Larry Summers on NAFTA

March 25th, 2017

Harvard University economist Larry Summers (born 1954) writes that the greatest gift the United States could give China is exit from the North American Free Trade Agreement (NAFTA).

I was in Mexico Thursday seeing the Mexican president, foreign minister and finance minister and addressing a convention of bankers. The only subjects anyone is interested is the future of NAFTA and U.S. Mexican relations.

I came to Mexico from Beijing, and so I was able to report that there was no greater strategic gift the United States could give China than to abrogate NAFTA and rupture the North American community.

In narrow commercial terms right now, Mexican goods enter the United States on a preferred basis relative to Asian goods. This preference would disappear with NAFTA suspension. Furthermore about 70 percent of Mexican exports are of goods that are not finished but are inputs to further U.S. production. Anything that hurts Mexico therefore hurts us in global economic competition with China. ….

Larry Summers, “Why scrapping NAFTA would be Trump’s big gift to China“, Larry Summers Blog, 24 March 2017.

the season of tax returns

March 24th, 2017

In Canada and the USA we are approaching the deadline for filing 2016 income tax returns. This is a task disliked by all of us. Why does it have to be so painful?

An economics professor came up with an idea to make filing tax returns easy and painless. Taxpayers loved it, yet he was unable to get anyone in the California state government, or the federal government, to put his plan into action. Why? Because there was a strong lobby against it, financed by those who make a living preparing tax returns (or sell software to do this), and conservative Republicans who want to keep payment of taxes as painful as possible.

Sound unbelievable? This is a true story, from one of my favourite podcast series. (It is not fake news!) Click on the link below to download or listen to the latest weekly podcast (#760) from Planet Money. It is 23 minutes of time well spent.

#760: Tax Hero, Planet Money, 22 March 2017.

charts of the day

March 23rd, 2017

The US is experiencing an epidemic of high mortality, concentrated in middle-aged White, non-Hispanic persons with high school education or less. This is self-inflicted harm, and is frightening. It is Trump’s political base, and conditions are deteriorating quickly.

For further information, see Alison Burke, “Working class white Americans are now dying in middle age at faster rates than minority groups“, Brookings Institution, 23 March 2017.

Case and Deaton’s full paper can be downloaded here.

Martin Wolf on trade negotiations

March 22nd, 2017

It is surreal that we depend on a Chinese communist to persuade a US president of the merits of liberal global trade. Yet today’s desperate times require such desperate measures.

Martin Wolf, “China and the US: an odd couple doomed to co-operation“, Financial Times, 20 March 2017 (metered paywall).

America’s accidental healthcare system

March 19th, 2017

The USA has a very inefficient healthcare system that is also the most expensive in the world. About two-thirds of the population receive health insurance as employer-based benefits. Benefits are not taxable, and came into being as a way to attract workers when wages were frozen during the second world war.

FT columnist Rana Foroohar has written an excellent column that explains why the system works so poorly and why neither Obamacare, nor the Republicans’ proposed replacement, can mend it.

America has a healthcare market that is not anywhere close to what Adam Smith would have considered functional. It has almost no price transparency (you don’t get a bill until weeks or months after you’ve made treatment choices), is controlled by vested interests (doctors, pharmaceutical and insurance companies) who exert monopoly power against the businesses and consumers they are supposed to service, and is highly fragmented and inefficient.

All this contributes to the fact that the economic implications of rising health costs on not just individuals, but American business itself, have been poorly understood. In the 1950s, healthcare made up only 7 per cent of total worker compensation; today, it’s 20 per cent. Given that, it is no surprise that as healthcare costs in the US have gone up, wages have stagnated.

Rana Foroohar, “Employers can help fix American healthcare“, Financial Times, 20 March 2017 (metered paywall).

Turkish-American journalist Rana Foroohar (born 1970) is the FT Global Business Columnist.

Ms Foroohar calls on employers to ‘help fix’ the broken healthcare system. She ignores the single-payer solution because it “is still an ideological leap too far for US business.” But Medicare for the elderly, and Medicaid for the poor, exist. These (despite opt-out provisions) are single-payer systems that cost less than employer-based insurance plans. Reform of US healthcare can be done with a simple reduction of the age of eligibility for Medicare from 65 years to zero. Employer-based benefits could continue for benefits not covered by Medicare, such as private or semi-private hospital rooms. Importantly, they could also be taxed as part of employee remuneration.

Merkel meets Trump in Washington, DC

March 18th, 2017

Yesterday’s meeting between Donald Trump and Angela Merkel did not go well.

The summit of the world’s most powerful man and woman brought together contrasting personalities — the cautious pastor’s daughter from the former communist East Germany and the extrovert businessman from Queens who briefly referred to the US as “a very powerful company” before correcting to “country”.

Courtney Weaver and Stefan Wagstyl, “Trump and Merkel air differences in tense first meeting, Financial Times, 18 March 2017 (gated paywall).

the folly of bilateralism in global trade

March 17th, 2017

The current government of the United States has expressed a preference for bilateral trade negotiations. The policy is extremely mercantilist: trade surpluses with specific countries are good; deficits are bad. This is insane, as Adam Smith long ago taught us.

Martin Wolf this week performed a public service by pointing this out to readers. Let us hope that Donald Trump has read Mr Wolf’s column, and that he comes to understand the folly of focusing on bilateral trade balances.

Consider what our national economies would look like if every company was required to balance its sales and purchases with every other one. This would be insanely costly — indeed insane. It is to allow a vastly more complex division of labour that we have money, and so the possibility of balancing the value of incomes against expenditure across the economy as a whole. Trade allows the same thing to happen across borders ….

In a multilateral economy, bilateral balances do not matter. Of course, overall budget constraints still do. But the fact that I run a consistent deficit with my nearest supermarket should be of no concern to me (or it), so long as I do not exhaust my overall resources. ….

The bilateralism now touted by the Trump administration is a delusion. It will not work. But it will do huge damage. It must be buried.

Martin Wolf, “The folly of Donald Trump’s bilateralism in global trade“, Financial Times, 13 March 2017 (gated paywall).

Trump’s income and tax returns

March 17th, 2017

Not much has happened in the two weeks I have been away, possibly with this exception.

Donald Trump has still not released his recent income tax returns, but two pages of his 2005 return were leaked to the press earlier this week. Because of the Alternative Minimum Tax (AMT), Trump paid taxes that year equal to about 25% of his reported income of roughly $150 million. Without the AMT, which Trump would like to abolish, his 2005 tax bill would have been only 3% of his income.

Presidents dating back to [Richard] Nixon have released their tax information. As Nixon himself explained: “People have got to know whether or not their president is a crook.” Two pages from a twelve-year-old tax form simply do not shed much light on the president’s business dealings or potential conflicts of interest. As it stands, Americans have every reason to worry about profiteering in the White House. Unfortunately, having dribs and drabs of tax information leak slowly into the media encourages the kind of speculative and even conspiratorial thinking that undermines public debate. ….

President Trump has said that avoiding your taxes is “smart.” We are lucky that most Americans hold themselves to a higher standard. They deserve to know whether Trump has shirked a civic duty that the citizenry takes so seriously.

Vanessa Williamson, “What Trump’s tax returns tell us: The public needs to see more“, FixGov, Brookings Institution, 16 March 2017.

closed for two weeks

February 27th, 2017

I will be traveling soon, with limited access to internet. Blogging will resume after March 15th.

Kenneth Arrow: a gentle genius

February 26th, 2017

Kenneth Arrow, one of the greatest economists of the past century, died last week. His nephew, Larry Summers, wrote a eulogy that was published in the Wall Street Journal. Here is an excerpt from it, followed by an ungated link to the full eulogy. Read the rest of this entry »