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From the New York Times today:
President Trump said on Thursday he had agreed to pleas from the leaders of Canada and Mexico not to withdraw immediately from the North American Free Trade Agreement, but he warned he would still pull the United States out if he could not negotiate a better deal.
“I received calls from the President of Mexico and the Prime Minister of Canada asking to renegotiate Nafta rather than terminate,” Mr. Trump said on Twitter. “I agreed…” Moments later, the president added, “…subject to the fact that if we do not reach a fair deal for all, we will then terminate NAFTA. Relationships are good — deal very possible!”
Mr. Trump’s posts showed once again his taste for high-stakes deal-making and his willingness to reverse himself. Only hours earlier, the president’s aides put out word that he was likely to sign a directive starting a six-month clock to end the trade agreement.
Certainly some on Wall Street found alarming the initial news flash that the president was going to sign an executive order beginning the withdrawal process. Investors had begun to accept the idea that while they might not be getting mega-fiscal stimulus, that was balanced off by less concern about protectionism. The WH not labeling China a currency manipulator was a good sign in that regard. And the tiffs with Canada over dairy pricing and lumber are considered minor.
But a NAFTA pullout would be a big deal, a story of higher tariffs and broken supply chains, notes this Quartz piece. Now we’re back to the idea that withdrawal threats are part of the negotiating process. Again, the NYT: “As a practical matter, it is not clear if Mr. Trump’s position has changed that much. During the 2016 campaign, he said he would seek to renegotiate Nafta, and pull out if he could not rework it to his satisfaction. That is essentially what he said on Twitter on Thursday morning.”
Hmm. Maybe now is a good time to recall that the abandoned Pacific trade deal provided for a big update of NAFTA. Economist Jeffrey Frankel:
Is renegotiating Nafta to cover new issues, strengthen labour and environmental protections, improve dispute-settlement mechanisms, and include more countries all pie in the sky? Would it be impossibly difficult to negotiate a new agreement that had every one of these desirable properties? Well, trade negotiators already hammered out precisely such an agreement. It was called the Trans-Pacific Partnership, which Trump has nixed. In truth, the best way to improve Nafta would be to return to what was agreed to in the TPP.
Indeed, the Obama trade office outlined just such a case when it was pushing the TPP. Anyway, NAFTA has hardly been a disaster for the US economy. Far from it, as I wrote the other day, including the above and below JPMorgan charts.
The above chart from the Committee for a Responsible Federal Bduget offers a rough guesstimate of Trump tax plan, not including economic feedback. So a pretty costly plan. But to me it’s also a case of the dog that didn’t bark. Recognizing what’s not in the plan is critical. For instance, CNBC reports Wall Street disappointment that the outline “failed to reveal a specific rate for repatriating overseas profits.”
And debt worriers, such as the CRFB, noted the lack of ideas to pay for the tax cut, other than possibly eliminating the state and local tax deduction. Then as I point out in my new The Week column, there is nothing in the mini-plan — unlike in the House GOP tax reform plan — “about allowing the cost of new capital investment to be fully and immediately deductible. That’s too bad. Models that dynamically score the economic feedback of tax plans, such as the Tax Foundation’s, find such immediate expensing to be one of the growthiest things tax reformers can do.”
That’s especially the case since the dramatic lowering of the top corporate tax rate to 15% from 35% is unlikely to stick at such a low level. I think this UBS analysis is correct: “Our base case remains that corporate tax rates will be lowered from the current 35% to around 25%.” And JPMorgan also thinks the plan gets less ambitious and costly from here: “While the end result of the negotiations is highly uncertain, we still think it most likely will be a modest amount of fiscal stimulus that is funded in part by deficit expansion.”
But maybe the Trump WH should stick with the 15% plan. As my AEI colleague Alan Viard explains:
The distortions caused by the corporate income tax in today’s globalized economy are legion. Because the corporate income tax primarily applies to profits earned in the United States, companies have an incentive to avoid U.S. tax by earning profits overseas. Companies may move capital investment abroad, which makes American workers less productive and drives down their wages. Or, companies may use accounting gimmicks to book profits abroad rather than in the United States. The corporate income tax also gives foreign-chartered companies an artificial competitive advantage over American-chartered companies and encourages companies to switch their charters through inversions. Slashing the corporate rate from 35 to 15 percent would shrink all of those distortions in one fell swoop.
And as for the unpleasant matter of all that red ink, well, go bold! Again, Viard:
One approach would be to offset the lower corporate rate by raising taxes on dividends and capital gains received by American shareholders. … A more sweeping approach would seek bigger economic gains by moving toward consumption taxation. Consumption taxes are more growth-friendly than income taxes because they do not penalize saving and investment. Most consumption tax plans involve some form of value-added tax (VAT) — a consumption tax used in 160 countries that involves taxing the value added at each stage of production. The tax blueprint that House Republicans presented last year would replace the conventional corporate income tax with a business cash flow tax, a modified VAT that allows firms to deduct their wage costs…. A more straightforward approach would adopt a full-fledged VAT. By itself, using a VAT to pay for corporate rate reduction would shift the taxburden toward middle-income and lower-income households. To address that problem, the change should be part of a bigger reform that includes individual income tax cuts and rebates or tax credits for low-income households. … Of course, moving to a VAT would raise many design and transition issues. For example, the VAT should be prominently listed on customer receipts to keep it from becoming a stealth tax that politicians could repeatedly raise without public scrutiny.
Erica Groshen, the just-departed commissioner of the Bureau of Labor Statistics, writes in the WSJ, “Sources tell me that when Congress draws up the BLS’s next budget, lawmakers plan to underfund the agency substantially.”
Which would be bad. The BLS — 2016 budget, $609 million — already needs better funding commensurate with its critical mission. As Groshen notes:
Yet it hasn’t been fully funded for the past decade. This has forced the elimination of useful work. The International Labor Comparisons program helped put America’s economic performance in a global context. The Mass Layoff Statistics program tracked major employment cutbacks. Both were dropped in 2013. This underfunding isn’t sustainable. Even holding the BLS budget flat at its 2016 level would provide $25 million less than needed to continue current activity.
To adjust temporarily, the BLS has slowed improvements and left vacancies unfilled—with two consequences. First, the agency can’t devote enough staff, money, IT hardware and software toward improving its coverage of emerging economic trends and expanding its use of “big data.” This is the path to irrelevance. Second, leaving the BLS short-handed risks serious errors or delays in its statistics. It hasn’t happened yet, thanks to the BLS’s dedicated staff, but sooner or later it will.
Last month, AEI held a joint event with Brookings on the importance of federal data gathering. And my AEI colleague Michael Strain has written repeatedly (including here and here) on the issue, stressing how crucial these stats are to policymakers.
Yet if this info is so valuable — and it really is despite some politicians occasionally claiming the numbers are cooked — why don’t we just rely on the private sector? Strain:
Far fewer private citizens and firms would disclose sensitive information to a private organization than to BLS, so privatization would make the price of collecting these data soar and their quality plummet. And even if firms would pay the price, the government still needs data, and it would end up purchasing a vastly inferior product at great expense with taxpayers’ hard-earned dollars. The Founding Fathers knew that government would require information, and they authorized such collection in the Constitution. This ain’t new.
President Trump has eased off China’s supposed currency manipulation, but he’s still pretty hot about NAFTA. When launching a probe yesterday into cheap Chinese steel — Beijing is hardly off the hook with the POTUS — he had this to say about that trade deal: “The fact is, NAFTA, whether it’s Mexico or Canada, is a disaster for our country.”
Almost certainly not true. Example: If these two JPMorgan charts didn’t indicate when NAFTA took effect, you couldn’t detect its impact on jobs:
Overall, JPM’s Jesse Edgerton, Silvana Dimino, and Gabriel Lozano sum up NAFTA’s impact this way, which I think is the consensus view: “Mainstream estimates suggest that NAFTA has modestly boosted North American GDP, but also left some workers worse off. Recent news suggests that the most likely changes that could come with NAFTA renegotiation would be unlikely to have major economic effects, but there are always risks of worse outcomes.”
The researchers also make a broader point on trade worth highlighting:
… even if aggregate effects are positive, the expansion of trade could still harm some individuals. And indeed, recent academic research has confirmed that US workers in areas and industries directly affected by trade competition have experienced long-lasting negative effects on their employment and wages. If some of these workers decline to accept lower-paying jobs and remain unemployed or decide to leave the labor force permanently, one might reasonably say that their jobs were destroyed by trade. It is unclear, though, if there is any reason to treat these jobs any differently than jobs destroyed by other manifestations of the creative destruction that is a central feature of capitalism. That is, should we be more concerned by jobs lost to trade with Mexico than jobs lost when inefficient businesses go bankrupt, or when technology replaces labor, or when a firm closes a plant in New York to open one in South Carolina? Most economists would likely say we should design a safety net to handle all of these situations.
Imagine a joint op-ed by Austan Goolsbee, Paul Krugman, Christina Romer, and Larry Summers telling President Hillary Clinton she was bungling a key piece of her economic agenda. Would be a big attention getter.
Now the GOP equivalent might be Team Supply Side: Steve Forbes, Larry Kudlow, Arthur Laffer, and Steve Moore. All highly influential economic thinkers on the right, it’s an antsy group. Earlier this week the New York Times published a buzzy op-ed by the foursome gently scolding the Trump White House for a) prioritizing health reform over tax reform and b) losing focus on the tax issue by scrapping the campaign plan and starting over.
And today’s Wall Street Street Journal piece on the current state of tax reform probably only exacerbates their concerns. FKL&M want the White House to narrowly focus on business tax cuts: Slash rates, allow full expensing of new investment, put a low tax on repatriation of foreign investment, and then move on.
But according to the WSJ, Treasury Secretary Steven Mnuchin said yesterday that while the administration will “very soon” release a plan, it will dramatically overhaul both personal and business taxes. It’s hard not to see Mnuchin’s comments as rebuttal. Oh, and Mnuchin added that the plan “will pay for itself” by boosting economic growth.
Well, at least the supply siders will like the addendum. But it should be noted that revenue neutrality through growth and dynamic scoring would be pretty tough. As the Tax Foundation’s Alan Cole explained on Twitter, “This implies an added 0.9% to growth each year for a decade.” Models suggest that is either very hard or impossible.
Cole makes another point: Any tax-cut only plan, such as the sort favored by FKL&M, avoids a worthwhile fight for deeply reforming the tax code, such as the House GOP has been pushing. Why fight that fight? As Cole rightly argues in a new National Review piece, budget deficits matter, and tax reform would allow Republicans to structure the tax code so that it raises revenue efficiently and fairly to pay for the tax cuts.
Cole: “If Republicans want to pass a more lasting reform, they should include some revenue-raising provisions in the bill. Tax reform is worth it also because Republicans have promised many times to reduce the complexity of the tax code for individuals, curb corporate-tax avoidance, make the code fairer for all, and limit carve-outs for special interests.”
Not that tax reform is easy, especially when the deep planning and advocacy for reform failed to happen during the campaign. So how might this play out? This from Goldman Sachs:
We recently wrote that our view continues to be that tax legislation is likely to become law, but that it is more likely to be a tax cut with limited elements of reform, namely a 25% corporate rate with provisions allowing for low-tax repatriation of foreign profits, incremental base broadening, and no border adjusted tax. However, the timing does appear to be slipping once again; if the legislative focus remains on health legislation through May, a vote on tax reform at the committee level might not occur in the House until July, which could make final enactment of tax legislation before year-end challenging. At this point, we expect that enactment is more likely in Q1 2018 than Q4 2017.
Sure, Donald Trump mused about returning to the gold standard during the campaign. But as president, he’s really more of a steel bug than a gold bug. “American steel” to be specific. To Trump, the decline in steel production and steel worker’s jobs are emblematic of lost American greatness. And when Big Steel is back, so will be America. As Trump put it last summer: “We are going to put American-produced steel back into the backbone of our country. This alone will create massive numbers of jobs.”
So with his First 100 Days almost complete, Trump is looking to make a down-payment on his American steel promise. Reuters reports:
President Donald Trump launched an investigation on Thursday to determine whether Chinese and other foreign-made steel threatens U.S. national security, raising the possibility of new tariffs and triggering a rally in U.S. steel stocks. U.S. Commerce Secretary Wilbur Ross cast the decision to initiate the probe as a response to Chinese exports of steel into the United States reaching the point where they now have 26 percent of the market. Chinese steel imports are up nearly 20 percent in the early months of this year alone, he said. … Trump signed a directive asking for a speedy probe under Section 232 of the Trade Expansion Act of 1962 at a White House event that included chief executives of several U.S. steel companies. The law allows the president to impose restrictions on imports for reasons of national security. … The Commerce Department will have 270 days to complete the probe. Ross said he expected it to be done much sooner. Trump’s directive asked that the investigation be conducted with all deliberate speed. Ross, a former steel executive, said the investigation was “self-initiated.”
Guys, it’s called supply chains. And steel is an intermediate good moving through those chains. As Douglas Irwin writes the new Foreign Affairs: “Any import restriction that helps some upstream producers by raising the prices of the goods they sell will hurt downstream industries that use those goods in production. If a tariff raises the price of steel to help U.S. Steel, it will hurt steel consumers such as John Deere and Caterpillar by raising their costs relative to those of foreign competitors.”
I mean, just compare the producers and users of steel. As I have written:
Now the entire US steel industry directly employs just 142,000 American workers, according to the American Iron and Steel Institute. … Which is not to say it is an insignificant industry. Indeed, the total value-added output of the entire US metal manufacturing industry is some $60 billion, employing some 400,000 workers. … But here’s the thing: the manufacturers that use steel generate nearly $1 trillion in value-added output, according to the Cato Institute, using government data. And they employ some 6.5 million people.
Attempts to temporarily help some workers will end up hurting others, Many others. And it is unlikely even to create many blue-collar domestic jobs in what has really become a technologically advanced industry. But still there remains the issue of Chinese state subsidies for its steel industry and its dumping of surplus steel. Again, Irwin:
So how should the United States respond to, for example, Chinese steel subsidies? Imposing antidumping duties is not the answer, since they would fail to solve the underlying problem of excess capacity and would punish steel-consuming industries in the United States. Paradoxically, however, threatening reprisals of some sort may be the answer; politely asking China to cut back its steel subsidies would accomplish nothing. Confronting unfair trade practices with the threat of retaliation is not protectionism in the usual sense. Instead, it represents an attempt to free world markets from distortions. In order to return trade to a market basis, Washington may have to threaten trade sanctions, some of which might have to be carried out for the threats to gain credibility. This process will no doubt be disruptive and controversial, but if handled skillfully, the end result could make it worthwhile. … Once again, the 1980s offers useful lessons. In 1985, Reagan used the power granted to him under a provision of U.S. trade law known as Section 301 to attack unfair foreign trade practices, such as the barring of U.S. products from certain markets. Although the U.S. action prompted bitter foreign protests, Arthur Dunkel, the Swiss director general of the General Agreement on Tariffs and Trade (the predecessor to the WTO), later admitted that it was one of the best things the United States had ever done for the multilateral trading system: it helped unite the world behind an effort to strengthen the rules-based system in the 1986–94 Uruguay Round of international trade negotiations. The WTO’s dispute-settlement system has proved remarkably successful and should be supported, but it may not be capable of handling every type of trade disagreement.
But even if what we are seeing from Trump is a negotiating tactic rather than an economic strategy, it’s important to think out the end game and to have realistic expectations of what can be achieved.
MIT’s Erik Brynjolfsson—who has appeared frequently in this blog, including here and here—has coauthored a book-length paper on the IT revolution and how government is unprepared to deal with it. From the FT:
An information vacuum about the sweeping impact of robotics and artificial intelligence has left governments badly positioned to respond to the coming upheaval in employment, say two US professors who have been co-ordinating a broad study on the subject. The warning, in a paper published in Nature on Thursday, calls for a new partnership with digital companies such as Uber and LinkedIn, which are quickly becoming repositories of the information needed to understand how work is changing. “Given the pace of change in the economy, we’re really flying blind,” said Erik Brynjolfsson, a professor at Massachusetts Institute of Technology and co-author of the report.
And here ia great summary of the paper, via Twitter:
One interesting recommendation is for the creation of various technology indexes to track the spread of tech advances through the economy. Sort of like a consumer price index, but for AI.
As I wrote yesterday, Donald Trump used to talk about the “highly political” Fed boss Janet Yellen. He has suggested Yellen probably wouldn’t get a second term heading the central bank. No more inflating the “false economy.”
But now this in the WSJ:
Ms. Yellen was a frequent target of Mr. Trump’s during the campaign, when he criticized her for keeping interest rates low. Asked if Ms. Yellen was “toast” when her term ends in 2018, Mr. Trump said, “No, not toast.” “I like her, I respect her,” Mr. Trump said, noting that the two have sat and talked in the Oval Office. “It’s very early.”
Of course those comments are hardly a guarantee of Yellen 2.0, but I think this take from Scott Sumner is reasonable:
Many commenters have taken it as a given that Trump will replace Janet Yellen next year. I certainly think that’s possible, but I’ve also argued that he might reappoint Yellen. Now that seems a bit more likely: The reason is simple. When Trump asks his advisors for some possible names to replace Yellen, he’ll be given a list of conservatives. Then Trump will ask whether interest rates will be lower under Yellen or under the conservatives. The advisers will respond “Yellen”. Trump will then say “Then why don’t we just stick with Yellen?
It really might not be a whole lot more complicated than that. Potential center-right Fed picks — the folks President Jeb Bush might have considered — tend to be more hawkish than Yellen. Here is what John Taylor told a congressional panel last month: ” … the Fed should normalize policy and get back to the kind of policy that worked well in the past.” And Martin Feldstein in the WSJ last October: “All of this suggests a willingness to continue the current dangerous policy of low interest rates—regardless of its effect on asset prices, inflation and financial stability. It is past time for the Fed to shift gears and normalize interest rates more rapidly.” And Kevin Warsh, also in the WSJ, last summer: “The conduct of monetary policy in recent years has been deeply flawed.” Finally, Arthur Laffer, in the FT last December: “Markets really know how to give you prices and Janet Yellen doesn’t. She’s never been forced to bear the consequences of her own actions.”
Donald Trump’s first act was as real-estate developer who loved leverage. Big time. Recall his CNBC interview last spring where he called himself “the king of debt” and gushed about how he “loved playing” with debt. Right about the same time, Trump weighed in on monetary policy: “Right now I am for low interest rates, and I think we keep them low.” Call that the prime-the-pump, Keynesian Trump.
But there’s another version of Trump. It’s one more in tune with the modern GOP; certainly its hard-money, supply-side wing. As he told GQ in 2015: “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.” When Trump was president, the dollar would be king. Oh, and the “highly political” Fed boss Janet Yellen probably would no longer be at the Fed, inflating the “false economy.”
Not surprisingly, gold bugs were very excited by that riff, much like they were when Reagan was elected and hopes for a return to a gold standard surged. So, too, the Ron/Rand Paul libertarian wing of the GOP. Not only are there plenty of gold groupies in that clique, but also lots of debt worriers. And they probably really loved it when Trump promised to eliminate the US national debt in just eight years.
So which Trump is sitting in the Oval Office? This one:
President Donald Trump said Wednesday the U.S. dollar “is getting too strong” and he would prefer the Federal Reserve keep interest rates low. Mr. Trump, in an interview with The Wall Street Journal, also said his administration won’t label China a currency manipulator in a report due this week. He left open the possibility of renominating Federal Reserve Chairwoman Janet Yellen once her tenure is up next year, a shift from his position during the campaign that he would “most likely” not appoint her to another term. “I do like a low-interest rate policy, I must be honest with you,” Mr. Trump said at the White House, when asked about Ms. Yellen.
What to make of all of this? What instincts and ideas are really driving Trumponomics? Perhaps a combo of the influence of Trump’s formative professional years (blasé about debt, love of low rates) and the educating influence of experts, specifically the CEOs whose company he’s comfortable with. It’s big business, after all, that really supports the Ex-Im and is worried about a China trade war. It’s especially notable that Trump was educable on the China currency issue. Maybe we’ve gone from “President Bannon” to “Prime Minister Cohn,” as this Politico piece suggests:
In private conversations, a number of Trump’s friends have told him he could be more popular — and accomplish more — if he embraced a moderate streak and listened to his business friends. Jared Kushner, the president’s son-in-law, is trying to orchestrate more power for New York business types, particularly National Economic Council Director Gary Cohn, while diminishing the power of chief strategist Steve Bannon, who drives the populist wing of the White House.
Some big questions remain: How does this moderate pro-business pragmatism play out on issues such as trade, financial reform (both Dodd Frank and Glass Steagall), tax reform, and Obamacare — especially when dealing with Congress? Conservative Republicans may have very different views on these issues than banking and private equity CEOs. For instance: The latter might think a VAT or carbon tax is a great way to pay for a big corporate tax cut, the former not so much. One can also imagine CEOism having a very different take on entitlement reform (the suits would be for it) vs. Trump’s populism (he promised to leave Medicare and Social Security alone.)
A key question about recent jobs reports, such as the March report last Friday, is what it says about labor market tightness. Just how much slack is left, if any at all? This bullish note from Capital Economics argues that little slack remains, based on two new employment surveys (bold is mine):
- The latest NFIB and JOLT surveys suggest that, despite the slowdown in payroll employment growth last month, labor market slack continues to diminish. They also provide further evidence that this will soon translate into a renewed acceleration in wage growth.
• The job openings rate ticked up to 3.8% in February. Admittedly, the hiring rate edged down but both have been broadly stable at relatively high levels for some time. This isn’t a huge surprise, however, given that the number of unemployed people per job opening is at a 16-year low.
• Meanwhile, although the voluntary quits rate dropped back to 2.1% in February, the continued decline in the unemployment rate is clearly making workers more confident in their ability to find new jobs. Furthermore, the share of small firms in the March NFIB survey saying that job vacancies are hard to fill suggests that the unemployment rate could soon fall below 4%. The latest Conference Board consumer confidence survey points to a very similar outcome.
• With little slack left in the labour market, wage growth is likely to continue to accelerate. Indeed, the share of small firms planning to increase worker compensation has risen sharply in recent months, and is consistent with annual growth in average hourly earnings rising towards 3.5% by year-end.
By the way, we haven’t seen a sub-4% unemployment rate since 2000.