The Tax Plan's Impact on the Trade Deficit

I've argued previously that international accounts don't really matter and have no implications for aggregate demand, employment, well-being, etc. Though it must be said it that getting imports is the whole point of trade. By definition we make our own exports, so we it's not like we can't get our hands on them without trade. Whereas imports are products we don't make, but still want. They're the whole point. Basically imports aren't bad and don't reduce well-being, in fact they increase it by this logic.

Anyway, according to the Wall St. Journal, the tax plan could potentially halve the trade deficit by reducing the incentive of firms to artificially shifting profits abroad. "Independent research suggests the legislation could...deliver a one-shot 1% or greater boost to annual gross domestic product. This shift would be an accounting effect rather than a change in actual business or worker income." 

This is supposed to happen because some US firms, instead of creating a "separate" entity that "owns" the firm's intellectual property in a lower tax jurisdiction, for example, for the purpose of attributing profits to the entity outside of the US, will no longer play that shell game due to lower tax rates in the US. This means the official trade deficit figures are presently artificially inflated. So this is a good aspect of the bill if it works as predicted (sounds like a kinda big if to me), but it won't really make any Americans better or worse off. 

As far as the effect on GDP, if it reduces our current account (trade plus net investment income and transfers) deficit, our capital account (net foreign investment plus changes in official reserves) surplus must decrease by the same amount (they are always equal, its just accounting, see prior posts). Both investment and net exports impact GDP so I wouldn't expect much difference, unless I'm misunderstanding something.

Hopefully it will make the dumb fascist asshole president happy and temper his idiotic protectionist instincts. You did it sir! It worked. The jobs came back, now who cares about getting rid of NAFTA or the WTO or any of your other dumbass ideas? Unfortunately, his supporters may not notice that this is an accounting trick leaving them no better off and actually think that being a blowhard is all it took to reduce the trade deficit. But maybe they'll notice that it was a change in our own policies that did the trick and not tearing up international agreements that our own exporters would rather keep.

Happy 10 Years Since the Start of the Great Recession

     The Great Recession started 10 years ago! Where does the time go? It was really an amazing thing, in a horrible way. The next most recent recession that is comparable is the Great Depression, hence the naming. It was just as severe a blow to our economic system, and has many eerie parallels to the Great Depression, such as the rise of fascism afterwards. But because we have made undeniable and, dare I temp fate, irreversible progress, the impact on our economy in terms of the decline in GDP and employment were many times smaller. 

     Make no mistake, the asset market collapse and financial crisis that led to the Great Recession was severe enough to cause a Great Depression if not for the economic progress we've made. But we still have so far to go, as evidenced by the damage we were unable to prevent. I feel confident in predicting we will get better still; the next century's Great Recession will look like a small re-adjustment to us, while still being the largest economic crisis in the future's modern times.

Anyway, here's a graph of a few important macroeconomic indicators indexed to the fourth quarter of 2007, the prior economic peak:

Employment is total non-farm employment, Poverty is the # of people under the poverty line, Annual Average Wage and NGDP are in nominal dollars (not adjusted for inflation). Notice how employment took the biggest hit, longest time to recover, and slowest growth overall. That's not unprecedented, it usually takes longer to recover and is limited in the long term by population growth. 

Republicans Find 137 "Economists" Who are Sell-outs or Idiots

137 "Economists" signed a letter fawning over the Republican tax proposals. It is reproduced below with my comments in brackets.

Dear Senators and Representatives: [I think a comma is the correct punctuation here]

"Ask five economists," as the Edgar Fiedler adage goes, "and you'll get five different answers." [strong start]

Yet, when it comes to the tax reform package aimed at fixing our broken system, the undersigned have but one shared perspective: Economic growth will accelerate if the Tax Cuts and Jobs Act passes, leading to more jobs, higher wages, and a better standard of living for the American people. If, however, the bill fails, the United States risks continued economic underperformance.

[So I can buy that growth could be boosted – if the Fed doesn’t cancel out this fiscal stimulus with monetary tightening, which it probably will – and some higher wages and maybe jobs in the short run but as the economy basically at full employment it won’t do much.]

In today's globalized economy, capital is mobile in its pursuit of lower tax jurisdictions. Yet, in that worldwide race for job-creating investment, America is not economically competitive.

[The second sentence is complete crap. In the worldwide race for investment, the US has a large and persistent capital account (investment) surplus. Real interest rates in the US are at historic lows, which means we aren’t starved of capital or access to financing for investment. How the hell any economist could miss this is beyond me.]

Here's why: Left virtually untouched for the last 31 years, our chart-topping corporate tax rate is the highest in the industrialized world and a full fifteen percentage points above the OECD average. As a result of forfeiting our competitive edge, we forfeited 4,700 companies from 2004 to 2016 to cheaper shores abroad. As a result of sitting idly by while the rest of the world took steps to lower their corporate rates, we lowered our own workers' wages by thousands of dollars a year.

[This is the part I find most agreeable, which isn’t saying much. Our statutory corporate tax rate is the highest in the OECD. When it was first set there it was among the lowest. It should be reduced for the sake of competitiveness. However, basically no corporation pays the statutory rate – its full of loopholes, deductions, credits, etc. So many corporations in fact pay little tax. A bill that eliminated loopholes while reducing the statutory rate would increase efficiency, competitiveness, and simplicity without necessarily reducing revenue. As all taxes eventually fall on a person, this can be done without reducing progressivity. None of the Republican proposals do this.]

Our colleagues from across the ideological spectrum – regardless of whether they ultimately support or oppose the current plan – recognize the record-setting rate at which the United States taxes job-creating businesses is, either significantly or entirely, a burden borne by the workers they employ. The question isn't whether American workers are hurt by our country's corporate tax rate – it's how badly. As such, the question isn't whether workers will be helped by a corporate tax rate reduction – it's how much.

[I don’t understand how the burden could be entirely borne by workers. The share of total income going towards capital owners is increasing over time. Some of the burden would have to fall on labor, some on capital, unless they think shareholders are workers. These are the worst economists ever.]

The enactment of a comprehensive overhaul – complete with a lower corporate tax rate – will ignite our economy with levels of growth not seen in generations. A twenty percent statutory rate on a permanent basis would, per the Council of Economic Advisers, help produce a GDP boost "by between 3 and 5 percent." As the debate delves into deficit implications, it is critical to consider that $1 trillion in new revenue for the federal government can be generated by four- tenths of a percentage in GDP growth.

[This is complete bullshit. Not seen in generations? So we’re going to grow faster than we did after WWII when the workforce was rapidly expanding and we were much poorer than today? This is insane. I wouldn’t make such a claim about policies I like. As far as the GDP boost, I don’t see how it will improve long run growth. But whatever. That “3 to 5 percent” figure is in the “long run”. The $1 trillion figure is over 10 years, the cost will be ongoing beyond the 10 years. They’re comparing apples to oranges here. These economists are either dumb or unethical sell-outs.]

Sophisticated economic models show the macroeconomic feedback generated by the TCJA will exceed that amount – more than enough to compensate for the static revenue loss.

[Maybe some models do but not any of the ones any credible analysts who specialize in tax policy use (such as the CBO and JCT). Also, the $1 trillion figure is what the JCT came up with after doing dynamic scoring, not static scoring. Again, dumb as fuck or shameless liars.]

We firmly believe that a competitive corporate rate is the key to an economic engine driven by greater investment, capital stock, business formation, and productivity – all of which will yield more jobs and higher wages. Your vote throughout the weeks ahead will therefore put more money in the pockets of more workers [Oh well if they firmly believe it].

Supporting the Tax Cuts and Jobs Act will ensure that those workers – those beneficiaries – are American.

[UUUGGHHHH. 1, it doesn’t fucking matter what nationality beneficiaries are so long as the economy is improved and 2, they won’t all be American regardless. Large corporations are typically multinational, with multinational owners who will benefit from a lower corporate tax rate.]

"A Hated Tax but a Fair One"

The cover article in the latest issue of The Economist argues in favor of death taxes. It's quite fair in theory: you don't need the money anymore and death happens to everyone. I said this a couple months ago just sayin.

Also what if it isn't fair is taxing income, consumption, and investment more fair? Gotta tax something some amount.

Happy Election 2016 Anniversary!

     Since it's "modern day presidential" to keep bringing up the election, here's a hot take: Jill Stein is a nationalist, populist, isolationist, protectionist, executive power loving, anti-science, anti-EU shill for Russia who's only ever led a protest chant. And yes, I’m still bitter about last November, when enough people who could’ve stopped Trump voted for Stein instead.

     Like Trump, Stein is an anti-EU Brexit supporter. Like Trump, she is anti-science, having recklessly raised questions as to the safety of vaccines (they’re safe), effectiveness of homeopathy (it’s not), dangers of Wi-Fi (none), and safety of GMOs (they’re safe – though our patent laws and oligopolistic market structure mean there are negatives involved, just not safety issues). Instead, she’s said that scientists studying these issues should prove they aren't harmful rather than be satisfied with finding no evidence of harm. Oddly for a “scientist” (she went to Harvard Medical School, but doctors strike me as more of skilled practitioners than scientists), she doesn’t seem to realize you can’t prove a negative.

     Like Trump, Stein has falsely accused the Bureau of Labor Statistics of faking unemployment data to make the economy look better than it really is. She also advocated removing the Federal Reserve’s independence, which would send markets tanking and, to take the example of governments with politicized Central Banks, would lead to a loss of monetary stability, a short-lived inflationary boom, and inevitable bust. In 2012, she advocated not increasing the federal debt ceiling, which would've caused the US to default on its debt despite having the ability to pay. Her excuse was that she supports raising taxes on the rich and reducing military spending (i.e. austerity) to keep from going over the limit. I somewhat agree in general with both of those proposals however, at the time it was literally impossible for that to be done before the debt ceiling was breached. And what was her plan for getting that through congress and what would she do if congress didn’t just go along with her wishes? She was either being disingenuous with the voters or is a fool. 

     Like Trump, Stein has cast doubt on the fact that Russia interfered in the 2016 election and suggested it is a conspiracy theory the democrats invented. She literally called allegations that the Russian plot to interfere in the 2016 election included her “fake news” and called for Hillary to be prosecuted instead. In fact the Russians did purchase ads on social media boosting her candidacy. There is presently no evidence she colluded, but she did have meetings with Russian officials at Russia Today (read Russian state media) sponsored events before the election. One such event was in Moscow when she was photographed sitting at Putin’s table along with Michael Flynn, the disgraced former national security adviser. Stein claimed there were no translators so she didn’t really talk to any Russians. This is bullshit. Putin, like many Russians, can speak English, as can his spokesman Dmitry Peskov, who sat right next to Stein. Why you lyin' Jill? Flynn got paid tens of thousands of dollars to be there; I wonder what Stein got out of it.

     Stein stated “I have never said that Hillary Clinton was better or worse than Donald Trump” and “they’re not different enough to save your life, to save your job, to save the planet.” Now, I could make all the obvious arguments why Hillary was better than Trump[1], but the only one that matters is that Trump is a fascist. To say there is an equivalency between him and a status-quo democrat like Hillary insultingly devalues every genuine accusation of fascism. Like Trump, it’s clear that Stein was at least one of Putin’s useful idiots, at most she too betrayed her country for personal gain. 

     So, again, thanks a lot everyone who thoughtlessly voted for her. Or perhaps it wasn't thoughtless, and Stein voters have, like Stein herself, more in common with Trump than they’d like to admit. Jill Stein is Trump without the bigotry. That makes her much better than Trump (I would never say something so stupid as “Stein is no better or worse than Donald Trump”), but still an overall awful candidate with terrible policies that will set our country back. Not to mention she has zero qualifications to lead combined with no ability to enact her agenda. Hillary was unfortunately the best option in the general election, and the only viable one, to oppose what Trump stands for. If having a populist-nationalist president mattered more than having one who wasn’t a white supremacist, then Stein was your candidate. And hey, you’ve actually gotten a good bit of what you wanted anyway.

Jerome Powell is Unqualified to be Fed Chair

     Jerome Powell has been nominated by Trump to be Chairperson of the Federal Reserve. Now for Trump, who is an ignorant dim-wit on a good day, Powell is not horrible. But he is nevertheless unqualified for the position. His most relevant experience is the fact that he is currently a member of the Board of Governors of the Fed, a job that he was, at the time, even more unqualified for. Powell doesn’t have any economics degrees. He has a BA in political science and a JD, so nothing relevant.

     Some may argue that his experience in Wall Street banks is relevant and qualifies him for the job. But that’s like saying my experience in economics qualifies me to be an investment banker; it just isn’t so. Business and economics are not the same, just as finance and monetary economics are not the same. The job of the Federal Reserve is to stabilize the macroeconomy. Banks only matter in this because they expand the broad money supply through lending and fractional reserve banking. If the banks all crash at once the money supply shrinks and so does the economy. But if the Fed cancels out the monetary effect of a banking collapse through expansionary policy, the banks are irrelevant in a macro sense. The ins and outs of finance don’t matter here just as the retail sector doesn’t, but the ins and outs of monetary economics do.

     Ben Bernanke is one of the world’s leading monetary economists, and indeed made similar arguments before he was Fed chair (while he was Fed chair he adopted the Board’s views as his own to minimize panic rather than admit the other idiots on the Board (many of whom were appointed by Obama) were keeping him from doing what he would have preferred). Paul Krugman said the same thing before he turned pop. You may think finance matters because the Fed manipulates interest rates. But interest rates are merely a symptom as well as a communication tool so that all the chumps, such as bankers, who would otherwise be hopelessly lost vaguely know what the Fed is saying. When the Fed says it is going to increase interest rates, it really means it is going to tighten monetary policy such that nominal interest rates rise to x level in the short run, and vice versa.

     Here’s an example of why Powell is unqualified: earlier this year Powell said below target / low inflation was a “kind of mystery” given low unemployment. Any economist should know that there is not a stable relationship between unemployment and inflation over time (see graph). In the 1930s there was high unemployment and inflation, same with the 1970s. 

     Here’s why it isn’t a mystery. There is what economists call the “natural rate” of unemployment. The labor market will tend towards this rate in the long run. Say you have a massive recession and tight monetary policy, or that monetary policy doesn’t loosen past a certain point because of a mistaken belief in the “zero lower bound”. Unemployment won’t stay above the natural rate forever, people will be willing to work for less rather than make nothing. The economy will add jobs and inflation will stay low because monetary policy isn’t expansionary enough for it to increase. That is the Great Recession recovery in a nutshell. It certainly isn’t a mystery that inflation has been slow to increase while the Fed has been tightening monetary policy, which it’s been doing ever since it started tapering QE3. This isn’t a mystery to me because I’ve studied economics. How should one run a bank? I have no idea, beyond lend at a higher rate than you pay depositors and supply a level of output such that MC=MR. 

     You know who is qualified to be Fed Chair? Janet Yellen. She's a PhD economist[1],and has one of the most successful records of a Fed Chair. Inflation is about at the Fed’s target, unemployment is low, and this expansion is almost the longest in US history. And she has, so far, succeeded where all other rich world central banks have failed: tightening monetary policy after the Great Recession. The Euro Zone central bank tried to and had to backtrack, as did Sweden's central bank. I know we would disagree on theory here and there, but you can’t argue with results. That she was not re-appointed is a break with recent tradition among presidents, since Reagan, of keeping the prior appointee for another term[2].

     In arguing that Powell is a safe pick, pundits point out how similar his voting record has been to Yellen [3]. So why replace her? In addition to Trump despising powerful women and having no qualms about politicizing independent institutions, Powell is a Republican former Wall Street banker seen as softer on bank regulation, which Trump’s Wall Street patrons like. What could go wrong? Powell’s lack of relevant knowledge won’t matter much in “normal” times, but he may be lost in a crisis, at the mercy of whoever he believes is making the strongest argument about a subject he is ignorant of.

     That being said, he is the least worrisome of the speculated contenders (besides Yellen), and certainly not the worst appointment Obama made to the Board.

The Federation for American Immigration Reform (FAIR) is an anti-Immigrant Think Tank

I think that title puts it mildly. I also don’t think it will surprise many people. Often I go up to people I know and tell them something interesting (to me) I learned / learned more about, almost always economics related. Sometimes I get people going “yeah, I know”. I think because they had already formed an opinion on the matter that my understanding of the subject confirms. 

But who doesn’t want to be told by an expert that their opinions are generally correct. I would want to know that. Similarly, a think tank that is against more immigration is probably xenophobic given the broad consensus of the literature (and theory) that immigration is good for the economy and at least doesn’t make the federal deficit worse. I’m sure it isn’t surprising and is casually assumed by many.

But I can prove it!

I found my way to a blog type post of theirs titled "Why Immigration Can't Solve the Social Security Deficit". Now it’s true immigration can’t solve the Social Security deficit in the sense that it can’t reduce it to zero on its own, but that’s not what reveals their bias. The post begins by saying the argument that more immigration is good for the SS deficit is “based on hype rather than reality. A realistic assessment of that idea appears in a report of the Social Security Advisory Board.” Which states, “[w]hile recognizing the importance of immigration to our future patterns of economic and population growth, the Social Security Advisory Board does not view immigration as a panacea or free lunch for saving Social Security.” 

Duh it’s not a free lunch, thanks for the expert analysis. The very next sentence in that report is “The Social Security Administration’s (SSA) Office of the Chief Actuary estimates that an increase in legal immigration of about a quarter of a million would reduce the 75-year actuarial deficit of the Social Security program by about 5 percent.” FAIR is clearly cherry-picking their quotes.

The FAIR post continues, “[w]hile increased immigration might help…in the short-run…it is no solution in the long run.” What short run? The SSA found that it would reduce the actuarial deficit over a 75 year period. The actuarial deficit is the gap between costs and revenue over 75 years in this case. How is that not the long run? While forecasting that far out is a huge stretch, the least that can be said is that more immigration is projected to on net reduce the SS deficit in the long run, or over an immigrant’s lifetime.

Their reasoning is that “immigrant workers age too. They then become eligible for benefits…In that sense it is a Ponzi scheme.” That’s not a finding; that’s anti-immigrant rhetoric. The SSA looked over a 75 year period, which accounts for aging immigrants becoming eligible for benefits.

Their second string argument is that “[a] majority of immigrant workers take low-wage jobs. Because the Social Security System is redistributive it pays out more to low-wage workers compared to their contributions than it does for high-wage workers. That means that the more low-wage immigrants who are admitted to work in our country and become eligible for future payments, the greater the burden will be on the future workers to support those retirees.”

The first sentence is misleading, the second is a damn lie and a non-sequitur. Payroll taxes are regressive in terms of % of income taxed. This means the poor are paying in more of their income than the rich. So the fact that the flat benefit is a greater percentage of a poor person's income than for rich people isn’t exactly ~unfair. More importantly, it doesn’t matter. Either immigrants are a net benefit, zero net cost, or net cost; that they are a smaller individual net benefit than if they were richer doesn't change the fact that more immigration reduces the SS deficit. This means there is no added burden on other taxpayers over the average immigrant’s lifetime. 

Furthermore, immigrants tend to be clustered in low and high skilled jobs compared to the native born. So there’s plenty of immigrants paying in a lot more than they’ll ever take out. And around 30% of immigrants eventually return to their home country, paying into the Social Security system, and then leaving without taking their full entitled benefit if any of it.

So FAIR's analysis is not just a different way of looking at the data; it’s not reasonable people disagreeing. They are deliberately misleading, cherry picking, and lying. It is not the truth they are after, but to provide a veneer of credibility to xenophobic rhetoric. Or else their analysts are dumb af.

Tax Wealth Rather Than Income or How to Accomplish (Relatively More) Efficiency and Equality

     The short story is that if you tax something you get less of it and if you subsidize something you get more of it. So taxing income isn’t a good thing economically, it’s more so done out of necessity. Taxing wealth more would enable us to lower the marginal tax rate on income (the amount of tax paid on an additional dollar of income), meaning less distortionary effects on incentives and higher growth.

     But here’s the long story of it:

     In the 1800s Vilfredo Pareto came up with the basis of the First and Second Fundamental Theorems of Welfare Economics. This is back when economists were first formulating mathematical macro models of the economy. Here’s Pareto’s at its simplest: imagine a two person economy where the first person is randomly given some of the economy’s resources and the second gets the rest. The two will make any mutually beneficial trades. They continue to trade until there are no more mutually beneficial trades. This is a market equilibrium. So The First Theorem is that competitive market equilibrium is “Pareto Efficient” (hereafter referred to simply as “efficiency”).

     The Second Fundamental Theorem is that given any initial resource endowment, there is an efficient outcome that can be reached. Basically, the Second is the First in reverse. Sounds simple now but the point is that a market equilibrium must be a point at which no person can be made better off without another being made worse off (that’s the First), and for any initial starting point, or resource endowment, market exchange will result in equilibrium (the Second). Or, equilibrium is the most efficient allocation of resources and free markets tend towards equilibrium. A key fact of this model is that efficiency is not equality, and equality is not something free markets in equilibrium will achieve per se.

     In the mid-1900s Kenneth Arrow, having lived through the Great Depression, tried to come up with a way to accomplish both equality and efficiency. His answer was a one-time lump-sum tax on individuals proportional to their earnings potential (pretend it’s possible to know someone’s earnings potential for the moment). Such a tax results in a 0% marginal income tax rate. There is no disincentive for people to try to make as much as they possibly can, so no distortions of market incentives. The tax basically alters the resource endowments, or starting points, of people in the economy. The Second Fundamental Theorem says that given any initial resource endowment, equilibrium can and will be accomplished. Together this means equality and efficiency can be accomplished by redistributing resources and letting market exchange do the rest.

     Also in the 1900s, Abba Lerner[1] showed that such an equilibrium, with both equality and efficiency, is the only aggregate utility maximizing point, assuming money “buys” utility, which economics does[2]. Going back to Pareto’s two person model, if the first person is richer than the second, and marginal utility per dollar decreases as you get richer (is one dollar “worth” less to Bill Gates than a homeless person? I think so), you can increase the sum of both people’s utility by taking a dollar away from the richer person and giving it to the poorer person. Aggregate utility grows until there is equality. While Lerner’s simple mathematical model ignores incentives and growth over time, Arrow showed that such an equilibrium point is theoretically achievable accounting for individual incentives.

     But this is all in theory. In addition to requiring assumptions that can’t all hold in the real world (see post from 2012), like every econ model, there is no way to know a person’s earnings potential in advance. However, you can know someone’s earnings potential after the fact. You look at how much wealth they accrued over their lives and you subject it to a one-time lump-sum tax, as Arrow said. This is essentially the Estate Tax. Even with the complications of the real world vs models, taxing wealth is is more economically efficient than taxing income because it involves fewer distortions of incentives to produce[3], reduces inequality, and increases aggregate utility, which is the whole point of economics.

The Jones Act is Protectionist Bullshit, Which Always does Real Harm to Real People

    The Jones Act is some protectionist bullshit from 1920. The stupid law requires maritime commerce between US ports, or intra-national shipping, to be carried out by US built and flagged vessels crewed by US citizens and permanent residents, or pay high tariffs. As a result, intra-national shipping is expensive and inefficient, resulting in higher prices for consumers. The justification, beyond handouts for politically connected businessmen, for the Jones Act is to ensure that the US has domestic ship yards, ships, and crews should a war that interrupts international shipping break out. This is a much less significant worry than in 1920: the prospect of a global conventional war reaching US shores is slight, the US has dozens of allies to rely on, and could just buy ships with international crews should they be needed. The cost of the Jones Act relative to its fuzzy supposed benefits is immense.

     Each of the main requirements of the Jones Act undermines the supposed usefulness of the others. The requirement that the ships be expensively built in the US means fewer US flagged ships and therefore fewer US crews. The requirement that the ships be expensively US flagged means fewer US built ships and fewer US crews. The requirement that the ships be expensively crewed by US citizens and permanent residents means fewer US built and flagged ships. In this way, the Jones Act illustrates the damaging inefficiency of trade barriers generally.

     Because of the increased cost due to the Jones Act, intra-national shipping companies are loath to build new ships and rather push aging ships to their limits, to the detriment of efficiency and safety of their crews. The result is slower, smaller, less fuel efficient, and less technologically advanced ships. The ships would suck in war anyway. Alexis Madrigal has a great podcast series called “Containers” about shipping in general and the huge impact of standardized shipping containers in particular. Episode 5 is about the Jones Act, and the fateful journey of a US ship bound for Puerto Rico from Florida that never made it.

     This highlights perhaps the most damaging aspect of the Jones Act. For the continental US, it means greater use of trains and trucks rather than more opportunities for crews and shipping companies. Puerto Rico has no other practical option for receiving goods from the mainland. The result is much higher prices for Puerto Rico’s on average poorer residents, to the relative benefit of well-off owners of US shipping capital. The real human cost of the Jones Act has been on vivid display after Puerto Rico was hit by Hurricane Maria. Aid and supplies from the mainland have to use small, slow US ships to take it to Puerto Rico at high cost, adding unnecessarily to Puerto Rico’s human misery. 

     It took Trump a week to waive the Jones Act for shipping to Puerto Rico, and he only waived it after significant backlash and only for 10 days. The delay was partly politics as the Jones Act is protectionist bullshit, which he loves, and partly that Trump is a bigot who doesn’t care about brown people, even if they are American citizens. The Jones Act only puts Americans first if you don’t count Puerto Ricans, who, again, are American citizens.



And he's a news article with numbers and studies/economists cited/quoted.

West African Spring

     Back in 2011-12-ish, large protest movements swept the Middle East and North Africa, collectively referred to as the Arab Spring. They started in Tunisia after a 26 year old street vendor named Tarek al-Tayeb Mohamed Bouazizi set himself on fire in protest over police confiscating his supplies, fining him, and otherwise harassing him for just trying to work for a living. The dictator of Tunisia fled the unrest with a plane-load of stolen money. Tunisia’s post-Arab Spring democracy has been shaky, but survived. As is well known, the other countries rocked by large protest movements were less lucky.

     To many, the Arab Spring was a huge disappointment and confirmed predispositions against democracy and/or Islamic/religious parties. But taking a wider view of the world, one finds many other relative success stories of people-power leading to democracy, as it did in Tunisia. One region in particular stands out to me: West Africa. Whereas the Arab Spring arose quickly and spread like wildfire, the West African Spring has smoldered on for nearly a decade, or longer if you include the democratic transitions of Liberia and Sierra Leone (or even longer if you include democratic transitions in Ghana and Nigeria), slowly passing from country to country. Like the Arab Spring, not every uprising has been peaceful or successful. But I think it argues against those who would prefer the illusory stability of autocrats.

     A potential starting point could be Côte d'Ivoire, aka Ivory Coast. In 2010, Côte d'Ivoire held elections that were supposed to happen in 2005. The incumbent, Laurent Gbagbo lost, but cried foul and his buddies on the Supreme Court nullified enough votes for him to be declared the winner. International observers, the UN, and most nations recognized Gbagbo’s opponent, Alassane Ouattara, to be the winner. The elections were part of a peace deal that ended the First Ivorian Civil War in 2002. The fighting was generally between the rebel north and the south of the country. After Gbagbo refused to step down, the Second Civil War started up, essentially a continuation of the previously frozen conflict. UN and particularly French (the former colonial power) military forces intervened on the side of the rebels whose leader they deemed won the election. The conflict ended in 2011 with Ouattara assuming the presidency.

     As far as I remember Gbagbo is now on trial at the International Criminal Court. Ouattara was re-elected in 2015. Côte d'Ivoire’s democracy remains untested by a transition of power, and military units occasionally mutiny over demands for higher pay but it’s a start.

     Pro-democracy street protest then hit Senegal in 2012. Senegal has been a democracy since (re-)independence in 1960, has never suffered a coup, and has had transitions of power between political parties. However, in 2012 the two-term then-president Abdoulaye Wade, decided the constitutional term limits he helped to bring about did not apply to him and would only apply to his successors. His buddies on the Supreme Court (notice a pattern?) agreed with him. Outraged Senegalese took to the streets in protest. The opposition united behind a single candidate, Macky Sall, who had fallen out with Wade, and won on a platform of kicking that fool out of office.

     In 2014, pro-democracy protests hit Burkina Faso for a similar reason as in Senegal, though Burkina Faso was no democracy. Its 27 year “president” Blaise Compaoré, had previously agreed to constitutional changes that included term limits that would have removed Compaoré as a candidate in the next election. Like Wade, Compaoré got cold feet about leaving power and announced he wouldn’t. But widespread street protests eventually took him down and a transition government took power and scheduled elections for October 2015. 

    In September 2015, a military coup, led by the Regiment of Presidential Security (aka the former president’s goons), attempted to take control and captured the leaders of the transitional government. But Burkinabés weren’t having that shit. Again they took to the streets in protest. A combination of those protests and the rest of Burkina Faso’s army advancing on the capitol convinced the coup leaders to free their prisoners and publicly apologize a few weeks after seizing power. Elections were held the following November, and Roch Marc Christian Kaboré won them.

     Just over a year later, in December 2016, in what was supposed to be a sham election in The Gambia (yes, “The” is part of its name) led to a pro-democracy uprising. In the lead up to the election a senior member of the opposition, Solo Sandeng, was taken into police custody and somehow went missing (the police tortured him to death). Another lead opposition figure was arrested in the protests that followed. It seemed the president, His Excellency Al-Haji Dr. Yahya A.J.J. Jammeh (yes, that was his title and is his name)[1] was trying to eliminate opponents in the run up to the election.

     The opposition united behind a single candidate, Adama Barrow, who was a relative unknown, which was perhaps a strength in terms of being underestimated and therefore not imprisoned or killed by the state. The election commission ran an honest election. Either Jammeh was over-confident of his popularity or election officials took a huge risk in defying him. Barrow won a plurality of the vote and Jammeh shockingly conceded. In retrospect in appears he did that to buy time to make sure the military would back him staying on. Once he had all the pieces in place, Jammeh went back on his word and announced he’d be staying. 

    The Gambia’s only neighbor, Senegal, wasn’t trying to have that. Jammeh had always been an annoyance to Senegal and this was the perfect chance to remove him. With Senegal’s leadership, the Economic Community of West African States (ECOWAS) urged Jammeh to leave and threatened military intervention if he didn’t. Come inauguration day, Barrow was sworn in in The Gambia’s embassy in Senegal, and ECOWAS troops entered Gambian territory. In the end Jammeh left for exile in Equatorial Guinea, with a plane load of stolen cash (a lot of patterns here), and Barrow is now president.

     And presently in Togo there is a large pro-democracy protest movement that has taken to the streets, risking violent repression. They are demanding term limits to be reintroduced and for the current president, Faure Gnassingbé, who followed his dad as president in a disputed election result, step down. Gnassingbé is on his third term, having decided term limits weren’t for him. Former West African heads of state, including Ghana’s former military dictator, who eventually stepped down in a transition back to democracy, have urged him to make reforms to the constitution that protesters are asking for. But unfortunately ECOWAS has been largely silent, as its current chairman is Gnassingbé himself.

     The momentous transition to democracy in West Africa reminds me of the democratic transition in Latin America. It is incomplete and took a long time, but Latin America is overwhelmingly democratic where it used to be overwhelmingly authoritarian. May the slow smoldering burn of the West African Spring continue to claim more dictators and give rise to, or in many cases a return to, more democracies.

The National Flood Insurance Program Part II: Solutions?

Continued from part I. So what’s the solution? If you only look at the economics it sounds pretty simple. There’s the laissez faire get the government out of flood insurance period option. But the private insurance market already went down in a death spiral for reasons I explained in part I. Better mapping, modeling, and forecasting could potentially alleviate the issues that created the death spiral, but it’s still the least likely action for the government to take.

(On a side note, the federal government used to have a physical flood model for the Mississippi River. It was literally a miniature, yet massive, outdoor scale model of the river basin’s topography. Water would be sent through the model and they’d see where it flooded. The feds switched over to computer models not because they were more accurate (in fact they weren’t, at least at first), but because the computer model was cheaper and could run simulations much faster. The podcast 99% Invisible has an interesting episode about it.)

Anyway, there are a variety of options to improve the government program, which might even encourage the revival of the private market, at least for supplemental coverage. The NFIP could use up to date maps based on future expected risk, and price based on that risk. Buy out repeatedly flooded properties and return them to nature. Give discounts for flood mitigation, which would eliminate the moral hazard of insuring risky properties. And if people want to pay less they can lobby their local government to implement zoning rules (which Houston lacks) and other projects to reduce flood risk. Localities could be helped in this with federal matching dollars for local mitigation programs, similar to other infrastructure projects (after all, the federal government will pick up part of the tab for floods eventually). Presently, in order to purchase flood insurance the locality the property is in must have a flood mitigation plan, but clearly this has been inadequate and favors better resourced localities. In Maryland, we have something that opponents derisively call the “rain tax”, which taxes property owners based on the impervious square footage of their properties. Such a tax, in theory, internalizes the negative external costs of a property generating storm water runoff, incentivizing private sector mitigation solutions. An insurance mandate may help enlarge the risk pool, but given correlated risks it would also increase payouts.

Undoubtedly these fixes will cause many people to be priced out of owning property in the most risky areas, but that’s the whole point. Less development in such areas would make everyone else safer from floods. And an actuarially sound government run insurance scheme would still charge less than private insurers. Speaking of which, get rid of the role of private insurers in selling, assessing and processing claims.

But of course, asking the feds for money is easier and more immediately rewarding than demanding local flood mitigation programs. And past reforms have been watered down by popular demand. I think the Federal Reserve is a good model for addressing these issues. A lot of government agencies could benefit from such a set up. The fed has been indefinitely authorized by congress and left to make its own decisions about how to achieve legislated goals, often unpopular ones that significantly impact people’s lives. Its board has representation from member branches chosen by member banks as well as political appointees. The fed makes mistakes, but by design nearly all of its mistakes are the result of the general economic consensus being wrong rather than special interests or dumb politicians. Also the fed is audited regularly. So give the NFIP, among others, as strong a mandate and institutional design rather than rely on congressional whims at every five yearly re-authorization.

Alas there is more than economics to everything. Repeatedly flooded properties are clustered in a few states, namely Texas, Louisiana, Florida, New Jersey, and New York. This means policy changes will have large concentrated effects. Just as the costs will not be distributed evenly geographically, they will almost certainly not be distributed evenly across race and income. While property owners tend to be more well off than non-owners, renters will face higher costs if their landlords do. Some properties in greater flood risk, such as beach-front, are pricier for it, while others are made less valuable. An example is New Orleans, it would be perhaps the most heavily impacted community by any changes to the NFIP. The city’s poorest residents live in its most flood prone areas, which are un-coincidentally the most predominantly black. This is generally true for the poor and minorities in cities the world over. This has prompted calls based on environmental and social justice to preserve the affordability of the program in order to preserve poor and minority communities.

In part to address these concerns, Omri Ben-Shahar and Kyle Logue examine the distributional effects of the NFIP and Florida’s state run property insurance program, named Citizens. Crucially, Citizens publishes data on actual rates paid by flood policy holders and the actuarially sound risk-based rates, allowing the researchers to measure the size of subsidies. Unsurprisingly, inland policy holders are overpaying, while the closer you get to the beach the larger the subsidy gets. The authors use data on median home values by zip code and insurance policy caps as proxies for wealth. A property owner cannot take out a policy that pays out more in one flood event than the property is worth, suggesting it is a good proxy for individual level home values. With each proxy the results are generally the same: both the dollar amount and percentage of subsidy increase with wealth. Because Florida’s program is very similar to the NFIP, their results are externally valid.

According to FEMA data from 2006, the average NFIP policy holder pays between 35 – 40% of the full risk premium. Of course those closest to the water pay much less. And 23% of coastal properties with flood insurance are not primary residences, aka mostly vacation homes. Such second, third, and so on homes are worth more on average than flood insured primary residences. The largest subsidies go to rich people who don’t even live in the flood zone. Like all subsidies, while poor people may depend on them, the majority of the benefit goes to the well off. Figure 3, below, from Ben-Shahar and Logue’s paper displays this nicely. The relatively wealthy are the largest subsidy recipients, but as the scatter plot shows, many less affluent people benefit too. While the rich can absorb the increased cost of eliminating the subsidy, or heaven forfend, live in fewer houses, it is the poor who will be priced out of living in certain areas. Again, this detrimental impact on the poor would likely be felt greatest in black neighborhoods of New Orleans.

However, the current program is a horribly inefficient and expensive way to benefit the coastal poor. And such calls ignore both the cost of subsidies born in part by the inland poor and the opportunity cost of wasteful spending. The most obvious change would be to not subsidize non-primary residences. Subsides on insurance could be means tested (which would add administrative costs). Or the cap for payouts could be lower, which would only impact the richest policy holders. And if people want more coverage they could buy private coverage. That is generally how the UK’s healthcare system works: public health insurance for all, but if you want fancier coverage there’s a private market for it. Sure the private flood insurance market collapsed here, but policy changes like this could encourage it to come back. Or my favorite option, eliminate all subsidies everywhere for everyone that can’t be justified on the basis of positive externalities and just give poor people money, preferably in the form of a basic income that phases out as income increases, perhaps modeled off the Refundable Earned Income Tax Credit.

This is similar to arguments I’ve made for free trade. Yes, there will be some concentrated losses for particular communities even though there are net benefits in aggregate. But that means helping those communities cope is easily affordable. There’ll still be displacement and adjustment, but letting the program lumber on as it is will only give more money to the rich at the expense of the poor and increase the number of people, poor and otherwise, who are put in the path of danger by subsidizing unsafe development. Basically, the reasons for putting off the reckoning will only be made worse as time goes on. The cheapest and least disruptive option is to fix the system now.

PS here's a good article about what Louisiana is doing to try to stop sinking into the Gulf. 

The National Flood Insurance Program Part I: The What?

2017 has been quite the hurricane season so far for North America, and we’re only on L. This season illustrates a long running trend for hurricanes hitting the US. There have been gradually fewer overall, but a greater number of major hurricanes, defined as category 3 and above. Without action from congress, this season will break the bank at the National Flood Insurance Program (NFIP). For most of its history, the NFIP took in more money in premiums than it paid out. That changed after Katrina, which added over $15 billion in debt, and was made worse by Sandy. These two hurricanes account for nearly all the NFIP’s pre-2017 debt.

Rather than do anything about it at the time, congress increased NFIP’s borrowing authority, from $1 billion to $25 billion. Before Harvey and Irma, the NFIP’s debt stood at around $24 billion. Allowing the NFIP to accumulate more debt was stupid because it did nothing to reduce the underlying cost of the program while adding the cost of interest payments on that debt. 

It may seem odd that a capitalist country like the US has a government run insurance scheme (but not for healthcare thank god (that’s sarcasm, though the shambles the NFIP is in isn’t too confidence inspiring)). Private insurers stopped providing flood insurance a while ago, with many leaving the market after the Great Mississippi Flood of 1927 (which I wrote about here). So the government filled the gap.

A government run flood insurance scheme can work in theory. With just one insurer, the risk pool is larger and more diverse than with multiple smaller insurers. Because the government doesn’t have a profit-motive, the monopoly power of a single insurer is not used to raise prices and reduce supply as a private monopoly would. But the NFIP does not work. Some of the reasons are not unique to the NFIP. Insurance works best for non-correlated, predictable, and rare risks; floods don’t fit any of those criteria. Risk is correlated: if your neighbor’s house is inundated in a flood yours is very likely to be as well. The weather is not very predictable. And because of where development has occurred – near bodies of water – flood damage is not rare and is becoming even less so. 

Additionally, due to the amount of chance involved, individuals may lack the information, or even the ability, to rationally calculate their personal risk. If they underestimate this risk, they will irrationally conclude that insurance is too pricey and forego it even if it is priced correctly from the market’s point of view. These same issues explain why private health insurance markets seem to death spiral. And handing flood insurance back to the private sector will not fix these problems. Though one key difference between flood and health insurance is that there are positive externalities to better health, which justify public subsidy, whereas there are no external benefits to anyone from someone being able to live in a bigger house closer to the ocean than they otherwise would. This means, in purely economic terms, there is no justification for the government running a flood insurance program. But fat chance of them getting out of the business and letting people lose everything in a storm.

There are also many well-known obvious problems that are unique to the way the NFIP is set up. Most obviously, it doesn’t charge enough in premiums to cover its payouts and does not charge homeowners based on the true risk of their property flooding. This ends up subsidizing development in flood prone areas, further increasing the cost to the NFIP. The NFIP grandfathers in low rates for current customers when it raises rates, pushing the cost onto new development. The NFIP uses old flood maps and averages estimated risk across flood districts, underestimating risk for the most vulnerable properties in particular. The NFIP does not factor in future expected risk, say from erosion or sea level rise. So even if it charged based on present risk with up to date maps, it would be underpricing based on future expected payouts. Congress tried to address some of these issue in 2012, but property owners were outraged that they wouldn’t continue to get as big of handouts from the government for living in flood prone areas and congress mostly watered down the reforms (pun intended).

Another problem is that properties that do flood are simply rebuilt in the same place. Repeatedly flooded properties account for 1% of NFIP insured properties and 25 to 30% of payouts – equivalent to half the program’s debt. 75% of these properties have done nothing to mitigate future risk. In some cases, owners have received payouts totaling many times the value of the property. And the job of selling, assessing, and processing claims for flood insurance is still in the hands of private sector insurers for some reason (cause they have lobbyists and bribe – I mean donate to the campaigns of – lawmakers). The private companies get paid per claim, giving them the incentive sell to the riskiest properties, maximize the number of claims, and assess damages as quickly as possible. Basically, repeatedly flooded properties are cash cows for them and they don’t want that problem fixed.

The NFIP must be re-authorized by congress this September. They will either have to increase FEMA’s budget and basically accept that the federal government is paying the $24 billion debt or increase NFIP’s borrowing authority. Neither will fix the long-term problems, and I bet congress won’t implement reforms that will. On the plus side, there’s only about a month and a half of Hurricane Season left to go. 

Part II

Trump's Dad was a Piece of Shit Racist Too

I don't know how I missed this story from February 2016, but it appears Donald Trump's dad, Fred Trump, passed his racist views on to his son, in addition to the money. Fred Trump was arrested while marching in a KKK rally in Queens, NY for failing to disperse when ordered to by police.

When asked about this in February of 2016, Donald gave a very convincing and not at all suspiciously repetitive denial:

"He was never arrested. He has nothing to do with this. This never happened. This is nonsense and it never happened...This never happened. Never took place. He was never arrested, never convicted, never even charged. It's a completely false, ridiculous story. He was never there! It never happened. Never took place."

So it looks like being a bigoted piece of shit runs in the family. No wonder Trump thinks "very fine people" march with the KKK.

Populist Nationalists are Birds of a Feather

Jeremy Corbyn shares a lot of traits with Donald Trump. No, Corbyn isn't a fascist (though he has been accused of antisemitism). But they still have a lot in common. First, they are both populist nationalists who want to return to a glorified past that never really existed, dredging up old failed ideas with promises that people can have their cake and eat it too. They are both anti-EU. They both praise dictators and autocrats. In Corbyn's case this includes Hamas, Hezbollah, the Castros, Hugo Chavez, Nicolas Maduro, and anyone else who tramples their people's rights in the name of socialism. 

Corbyn was asked by the media about his stance on Venezuela in light of the anti-democracy palace coup that Maduro has recently pulled off. Millions of pro-democracy protesters have taken to the streets and faced violent repression, imprisonment, and assassination campaigns at the hands of the government. 

His response was "What I condemn is the violence that’s been done by any side, by all sides, in all this [emphasis added]." 

Corbyn's response was simply Trumpian. Or perhaps, since it came days before Trump's response to the violence surrounding a fascist rally in Charlottesville, VA, Trump's response was Corbynesque. Whereas Trump equated violence by Nazis with that of people protesting Nazis, Corbyn is equating violence of a socialist dictatorship with that of people protesting in defense of democracy. 

Corbyn went on to say "we also have to recognise that there have been effective and serious attempts at reducing poverty in Venezuela." This about a country where Venezuelans are dying from a lack of access to medication because the government won't admit there is a shortage and can't afford to import medicine at its sham of an official exchange rate, where the average Venezuelan is losing weight in what's being called the "Maduro diet" due to a scarcity of basic foodstuffs. I guess there's "very fine people" on both sides. 

As Corbyn tweeted earlier this year, "if you are neutral in situations of injustice, you have chosen the side of the oppressor."

Gary Cohn is Still a Collaborator

Gary Cohn is a former Goldman Sachs banker who washed into the Trump Administration when they were draining the swamp. He is presently the Director of the National Economic Council and at the top of most pundits’ list to succeed Janet Yellen as Chair of the Federal Reserve once her term ends in February 2018; or at least he was.

Cohn, who is Jewish, was standing next to Trump when Trump said that there were "fine people" marching among Nazis and KKK members. Cohn later gave an interview to the Financial Times where he said that “citizens standing up for equality and freedom can never be equated with white supremacists, neo-Nazis, and the KKK.” And, according to the Washington Post, has privately voiced his frustration and shock at Trump’s comments and even considered resigning. While it may seem standard for a politician to condemn hate groups, Cohn’s remarks reportedly angered Trump.

I imagine Cohn is a smart guy and knows a lot about finance, but he has no formal background in economics and no relevant experience in monetary economics. So I really hope his comments have reduced his chances to be in charge of the Federal Reserve. He is unqualified for that position.

Cohn’s reaction to Trump’s comments equating Nazis with anti-Nazis is how a non-bigot should react. So I guess he's better than other people in the administration. But Cohn still deserves the label of fascist collaborator. He expressed no qualms when the targets of Trump’s bigotry were Muslims, Latinos, Blacks, Asians, immigrants, women, etc. Only after Cohn felt a group he belongs to was the target did he find his conscious. Has he never encountered the Martin Niemöller quote? How is he shocked that Jews are also among the targets of the bigots who support the President he works for. 

Collaborator watch: Jesse T. Richman, Gulshan A. Chattha, and David C. Earnest

Jesse Richman is a fascist collaborator. Why do I say that? First, Trump and his far right nationalist supporters are fascists. What else do you call such race/nationality based right wing extremism that scapegoats minorities and has no respect for independent institutions of government, a free press, etc.? Second, Jesse Richman and his co-authors, Gulshan Chattha and David Earnest, collaborate with them. They have done so through disingenuous research into voter fraud that finds that large numbers of non-citizens vote in US elections, despite the fact that no one else has come up with any evidence to support that claim. Voter fraud is extremely rare, non-citizen voter fraud even more so.

But any researcher who wants to make a name for themselves can come up with a junk science study to find otherwise. That’s exactly what Richman et al. did, and it worked. The paper was published in the journal Electoral Studies and received national attention. Jesse Richman has since been hired by Trump’s voter fraud commission to duplicate his dubious work for them. He is literally a collaborator with a far right white-nationalist (aka fascist) political movement.

So what makes their bullshit study such bullshit? Start with the sample size. They use an internet survey that had 32,800 respondents in 2008 and 55,400 in 2010. Sounds pretty big right? But non-citizens made up only 339 respondents in 2008 and 489 in 2010, or about 1% in each year. Non-citizens make up 7% of the population of the US. The survey made no attempt to get a representative sample of the US population writ large because the survey was designed for eligible voters, and non-citizens are not allowed to vote[1]. Despite this, the authors claim in their paper that the survey’s sample was “selected to mirror the demographic characteristics of the US population”. They must mean the population of eligible voters, because otherwise that is a lie. Elsewhere they state that “it is impossible to tell for certain whether the non-citizens who responded to the survey were representative of the broader population of non-citizens,” a severe understatement at best.

Of this small unrepresentative group, just under 20% claimed to have been registered to vote or were verified to be on voter registration rolls. The authors could only verify that a minority of that number were registered. Only 3.3% both claimed and were verified to be registered in 2008, and none in 2010. Some self-identified non-citizens claimed to not be registered to vote, but were verified to be registered. The authors leave out any details of the verification and use this finding to assume a higher number of non-citizens were registered than the survey responses and verification process indicated. For example, in 2008 67 non-citizens either reported or were verified to be registered; the authors assume 84 in their estimates.

Of this minority of non-citizen respondents, only a minority voted. In 2008 “71 non-citizens answered a survey question indicating whether they voted, and also had their vote validated. Among these, 56 indicated that they did not vote (but two of these cast a validated vote), while 13 indicated that they voted, of whom five cast a validated vote.” Notice how small the numbers are getting? They are using an un-representative sample size of less than a hundred people to reach conclusions about the voting behavior of millions. This is bullshit social science; that point is hard to understate.

The authors apply population weights so that their teeny tiny sample’s demographic characteristics match that of the non-citizen population as a whole. This is a perfectly reasonable technique when using a large enough sample size. On such a small sample it is unreliable at best. While the average characteristics of their sample may now match non-citizens as a whole it does not mean the distribution of survey responses will match the true figures for the larger population. Basically, their statistical techniques cannot overcome the flaws in their sample.

The authors conclude that “non-voter participation has been large enough to change meaningful election outcomes including Electoral College votes, and congressional elections.” How large? Their adjusted estimate is 6.4% of non-citizens in 2008 and 2.2% in 2010. Again, this is all based on an internet survey where 13 people out of 32,800 in 2008 said they were non-citizens and voted; only five of which could be confirmed. What are the chances that five to 13 people out of 32,800 clicked the wrong box on the citizenship or voting questions? The authors gloss over this and instead publish a highly flawed and prejudicial finding that falls apart upon the slightest scrutiny. A 2015 paper published in the same journal finds that observed levels of response error to the survey Richman et al. use can explain the entirety of their results.

Jesse Richman is now selling these dubious techniques to the Trump administration, where his latest finding that 18,000 non-citizens voted in Kansas was based on a sample size of 37. At best the authors wanted some limelight and were willing to slander a scapegoated minority to get it. Perhaps Jesse Richman and his co-collaborators are not hateful xenophobes and are just incredibly naïve. Perhaps they didn’t know they’d become the academic poster children of voter suppression. Whether bigots or fools they do not deserve the positions they hold at accredited universities. They should have known better than to publish such junk. That they did anyway speaks volumes as to their lack of ethical standards and/or lack of understanding of statistics.

An open letter signed by more than 150 political scientists states that “this paper has been shown to be incorrect”. Jesse Richman has offered numerous responses to the criticism on his blog.

Appeaser Watch / The Economist Misses the Point

More like Appeasement, the British Problem

I read the economist quite a bit. Their cover story an issue ago was one of the worst pieces of writing by the Economist since they advocated for the second Iraq war. They appease protectionist and mercantilism instincts with some very fuzzy logic, arguing that it is a bad thing that Germany has a current account surplus (basically a trade surplus). The title says "Why Its Surplus is Damaging the World Economy" but I read it and I still don't know.

The closest they come to explaining anything is: 

"For a large economy at full employment to run a current-account surplus in excess of 8% of GDP puts unreasonable strain on the global trading system. To offset such surpluses and sustain enough aggregate demand to keep people in work, the rest of the world must borrow and spend with equal abandon."

Yes a current account surplus must be balanced out by deficits elsewhere, but why is it a bad thing for the rest of us that a surplus exists in one country? Again, a current account deficit in a country means it also has a capital account surplus (trade deficit means investment surplus, see prior post), so there's no net impact on GDP. Is this just some puritanical anti-debt instinct?

Their solution to the problem they can't fully explain seems to be for Germany to raise wages (which are set by the market and already among the fastest growing in the EU since the Great Recession) so that their exports are less competitive so that their neighbors can catch a break. Why isn't the solution for Germany's neighbors to reform (as Germany did in the late 1990s / early 2000s) and become more competitive? How would a less competitive Germany (such as it was pre-reform) be good for the world?

Anyway, Scott Sumner, one of my fav economists (as I've said before) beat me to this (again). So here's the highlights:

"The Economist confuses trade and aggregate demand, which are entirely unrelated issues...

We know that Italy, Greece, and Spain were not "forced" to run large deficits by Germany, because Italy and Spain have sizable surpluses, and Greece's current account is roughly balanced...

It's true that at a global level a German CA surplus must be offset by an equal deficit elsewhere. But the German economy is only a very small percentage of the global economy, so a Germany CA surplus of 8% of GDP implies a "rest of world" deficit of far less than 1% of GDP...

Even in a world with zero debt, there would be large and persistent CA imbalances as assets are bought and sold across borders."

Perhaps its noticeable, but international accounts is not a strong suite of mine. That's because of how little it matters. This kind of junk used to be important in the world of fixed exchange rates (such as the Gold Standard or the Bretton Woods System), where a change in the balance of a country's international accounts could force it to abandon its fixed exchange rate peg. But in a world of flexible exchange rates set by the market this stuff just takes care of itself and has no significant implications for anything. So from a global perspective Germany's trade surplus is insignificant. 

However, the Euro area is a fixed exchange rate regime. This is the real issue that the Economist missed, instead they are freaking out about symptoms rather than the cause. If Germany and its Euro area trading partners had flexible exchange rates Germany's currency would most likely appreciate and its partners' depreciate, making Germany less competitive relative to them. The result would be a lower trade surplus for Germany. Instead Germany's Euro area trading partners can only become more competitive through structural reform or lower wages or the dumb suggestion that Germany make itself less competitive.

If there are any problems within the Euro zone due to Germany's trade surplus with the world, it is because of the fixed exchange rate regime. But even this may be meaningless; as noted above Italy and Spain also run surpluses despite being in a fixed exchange rate regime with Germany. So why is Germany's surplus a problem? The best answer I can find is that it isn't. Stop appeasing protectionists. Free trade forever.

More Economic Ignorance from Trump

Here's another horribly ignorant statement from Trump, during a Rose Garden ceremony with South Korea's president, concerning economics:

"From when the US Korea trade deal was signed in 2011 to 2016 - you know who signed it, you know who wanted it - our trade deficit with South Korea has increased by more than $11 billion, not exactly a great deal. 

I was gratified to learn about the new investments South Korean companies are making in the United States.

This month Cheniere is sending its first shipment of American LNG to South Korea in a deal worth more than $25 billion. We will do more to remove barriers to reciprocal trade and market access."

Let's start with the first statement. Yes, the US - South Korea trade deficit has gone up by about that much, at about the time the deal was implemented. The trade deficit in 2016 totaled $28 billion. That is a tiny deficit for an $18 trillion economy; it's a rounding error.

Now to the second. Anyone who took notes in their first macroeconomics class should know that a current account deficit is the equal opposite of a capital account surplus. What does that mean? The "current account" is a fancy term for the trade balance[1]. The "capital account" is the investment balance. As an accounting identity (of international flows of dollars that must net out) an international trade deficit means an international investment surplus. Why again? see note 2 below. Another way to put it is that we have an investment surplus with the world because we have a trade deficit, and vice versa. 

The dollars that flow to South Korea for purchasing imports do not have to come directly back in the form of investment. South Korea may trade goods services and investments with other countries who then trade with us, balancing the flow of dollars out. This means it is possible for a country with no trade deficit / surplus in general to have a bilateral trade deficit / surplus with individual countries. It is illogical (and betrays basic ignorance of a topic Trump supposedly cares a lot about) to worry about bilateral trade balances trade, and equally illogical to be mad about a trade deficit and happy about an investment surplus[3].

Trump then goes on to highlight an export deal to South Korea worth almost the entire trade deficit, again underlining how small it is[4], and promises to pursue even freer trade with South Korea. What else is free trade besides seeking to "remove barriers to reciprocal trade and market access"?

So, if I've got this right, the free trade deal with South Korea was bad. But the South Korean investments it facilitated are good. Also South Korea is an export opportunity for american companies, and we should do more to remove trade barriers between the US and South Korea. 

Um, what?

Populist/Nationalist economics makes no sense. It's just xenophobic knee jerk reactions. Now maybe it's expecting too much of a president to be this knowledgeable on every topic. That's why presidents have advisers. But this president has not even staffed the Council of Economic Advisers and has otherwise hired rich businessmen and populist hacks who have betrayed similar economic illiteracy[5]. Either they are plain stupid, out of their depth, afraid to contradict Trump, or have tried to teach him and given up[6]. Any of those would be concerning. The president has no idea what he's talking about and endorsing a mutually exclusive and incoherent mix of policy.