Archive for the ‘Political Economy’ Category

Larry Summers on NAFTA

Saturday, 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

Friday, 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.

the folly of bilateralism in global trade

Friday, 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

Friday, 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.

Kenneth Arrow: a gentle genius

Sunday, 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. (more…)

respect for the White Working Class

Saturday, February 25th, 2017

Traditional labour and liberal parties have lost much of the vote of the white working class (WWC). FT columnist Simon Kuper writes that lack of respect that drives their rage. For them, respect is more important than income and living conditions. Politicians can learn from Donald Trump and Nelson Mandela, two politicians who successfully courted WWC voters.

Here is a third of Mr Kuper’s essay. There is much more in the other two-thirds. Read it and think, especially if you tend to vote liberal or labour. (more…)

Sebastián Edwards on Alphachat

Friday, February 24th, 2017

I just finished listening to a fascinating conversation between Chilean economist Sebastián Edwards and FT journalist Cardiff Garcia. The 38-minute podcast is an entertaining and informative discussion of populism – mostly but not exclusively in Latin America – and what it has in common with the populism of Donald Trump in the United States. I won’t attempt to summarize it. Just click on the link below – or download it from iTunes or a similar site.

Cardiff Garcia, “Sebastian Edwards on why economic populism always disappoints“, FT Alphachat 24 October 2017 (ungated access – free registration required).

Sebastián Edwards (born 1953) is currently Professor of International Business Economics at the University of California, Los Angeles (UCLA). He is a prolific writer of newspaper columns, scholarly articles and books. His latest books are Toxic Aid: Economic Collapse and Recovery in Tanzania (2014)and Left Behind: Latin America and the False Promise of Populism (2010).

public policy and share prices

Friday, February 24th, 2017

“Lex”, a Financial Times column directed to active traders of company shares, has an interesting report today on fluctuations of the share prices of firms that manage private prisons.

Last August, when the Obama government announced its intention to phase out use of private prisons, share prices in affected firms fell sharply. They climbed after Donald Trump won the election. Yesterday, after the Trump government reversed Obama’s August decision, share prices increased further.

Share prices are volatile so, as the column notes, the fall in price last August was larger than justified (at least in retrospect), and its current price may well be higher than justified. But, suppose you knew with certainty that a policy change was coming. Then you  could have purchased shares on Wednesday, then sell them today at higher prices.

Did Donald Trump profit from such a transaction? We may never know, as Trump never placed his assets in a blind trust. Indeed, he has never released his tax returns.

This is a clear example of how it is possible to profit from inside knowledge of government policy. This is why it is important that the President, indeed all government officials, refrain from ‘playing the market’, from using inside knowledge of public policy for private gain.

When President Donald Trump rounds up the “bad hombres”, he will need somewhere to put them. His officials on Thursday evening reversed an Obama administration edict to shun private prisons. ….

Last August, the Department of Justice said the Bureau of Prisons would stop using them after a report found them to be more dangerous and stuffed with contraband than government-run facilities. The new attorney-general has reversed that with the stroke of a pen.

Even better news, for investors at least: Mr Trump has ensured much greater demand for prison beds by deciding to detain and deport hundreds of thousands of illegal immigrants to whom the Obama administration had turned a blind eye. It is no surprise that CoreCivic and Geo’s shares have overshot their pre-August levels.

Yet just as we argued the 30-40 per cent fall in August was too far, the surge looks overdone now. The federal government is not the only game in town and this government will not endure forever.

Lex, “Private prisons: turning the screw“, Financial Times, 24 February 2017 (gated paywall).

crony capitalism in Washington

Wednesday, February 22nd, 2017

I have seen this movie before … many times. Regardless of country, the ending is very sad.

A few hours after Rex Tillerson was confirmed as US secretary of state this month, he received some excellent news. The House of Representatives voted to nullify a rule that, as head of ExxonMobil, he had vigorously opposed. Known informally as the “publish what you pay” rule, it obliges oil and mining companies to disclose payments they make to foreign states. Scrapping it is a big victory for Big Oil. It is another sign that a Donald Trump presidency means not so much draining the swamp as handing over the swamp to the crocodiles. ….

If ExxonMobil bags a big project in Mozambique or, better yet, Russia, people will ask what it paid and whether Mr Tillerson smoothed the way — despite his pledge to recuse himself from such issues. As Jeffrey Sachs, an economist and author of Building the New American Economy, argues, Mr Trump is putting lobbyists out of business. “He’s just handing finance over to Goldman Sachs,” he says of Gary Cohn’s appointment as director of the National Economic Council. “And he’s just handing State over to ExxonMobil.”

David Pilling, “Trump, Tillerson and the resource curse“, Financial Times, 23 February 2017 (gated paywall).

The nullified rule was signed into law in 2010, but never come into effect because of industry lobbying by the American Petroleum Institute.

As the sponsors of the bill – Republican Senator Richard Lugar and Democratic Senator Ben Cardin – point out, Canada and European countries have enacted similar laws, so lobbyist arguments that the rule would place US oil companies at a competitive disadvantage are not valid.

corporate reaction to Donald Trump

Thursday, February 2nd, 2017

These are emotional days in the US C-suite. ….

The stakes are uncommonly high: no company can predict when it will be hit with a tweet from @realDonaldTrump, insisting it scrap a factory in Mexico or cut the price of an aircraft. …. Business likes certainty, and no chief executive can predict what Mr Trump will do next or what impact it will have on his company’s share price.

Emotions are running just as high. Some business leaders seem intoxicated at the prospect of breaking bread with the most powerful man on earth, as several auto executives did on Mr Trump’s second day in office last week. The head of Ford, Mark Fields — target of some of Mr Trump’s most damaging Twitter attacks for producing cars in Mexico — grinned with pleasure afterwards, clearly excited at having been invited in to see the Oval Office. ….

Many who scoffed at Mr Trump before his stunning election victory in November have found occasion to praise him since. During the current earnings season, several corporate leaders told analysts they were “encouraged” or “optimistic”. ….

Industry analysts question whether this new habit of flattery is genuine, or merely aimed at placating and cajoling a man who is notoriously prickly and easily offended. “Only their therapists know for sure,” said one.

Patti Waldmeir, “US executives ride Donald Trump’s wave of uncertainty“, Financial Times, 2 February 2017 (gated paywall).