Trump: 'Trade Wars Are Good'

Trump: 'Trade Wars Are Good'

Yes, that’s apparently a real quote from President Trump.
This is likely the worst economic position he has staked out so far.
On the plus side, if he puts his trade war optimism to the test and thus sparks the next recession, perhaps we won’t have to hear contrived arguments about how tax cuts cause recessions…

Trump: 'Trade Wars Are Good'

Trump: ‘Trade Wars Are Good’

Yes, that’s apparently a real quote from President Trump.

This is likely the worst economic position he has staked out so far.

On the plus side, if he puts his trade war optimism to the test and thus sparks the next recession, perhaps we won’t have to hear contrived arguments about how tax cuts cause recessions…

Trump: 'Trade Wars Are Good'

New Bipartisan Effort in Senate to Stop the War in Yemen

Progressive Senator Bernie Sanders (I-VT), Senator Chris Murphy (D-CT) and libertarian-leaning Senator Mike Lee (R-UT) have introduced new legislation this week that would end US support in the Yemen War.

It’s unclear if the legislation will be allowed to come to a vote by the leadership, but it’s good to see the protracted conflict finally back in the news. Yemen is home to one of the most acute humanitarian crises in the world right now, with millions internally displaced and suffering from malnutrition as a result of the war.

In a time of increasing polarization, this is also a good reminder that progressives and libertarians can often find common ground when it comes to the most important issues.

Trump: 'Trade Wars Are Good'

WaPo Debunks the Non-Scandal of "Anglo-American" Law

In a recent speech, Attorney General Jeff Sessions made a passing reference to the “Anglo-American heritage of law enforcement”. Naturally, this sparked outrage and new accusations that Sessions is racist.
Those accusations may be well-founded, but this is about the weakest evidence that could be offered to support them.
A solid new piece at The Washington Post explains why.
In short, descriptions of the US legal system as “Anglo-American” are actually quite mainstream, appearing routinely in legal arguments and even Supreme Court opinions. The reason this description is common is because it’s literal. The roots of the American legal system can be found in the English (that is, Anglo) common law tradition. Since the US started out as thirteen English colonies, it should be a surprise to precisely no one that the American legal system was influenced by the English one.
Don’t get me wrong; I’m all for criticizing Jeff Sessions. Among other problems, he’s a hard-liner on immigration, a staunch supporter of the Drug War, and an advocate for civil asset forfeiture.
The point is that we should criticize politicians primarily for the things they do, and the policies they promote–not just the words they say.

Trump: 'Trade Wars Are Good'

WaPo Debunks the Non-Scandal of “Anglo-American” Law

In a recent speech, Attorney General Jeff Sessions made a passing reference to the “Anglo-American heritage of law enforcement”. Naturally, this sparked outrage and new accusations that Sessions is racist.

Those accusations may be well-founded, but this is about the weakest evidence that could be offered to support them.

A solid new piece at The Washington Post explains why.

In short, descriptions of the US legal system as “Anglo-American” are actually quite mainstream, appearing routinely in legal arguments and even Supreme Court opinions. The reason this description is common is because it’s literal. The roots of the American legal system can be found in the English (that is, Anglo) common law tradition. Since the US started out as thirteen English colonies, it should be a surprise to precisely no one that the American legal system was influenced by the English one.

Don’t get me wrong; I’m all for criticizing Jeff Sessions. Among other problems, he’s a hard-liner on immigration, a staunch supporter of the Drug War, and an advocate for civil asset forfeiture.

The point is that we should criticize politicians primarily for the things they do, and the policies they promote–not just the words they say.

3 Forces Driving Interest Rates Higher

3 Forces Driving Interest Rates Higher

In the past two weeks, interest rates have gone up sharply, sparking turmoil in the stock market. To take one example, the rate on 10-year Treasury bonds went from 2.66% on Jan. 26 to close at 2.85% on Feb. 12.

The recent moves have brought key interest rates up to levels they haven’t seen since 2014. If the Federal Reserve sticks with its current policy course, chances are that interest rates will go higher still.

Why Interest Rates Are Headed Higher

There are three main forces that will help push interest rates up in the US:

  • Federal Reserve Rate Hikes
  • Federal Reserve Quantitative Tightening Policy
  • Expanding US government deficits

Federal Reserve Rate Hikes

According to its latest public projections, the Federal Reserve is planning to raise interest rates three more times this year. If they follow through on these projections, the result will be a total increase of 75 basis points or 0.75%.

It’s important to note here that the Fed’s decision to raise rates only directly affects one specific rate that they set explicitly. This interest rate is known as the federal funds rate, and it is used when banks lend reserve balances to each other overnight. This is effectively the shortest term rate available.

Because it’s so short term, the federal funds rate acts as a kind of floor for other interest rates in the US economy. Providing an overnight loan to another bank is viewed as virtually risk-free. The short duration minimizes uncertainty.

If banks or investors provide financing for any duration longer than overnight, they will typically demand a higher rate. This heightened interest rate helps to compensate them for the additional risk they are taking on by making a longer commitment.

Thus, by raising the interest rate floor in the US, the Fed’s actions will push other interest rates up as well. Indeed, this is the intended outcome.

Federal Reserve Quantitative Tightening

In the wake of the 2008 financial crisis, the Federal Reserve embarked on an unprecedented policy known as quantitative easing.

This policy involved the Fed explicitly conjuring new money into existence and using it to purchase two main types of securities: US Treasurys and mortgage-backed securities. This was referred to as quantitative easing because it increased the quantity of money.

The direct effect of quantitative easing was to push down interest rates by artificially increasing the demand for bonds. This increased demand pushed up bond prices and thus reduced prevailing interest rates since the two are inversely related.

Now, the Fed is gradually unwinding this policy with quantitative tightening. In this policy, the Fed is not explicitly selling off any of the securities it holds; it is simply allowing them to mature and reinvesting a smaller share of the proceeds.

Either way, the end result is the same–the Fed’s balance sheet decreases and the quantity of money declines. And since the US Federal Government is not running a surplus, the US Treasurys in question will have to be reissued, and a new investor will be expected to buy them. Thus, the net income is similar to what would occur if the Fed sold the securities outright.

Right now, the pace of quantitative tightening is $20B per month. Under the Fed’s current plans, this pace of quantitative tightening will accelerate by $10B each quarter until it reaches a maximum rate of $50B in balance sheet declines each month.

Even in the context of the enormous bond market, these are large changes. If the plan holds, the total drawdown will come to $360B worth of bonds in 2017 that will need to be purchased by a new investor.

This level of change would always put some upward pressure on interest rates (and downward pressure on bond prices). In this case, however, the effects are likely to be magnified by the fact that the buyer that steps in to replace the Fed will be more price-conscious.

When central banks buy bonds, they aren’t concerned about whether they are making a good investment. After all, when you have the ability to literally print money, ROI isn’t a high priority. Instead, these entities are buying government and other bonds to achieve a particular policy objective–usually some variant of “stimulating the economy”. Thus, the interest rate offered by those bonds doesn’t matter; they’ll buy them regardless.

This helps explain how we have arrived at the absurd, yet enduring, spectacle in Germany and Japan of negative-yielding government bonds. In those cases, investors are literally paying governments for the privilege of lending the government money.

Anyway, most purchasers of bonds are actually interested in making some kind of return on their money. So just because the Fed was comfortable earning say, 2.5% on a 10-year US Treasury, that doesn’t mean a normal investor or institution will feel the same way. In turn, this suggests interest rates may need to rise somewhat to entice regular investors to fill the void left by the Fed.

Higher Government Deficits

The last factor pushing interest rates higher are rapidly expanding US deficits.

Deficits were already back on the rise at the end of President Obama’s second term. This year, the implementation of tax cuts and a profligate bipartisan budget deal will accelerate the trend considerably.

CNBC reports that the Treasury expects to issue $955B in new bonds this year alone, and that estimate actually came before the recent budget deal.

Wherever the final figure lands, this will be a major increase in the supply of bonds. As with quantitative tightening, interest rates will need to rise to convince investors to purchase all of these bonds.

Will the Fed Let Interest Rates Rise?

As seen above, the Federal Reserve’s current policy trajectory is deliberately driving interest rates higher, with an assist from the US government’s fiscal policy. However, the Fed is likely overestimating the US economy’s ability to deal with higher interest rates.

Two likely casualties of high interest rates are the stock market and housing prices. Stocks get hit by interest rates in at least two ways–companies will find financing more expensive and some investors who are looking to generate cash flows may rotate out of low-dividend yielding stocks into newly attractive bonds.

For housing, rising rates in the bond market will entail higher mortgage rates and critically, higher monthly payments for the same loan amount. This will make home prices even less affordable than they are currently. Eager sellers will have to lower prices if they still want to make a deal.

So stock prices and housing prices are both likely to drop substantially due to higher interest rates. The big question is whether the Fed will stay the course while this happens. Will the Fed finally let the air out of the asset bubbles they have actively created?

 

Trump: 'Trade Wars Are Good'

Why Good News Was Bad News for the Market

Over the last two trading days (2/2 and 2/5), the Dow Jones Industrial Average has lost more than 1,800 points, or about 7%.

Meanwhile, the S&P has lost 173 points, or more than 6%.

These sharp downward moves have many people looking for an explanation. No big companies failed. No wars were started. No new policies were enacted. So why did the market lose nearly 7% of its value in two days?

Part of the answer is this: a better-than-expected jobs report.

That is, the markets received positive news on the US labor market, indicating that the US economy appears to be in good health. In response, stocks sold off.

On the surface, this sequence of events appears absurd.

If the economy is doing well, that should be a positive indicator for US companies and US stocks. After all, a positive jobs report would suggest that companies are optimistic about the future and expanding their operations by hiring more people. In turn, we’d expect these new investments to eventually bear fruit in the form of higher profits. If anything, stocks should go up after a positive jobs report.

And in a truly free market, that’s probably how things would work.

However, in the markets we actually have, this intuition gets turned on its head.

Good News Is Bad News

Today’s stock market is influenced dramatically by the actions of the US central bank, the Federal Reserve.

While not technically part of the US government, the Federal Reserve is not a creature of the free market. Instead, it is a quasi-governmental body that is responsible for centrally planning interest rates–arguably the most important “price” in the economy.

All else equal, when the Fed raises interest rates, stocks tend to go down and vice versa.

This relationship, and the outsized influence of the Fed, is the key to understanding why the market behaved like it did.

The better-than-expected jobs report really was good news for the economy. The problem was that this good news made it even more likely than before that the Federal Reserve would continue on its current path of hiking interest rates and reducing its balance sheet. Indeed, it could even accelerate the interest rate hikes. This is a big part of what spooked the markets.

In other words, there are two questions we need to consider when we get new data on the economy:

  • What does this data say about the economy?
  • How will the Fed react to it?

Of the two, the second question is far more important.

Stocks have soared to record highs on the back of nearly a decade of ultra-low interest rates from the Fed. Now that the Fed appears committed to bringing interest rates back to more normal levels, investors are taking notice.

That’s why good news was bad news for stock prices.

Low Prices Are Illegal in France

Low Prices Are Illegal in France

In a recent newscast, NPR carried a story on the so-called “Nutella Riots” in France, in which shoppers literally fought over discounted jars of chocolate-hazelnut spread. It seemed like a strange event, but everything else about the report felt pretty normal. That’s when NPR dropped this bombshell on my afternoon:

“In France, selling at a loss is illegal, except under very specific conditions.”

Sorry, what?

I figured I must have misheard. Granted, France is a long ways from Bastiat at this point, but surely they still have some standards. Right?

Wrong.

On subsequent playbacks, NPR reporter Eleanor Beardsley confirmed the absurd–and, impressively, she did so without any hint of shock in her voice.

It turns out this really is a law in France. According to The Guardian, French companies are generally prohibited from selling products at a loss, except during two officially prescribed six-week sales periods where discounts are permitted. But even during the official sales periods, companies are limited to selling products that are more than 30 days old and the price they charge must still be deemed “fair” by the authorities.

Economic Effects

There are several likely effects from this rule.

For retailers, it means higher average inventory costs and less flexibility. Whenever they purchase more of a product than they can profitably sell, they will face two bad choices.

They can wait for the next sales window to open so they can sell at a steep discount and recover at least some of the cost. However, with this option, they would incur storage costs while waiting for the official sales period to start.

Alternatively, they can simply dispose of the product to free up room in their inventory sooner. This saves on storage costs but also ensures they will lose all of their initial purchase price.

Notably, both of these options are generally worse than the option that would be available in a normal market–the ability to hold a discount sale immediately, regardless of what month it happens to be.

France’s restrictions artificially raise the cost of buying too much product for resale or trying to sell a new product that doesn’t work out. In turn, this will make companies more reluctant to stock new products that are unproven. They are incentivized to focus more on stocking mainstream items that they know they can sell. This means consumers will have fewer choices and entrepreneurs will find it harder to get traction with a new offering.

But even if companies try to adapt to the policy, they will still invariably make some mistakes in their purchasing decisions. Since those mistakes are more expensive under France’s restriction regime, chances are they will pass some of these costs along to their customers in the form of higher prices.

To recap then, France’s discount restriction entails more regulation, more costs, and less flexibility for French retailers. Meanwhile, it also offers higher costs and fewer choices for French consumers.

Given these problems, you might be wondering why such a policy exists at all. Were French voters (and consumers) really clamoring for fewer sales at some point?

I’m not sure about that. However, the official justification for the policy today is the same one that often gets used to explain other bad economic ideas–“fairness”.

Specifically, the French government alleges that selling products below cost amounts to “unfair competition”. Thus, the argument goes, the practice needs to be heavily regulated.

In reality, France’s policy is a solution in search of a problem.

Market Solutions to “Unfair Competition”

The market provides a natural check on the type of “unfair competition” discussed above. A company that is selling all its products at a loss cannot do so in perpetuity. At some point, it will have to turn a profit or perish. After all, it doesn’t matter how much market share you have if all your sales lose money.

Of course, it may be argued that large companies might be able to endure these types of losses long enough to force smaller firms to go bankrupt and acquire a monopoly. That could indeed occur, but it’s not the end of the story.

After the small firms go bankrupt, the large firm would need to raise prices to reap the benefit of having a monopoly. But once prices go back up, then new small firms could enter to compete again. For the large firm’s strategy to be successful, it would have to constantly be willing to drop prices to loss levels to fight off competitors. But then it never has a chance to reap the monopoly profits it seeks, and the strategy becomes self-defeating.

In the more nuanced case of a grocery store, we can imagine a company selling some high-profile products at a loss to attract more people to its store–in marketing jargon, such products are described as “loss leaders”. If the strategy is successful, and the store makes money on other products that customers buy, this really could be a sustainable long-term strategy.

Notice, however, that there’s nothing preventing competitors from adopting the same marketing tactic. They could experiment with their own loss leaders or different marketing strategies to try to lure customers back to their stores. There’s nothing remotely “unfair” about this type of competition. Businesses are supposed to compete for customers, and the customers benefit regardless of which company is more successful.

Who Decides What Is Fair?

Ultimately, it shouldn’t be up to competitors or the government to decide what qualifies as fair.

The fairness or unfairness of a given transaction should be judged by the people participating in the transaction. In this case, the grocery store decided to sell Nutella at a discount voluntarily. Many customers were eager (okay, perhaps too eager) to take them up on the offer. These are the only two stakeholders that matter for determining whether a sale was fair. And since both sides participated willingly, we can safely assume they both believed the transaction was in their interest–that it was indeed fair.

There is no reason for the government to step in and prevent this exchange from occurring. The right solution for the government is to do nothing.

Let companies decide when they want to have a sale. Let the market sort out “unfair competition”. And let individuals decide what is fair for themselves.

How DACA Became a Political Football

How DACA Became a Political Football

Democrats, Republicans, and regular Americans agree that DACA recipients should be allowed to stay in the US.

In spite of this happy news, the DACA program remains in limbo nearly five months after it was revoked by President Trump. The government also just went through a brief shutdown because Republicans and Democrats in Washington couldn’t come to a compromise on this issue.

Needless to say, it’s not an ideal situation.

The problem is that both parties are more interested in using the plight of nearly 700,000 DACA recipients as political leverage than resolving their issue.

There’s plenty of blame to go around here, but let’s start at the beginning of the program with then-President Obama.

President Obama’s Contribution

Formerly known as Deferred Action for Childhood Arrivals, the DACA program was initiated by the Obama Administration in the summer of 2012. The program allowed people who came to the US illegally when they were younger than 16 to register with the US government and receive a special legal status. To be eligible for the program, the applicants must not have been convicted of a felony or certain misdemeanors.

The DACA status protected them from deportation and gave them the ability to work, enroll in college, and obtain a drivers’ license. However, it stopped short of giving them a pathway to citizenship or even legal permanent residency. You could think of it as a kind of immigration purgatory. They were no longer illegal and subject to deportation, but they weren’t legal in the way that other immigrants are.

As a strict matter of policy, DACA is a good idea. It would have been better if it allowed a proper pathway to residency or citizenship, but it was still an improvement over the status quo for the individuals affected.

The problem is that the policy was implemented by executive action, not by Congress. This meant that DACA was likely unconstitutional at the outset (and ironically, Obama himself argued as much in the early years of his presidency–before he decided to do it anyway).

But even if we assume DACA was constitutional, passing it by executive action still meant that it could be undone just as easily the next time a Republican was in the White House. This is precisely what happened.

This leads to an unfortunate paradox in Obama’s DACA policy. The ostensible goal of the policy was to provide undocumented immigrants relief from the fear of deportation and a greater degree of certainty. But by implementing the policy via executive action, the future of the program was inherently uncertain.

Indeed, some argue that the DACA recipients are in an even more precarious position now than they were before DACA. Before the program, they were undocumented and would need to be identified in order to be deported. Now, if the protections fully expire, the US government has a detailed profile of each one, which could expedite the deportation process.

These risks were foreseeable from the beginning. Obama decided to implement DACA anyway.

The move offered political benefits to him in the short-term, as it was announced just months before the 2012 election. Meanwhile, the risks to the beneficiaries could only arise in the long-term, after he had left office.

Of course, this doesn’t mean Obama intended for the DACA recipients to wind up in the predicament they are in today. On this issue, we can assume Obama sincerely wanted to help. The point is that it was also in his political interest. And as a rule, politicians don’t mind risking other people’s well-being to promote their own.

President Trump and the Republicans

Next on the list, we have the most obvious contributors to the current DACA problem.

Back in September 2017, Trump’s Attorney General Jeff Sessions announced the end of the DACA program and set an expiration date on the existing DACA protections. If Congress did not act within six months, the DACA recipients would once again become subject to deportation.

The main rationale Sessions offered for ending the program was that it violated the Constitution. Based on my reading, this is probably a correct statement. But it was also hard to take seriously coming from an administration that has been perfectly happy to flout the Constitution elsewhere.

Of course, if the Trump Administration really believed that the main problem with DACA was a matter of constitutional procedure, it would be a simple fix. They could take the program implemented by Obama, reformat it as a piece of legislation, and pass it through both houses with little change.

At first, there was some hope that this direct approach might occur–with Trump publicly calling for Congress to work on a DACA fix.

But ultimately, Republicans opted to use the DACA fix as a bargaining chip to push unrelated immigration policies through the Senate. At the moment, the deal Republicans are offering is a DACA fix in exchange for funding Trump’s wall.

In effect, they are holding the DACA solution hostage until they can extract some type of concession from Democrats. For the GOP, helping the DACA recipients is a means to an end, when it should be an end in itself.

The Democrats

All of which brings us to the Democrats’ contribution to the DACA impasse.

As noted above, the Republican position on this issue is cynical and opportunistic. But the actual terms they’re offering for a deal are quite modest. The wall has always been more of a symbol than a serious policy. And that’s all Republicans are after here: a symbolic victory they can tweet about.

Preliminary details of the wall proposal suggest it would cost around $25 billion in total. Of that amount, $20 billion would go to the wall specifically while the rest would be spent on other border security priorities.

It’s not clear the wall would do much to stop illegal immigration, which has already been declining. From a libertarian perspective, it’s also unclear why curtailing immigration from a Mexico is a high priority in the first place.

It’s best to think of the wall as a large make-work project. The wall is a waste of money, but it’s mostly impotent. And in the scope of the enormous federal budget, $25 billion is sadly a rounding error.

The question here is not whether the wall is a good idea by itself. The question is whether the benefit of fixing DACA–preventing the deportation of peaceful people– outweighs the cost of another useless government project. The answer is clearly yes.

Even The Washington Post Editorial Board agrees with this assessment. In a recent op-ed on the subject, the Post offered a compelling argument for Democrats to take the deal:

“Consider how rare it is that a dumb idea in Congress actually buys something smart in return. In this case, the return on that dumb idea would be huge…

The wall’s $18 billion price tag [an earlier estimate] would be spread over a decade. If a few billion dollars annually is the trade-off that provides certainty — a pathway to citizenship or permanent legal status — for nearly 700,000 young immigrants brought to this country as children by their parents, it’s worth it. Because the alternative — all those lives ruined, all those jobs lost, all that education and promise cut short — is much worse.”

The Post is spot on here. This should be an easy deal for Democrats to accept and sell to their constituents as a victory. But so far, they haven’t been able to do so.

Not surprisingly, their reluctance has more to do with politics than policy. As early as September 2017–the same month Trump decided to end the program–Democratic leaders were already facing criticism from activists in their party for failing to resolve the DACA issue. Around the same time, Democratic leaders were also facing criticism from activists for negotiating with Trump on DACA at all.

Indeed, a week after the initial DACA announcement, Senator Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi were discussing a deal with Trump on DACA that sounds a lot like the deal that’s still on the table today–border security spending for DACA. For her trouble, Pelosi was actually shouted down at a public news conference.

Clearly, Democratic politicians understand that the deal on the table is a net win for their policy priorities. But, after spending a year characterizing Trump as a uniquely evil and illegitimate president, it’s hard for them to publicly agree with Trump on much of anything.

So we remain at an impasse. Republicans insist on getting concessions for fixing a problem they helped create. And Democrats refuse to accept a reasonable trade-off for fear it may jeopardize their anti-Trump bona fides in upcoming elections.

Meanwhile, time is quickly running out for the DACA recipients. Will their well-being be sacrificed on the altar of political expedience?

Trump: 'Trade Wars Are Good'

Sometimes I Love the Trump Effect–Solar Tariff Edition

The Trump Effect is what causes millions of moderate and left-of-center Americans to immediately take the opposite position of President Trump whenever he makes a new decision.

The issues in question are often obscure, but the popular center-left positions that emerge on them can be quite interesting.

That is precisely what is happening now that President has unwisely decided to issue new tariffs on solar panels. In response, The Huffington Post released a critical article that  explains why the tariffs will harm downstream companies and consumers alike.

It’s refreshingly sound economics from an unexpected place. (If you’re interested in the issue, you can also check out my take on the solar panel tariffs and the canard of “unfair trade”.)

Now if Trump will just come out in favor of a $15 minimum wage, things would get really interesting…

Trump: 'Trade Wars Are Good'

Oprah 2020?

In case you’re wondering why you’re suddenly hearing about Oprah running for president, Reason’s Christian Britschgi will get you up to speed in his latest piece:

Will 2020 Be Oprah vs. Trump?

There are several good lines in here, but I particularly enjoyed his description of center-left Twitter as the place “where endless optimism about government in general mixes with apoplectic rage and fear about the government we currently have”.

Book Foolssm

Fool’s Errand: Time to End the War in Afghanistan

by Scott Horton

Book Paulsm

The Great Ron Paul

by Scott Horton

Book Griggsm

No Quarter: The Ravings of William Norman Grigg

by Will Grigg

Book Animalssm

What Social Animals Owe to Each Other

by Sheldon Richman

Book Palestinesm

Coming to Palestine

by Sheldon Richman

Pin It on Pinterest