigiste economies or even that orthodox macroeconomic theories produce better results. Singapore is perhaps the most managed economy on the Earth, and yet per capita PPP GDP is 150% that of the United States.
The globalists and the free traders seem to have a vision of the United States that calls for complete Detroitification.
They say Trump is wrong.
Thomas Sewell
Aug 8 2019 at 7:59pm
You’ve made some interesting claims.
And what do you think the cause of that price level is, say, compared to the vast majority of the country where that’s sufficient to purchase a large mansion and/or a huge ranch?
Americans are wealthier than most countries, thus they spend a lot more on just about everything. We spend more on books, on eating out, on cars, on houses, on clothing, on just about everything. Why should healthcare be different? Still, there is a good case to be made that without all the government health care market distortions we’d get more health care services for our spending.
Are you sure? I’m guessing you mean that they’re less expensive than more market oriented health care. Can you provide any examples of countries which had more market oriented health care, which then switched to a completely socialized system and afterwards spent less money on the same quality of care? How much did they save in the decades after the transition?
FYI, currently the government in the U.S. covers only about 37% of Americans with their health care programs, yet the government still manages to spend more than just about every other country on health care per person. Why would you think that if they tripled the number of people people they covered, they would somehow reduce how much is spent? More likely, they’d just be spending more than triple what other countries spend instead.
Benjamin Cole
Aug 9 2019 at 11:57pm
I cannot answer all the replies, but I will bunch my thoughts here:
Non-Market Housing Costs=Property Zoning. People pay an average pf $3,600 a month (many pay more, obviously) in San Francisco for a one-bedroom due to NIMBYism, property zoning, and the complicity of the financial-propertied classes, which prefer safe lending on appreciating, zoning-protected properties. Yes, that is an extreme example, but the problem afflicts the entire West Coast, NYC, Boston, an all other areas to greater or lesser extent, and is a structural impediment about 1000 times larger than Trump’s tariffs. The perversion of housing markets even influences Fed policy, which tightens up, perceiving inflation. The Fed has to suffocate the larger economy to jeep housing inflation in check.
Countries with socialized health care, like Britain, spend about half hat the US spends on healthcare and get about the same results. If we want to take a load off of consumers, who pay one way or another for these exorbitant costs, the US could just copy Canada or Israel or Britain, or Japan. “Total current healthcare expenditure in the UK accounted for 9.6% of gross domestic product (GDP) in 2017, compared with 9.7% in 2016.Apr 25, 2019″
Japan: Japan and macroeconomists? Japan runs heroic annual federal budget deficits, its central bank printed money and bought back JGBs equal to more than 100% of GDP, the central bank mandates negative interest rates, and they have 162 job openings for every job seeker. Japan is also Japan Inc, that is there is always close cooperation between government and the private sector (the Far East model). Japan is skirting deflation yet, and for decades. Orthodox macroeconomists obviously do not understand what is going on in Japan.
Singapore? The Temple of Orthodox Macroeconomic Theology has many a totem, fable and hagiography.
“Singaporean Government and Economy
Singapore operates under a system that locals call state-guided capitalism. The Singaporean government is famous for central planning, micromanaging and enforcing tight controls and encouraging multinational corporations to come to Singapore. Many important economic decisions are made by the powerful Economic Review Committee.
American economist Paul Krugman sarcastically referred to Singapore as the “economic twin of Stalin’s Soviet Union.” He claimed that Singapore achieved its stunning growth rates not through greater productivity and efficiency but rather through multi-billion infrastructure projects and additional investments and labor that helped Singapore grow “through the mobilization of resources that would have done Stalin proud.”
—-30—-
Usually I disagree with Krugman, but his analysis is correct.
Doubts”
Just another day in Singapore:
“In 2018, Singapore was ranked the most food secure country in the world by the Economist Intelligence Unit (EIU). The city-state, which currently produces less than 10% of its own nutritional needs, will not rest on its laurels.
By Maegan Liew
In an effort to improve its food security, Singapore has set its sights on increasing its food production capabilities by threefold over the next ten years.
Coined the ‘30 by 30 vision’, the Republic has set the target of producing 30% of its nutritional needs by 2030 – up from less than 10% today. The aim is to increase the cultivation of vegetables and fruit and boost the production of protein sources to strengthen the resilience of Singapore’s food supply.”
—-30—-
Singapore will be building multi-story LED-lit fish-vegetable factories. High-tech government aided and directed food production to supplant imports—a quintessential Singapore macroeconomic policy.
If you build such a factory, and a pollster asks you if Singapore is business-friendly, you will shout “Hooray!” You will be getting subsidies up the wazoo, including free land (Singapore owns all the land in Singapore), discounted power rates, employee-training, financing.
I do not see how the US can compete with dirigiste economies, and in fact is has been unable to. Detroitification is not a theory, it is a reality.
Alan Goldhammer
Aug 9 2019 at 8:04am
I highly doubt that this is the median rent for a one bedroom apartment. My daughter lives in Oakland and commutes daily in to San Francisco. She lives in a great neighborhood with lots of stores and restaurants. Monthly rent including a parking space is $2200.
Jon Murphy
Aug 9 2019 at 9:22am
Free trade has always been prominent to economists (not just macroeconomists). See Adam Smith’s Wealth of Nations, for example. Or the Salamanca School, for that matter, which predates him.
According to Zillow, there is only a handful of one-bedroom apartments available for that rent in Northern California, and all of them are in San Fransisco. So, your statement here is factually incorrect. Indeed, the average rent for California as a whole is just $1,750, so we have no idea where you got that number from.
Not in terms of total costs, no. Monetary costs, yes, but that’s because of the sleight of hand of price controls. Figuring in total costs, definitely not.
Nope. In fact, it’s confirmation. Again, we wonder where you got all this. Why, it’s almost as if you don’t even know what macroeconomics is…
Actually, the theories work extremely well. Your example of Singapore is evidence of this. You only think otherwise because you erroneously believe “Singapore is perhaps the most managed economy on the Earth” (according to various measures, such as the Economic Freedom of the World Index, Singapore is one of the least managed countries in the world and getting freer).
As an aside, I find whenever someone begins with a statement along the lines of “The entire field of X is wrong!” they’re about to launch into an explanation relying on an incorrect perception of X.
Thaomas
Aug 10 2019 at 7:06am
The same kind of people who see trade war are harmful (economists) who see how restrictions on development raise housing costs, restrictions on using “imported” physicians and nurses and Medicare/Medicaid/private insurance paying for treatments abroad raise health care costs. Trade restriction is just the issue of the day, although immigration restriction is growing.
Jon Murphy
Aug 9 2019 at 9:26am
I think Casey is dead-on right here. Trade, we must remember, is a relatively small part of the overall economy (it’s about 14% of GDP, if memory serves). And Trump’s tariff increases have been relatively small. This, of course, works in both directions, as also the negative effects of trade cannot be nearly as large as Trump et al. claim they are (indeed, even the Autor et al “China Shock” paper finds total net effects from trade with China over nearly 20 years on employment less than that which occurs naturally every month within the US economy).
Phillip Nagle
Aug 9 2019 at 3:55pm
It seems like politicians have been complaining for decades about Chinese stealing US intellectual property and manipulating exchange rates and illegal immigration. Now we have a president who is actually doing something about it and we hear his opponents squealing like stuck pigs. First, tariffs on China will have little effect on consumers. China has already cut their exchange rate so in effect, they are absorbing much of the cost of the tariffs. Also, it is not that difficult to move much of those Chinese produced products to other low wage countries so while there will be some increase, it will not nearly approach the total tariffs. We should be grateful that we finally have a president with cajones. The situation is not much different with illegal immigration. The US cannot exist with an open southern border and unlimited (and illegal) immigration.
Jon Murphy
Aug 10 2019 at 5:59pm
Phillip:
Just because politicians have been “complaining” about something doesn’t make it legitimate. For example, China’s IP theft has been largely overstated (see here: https://www.mercatus.org/publications/technology-and-innovation/how-united-states-should-respond-china-intellectual).
Further, there are several issues with your comment. First off, you accuse the Chinese government of currency manipulation and claim it is something supposedly bad. But then you cite Chinese currency manipulation as a benefit of the trade war. Ignoring the fact that the drop in the Yuan is basic economics and not manipulation, that is problematic for the narrative you want to tell, especially since you claim that part of the goal of the trade war is to prevent currency manipulation. On that front, the trade war has been a failure, apparently.
Second, a drop in the exchange rate does not imply the Chinese are “absorbing the costs of the tariffs.” That burden is still felt entirely by Americans. But, even if we grant your claim as true, we still run into the issue that the drop in the exchange rate cannot offset the deadweight loss to Americans occurring from the tariffs.
Third, even if we assume that it is easy to simply move production out of China (again, ignoring the fact that if it were so easy and costless, why aren’t firms already doing it?) a deal was already in place to accomplish exactly that: the TPP (which Mr. Trump withdrew from). So, the tariffs are adding costs to something that would have naturally occurred earlier, which means that the costs of the tariffs are greater than the total tariffs, not lesser.
Fourthly, the comment about “unlimited” immigration is incorrect, both factually and historically. There would not be “unlimited” immigration. Such a thing is impossible; costs exist after all. And historically, you make the claim the US could not survive with an open border, and yet we did for 150 years.
David Henderson
Aug 11 2019 at 12:29pm
The one thing I take issue with is Jon Murphy’s statement:
If he had left out the word “entirely,” there’s a reasonable chance that he’s right. But even there he would be right in denying that the Chinese bear all the burden. The fact that the exchange rate fell is prima facie evidence that the Chinese bore at least some of the burden.
There is no magic about borders. The split of the burden of a tax depends on the relatively elasticities of supply and demand, not on borders and not on the identity of the players. If, perish the thought, California’s state government imposed tariffs on goods from Virginia, the split of the burden of those tariffs would depend entirely on the relatively elasticities of supply and demand for the tariffed items. There is no magic about state borders. Similarly, there is no magic about national borders.
Jon Murphy
Aug 11 2019 at 1:43pm
Fair criticism, David. I was being sloppy with my language.
Thaomas
Aug 10 2019 at 7:13am
Who cares if (for the sake of argument) Reagan’s trade restrictions were more harmful than Trump’s? Were the deficits created by Reagan’s tax cuts more harmful than Trump’s. Was Pol Pot worse (per capita) than Mao? Two wrongs do not make a right.
David Henderson
Aug 10 2019 at 10:47am
You wrote:
Who cares if (for the sake of argument) Reagan’s trade restrictions were more harmful than Trump’s?
I do, and many people do. Reagan is often held up as some kind of ideal Republican. I still sometimes get the warm fuzzies when I think about the fact that I worked as one of his advisers for two years. But it’s important to get the facts right.
Having said that, I think Scott Sumner above makes an incredibly important point: Reagan was responding to political pressures from Congress when he did a lot of his damage, in a climate of very high unemployment. Trump, on the other hand, is the initiator of most of the bad trade policies. Casey Mulligan looks at the straight economics and not at the institutional constraints.
Were the deficits created by Reagan’s tax cuts more harmful than Trump’s.
As a % of GDP, yes.
Was Pol Pot worse (per capita) than Mao?
Yes.
Two wrongs do not make a right.
That’s true and it’s irrelevant to this discussion. The degree of wrong matters.
Clay
Aug 14 2019 at 4:48pm
Just because the Trump tariffs are smaller than the tax cut, that doesn’t mean Trump’s overall policies are better. I’ll grant we may be paying less tax overall compared to a year or two ago (personally mine didn’t change much) but we are running up our debt faster than ever. It’s like saying I am saving money because I started paying only half of my mortgage.
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