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September 13, 2009

Economist's View - 4 new articles

"Are Tire Tariffs Stupid?"

Brad DeLong (I've added a few comments are at the end):

Barack Obama Does Something Really Stupid: Tire Tariffs, by Brad DeLong: Why oh why can't we have better Democratic presidents?
Barack Obama does something stupid. So does Harold Meyerson, who writes an op-ed on the tire tariff that clouds the issues.
Meyerson:
A Trade Test for Obama: Sometime before Sept. 17, President Obama has to make a decision that will tell us a lot about his commitment to American manufacturing. By that date, Obama has to accept, reject or modify a recommendation from the International Trade Commission (ITC) to impose tariffs on the Chinese-made tires that are swamping the U.S. market. The importance of this battle goes well beyond its impact on the tire industry. Much of Americans' skepticism toward free trade comes from their empirically verifiable sense that their government has been reluctant to enforce its own trade laws -- an issue that candidate Obama tackled head-on last year by his repeated pledges to enforce those laws.
Between 2004 and 2008, tire imports from China increased 215 percent, while imports from other nations decreased 5 percent and U.S. tire production declined 27 percent...
Harold: you need to provide people with the right numbers--which are that Chinese tires rose from 6 to 20 percent of U.S. purchases. You don't.
Meyerson goes on:
[T]he ITC's staff analysis forecast an increase of only $3.50 per tire -- not nothing, to be sure, but a cost that has to be measured against the possibility of tens of thousands of job losses in U.S. tire factories (where more than 5,000 jobs already have been lost because of Chinese imports)...
Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.
Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.
But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.
That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid.
But, Meyerson says, not to impose the tariff would violate the rule of law:
The ITC found this a clear violation of a provision in the Trade Act (Section 421), added with Beijing's consent during the negotiations preceding Congress's 2000 enactment of Permanent Normalized Trade Relations with China...
China isn't doing anything wrong. For Chinese manufactures to sell us tires is not against the law. To say that China has committed a "clear violation" of the law is to badly misstate the case.
What is the case is that:
Section 421... allowed the U.S. government to levy tariffs on surging Chinese imports that were eviscerating an American industry... [and it] was a key argument in persuading Congress to permanently normalize trade relations...
§421 gives the U.S. the right to impose tariffs in response to a surge. It doesn't make the surge a crime, or a violation. And it doesn't require the U.S. to impose tariffs--especially if imposing them would be a really bad idea for U.S. consumers.
But, Meyerson says, we can't do the right thing now because imposing tariffs might be the right thing to do at some point in the future:
The implications of Obama's decision go well beyond tires. Section 421 was created to provide some protection for American workers while allowing China entry to our markets. If Obama opts not to enforce it, why would anyone concerned about American jobs believe such provisions in future trade agreements? Why would U.S. manufacturers maintain their domestic production if they know that none of the legal protections they've been promised will ever be invoked?... Endorsing the ITC's recommendation would not only honor his campaign promises and fulfill the mandates of our trade laws, but would also allow him to rescue the very Americans who, rightly or wrongly, have felt left out of his efforts to save the nation's economy.
I have a proposal. The president should, in each case, do the right thing. When there are net benefits to the United States from exercising its §421 rights, it should exercise them. When there are net costs to the United States from exercising its §421 rights, it should not exercise them.
That would be real change we could believe in.

Suppose that you agree this is not a good policy, but you think that the benefits of health care reform to workers are larger than any losses associated with this policy, and that success on health care reform is an essential step that will allow additional policies that help workers to be enacted down the road. All of that is in danger if health reform fails.

My understanding is that this is part of a deal for union support on health care reform (further politicizing economic policy?). If so, and if that support is the key to future policy success, does that change the equation at all? Is it proper to consider the costs and benefits of this policy in isolation, or should we look at the costs and benefits of the entire trajectory of current and future policies associated with the two options (tariffs or not)? It's hard to justify tariffs based upon the economics of this policy in isolation, and perhaps economists should stop there, but I doubt the administration views the net costs and benefits of a policy in isolation from the rest of its agenda.

Still, even if it is the case that future policy success requires giving in to bad policy at present and the net benefits are positive, I am uncomfortable advocating that position. Even if it's true that future policy success requires such tradeoffs, the role of the economist is to point out exactly what those tradeoffs are so they can be fully evaluated, and to suggest less costly alternative policies that benefit workers, but avoid the negative effects of the tariffs. What happens in the political arena after that is out of our control.


"The Most important First Step is to Limit Leverage"

Update: Here is a link to the discussion (it's in the comments to the post).

I will be hosting a Firedoglake Book Salon for Robert Frank's The Economic Naturalist's Field Guide today from 2:00 - 4:00 PST, and this column touches upon several of the topics likely to come up in the discussion (I'll add an update with a link to my opening comments when it begins, questions are encouraged and can be entered in comments at the link I'll provide):

Flaw in Free Markets: Humans, by Robert H. Frank, Commentary, NY Times: There is broad agreement that Alan Greenspan ... was wrong to have believed that market forces alone would insulate society from excessive financial risk. ...[C]ritics fault Mr. Greenspan for having overestimated the strength of competitive forces, a point he essentially conceded... But the financial crisis was not caused by a shortfall in competition..., it was fueled by competition's growing strength.
Adam Smith's theory of the invisible hand, which says that market forces harness self-serving behavior for the common good, assumes that markets are competitive... The invisible hand, however, requires not just strong competition but also two other preconditions. The economic models that spawned Mr. Greenspan's former optimism simply assume those conditions, despite compelling evidence of their absence.

First, those models assume that rewards depend only on absolute performance, but ... payoffs are often tightly linked to relative performance. When a valuable new piece of information becomes available to the investment community, for example, the lion's share of the gain goes to whoever trades on it first. For an individual firm..., it is thus completely rational to invest millions of dollars in computer systems that can execute stock trades even a few seconds faster than others. But rivals inevitably respond with similar investments. Taken together, these expenditures are wasteful in the same way that military arms races are.

A second problematic assumption of standard economic models is that people are properly attentive to all relevant costs and benefits... In fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift. ...
During the recent bubble, unregulated wealth managers created mortgage-backed securities that enabled investors to magnify their returns through financial leverage...
Many experienced analysts had warned for years that those derivative securities were vastly overpriced, but Mr. Greenspan assumed that prudent concerns about the future would prevent investors from taking foolish risks. ...
Wealth managers faced a tough choice..., many customers would desert them if they failed to offer the higher-paying, but riskier, investments. Managers also knew that if markets turned against them, penalties would be limited by the fact that almost everyone had been following the same strategy. The resulting collapse was all but inevitable.
Memories are short. Immediately after a severe flood, most people are reluctant to build on a flood plain. But land on flood plains is cheaper, and the prospect of short-term advantage quickly lures many to abandon their caution. That is why many jurisdictions adopt strict regulations against building on flood plains.
The same logic dictates regulation to limit the damage caused by financial bubbles. The ... most important first step is to limit leverage. ... Relaxed regulation and increased competition now confront investors with temptations that growing numbers of them are ill-equipped to resist.
Alan Greenspan's erstwhile faith in the invisible hand notwithstanding, it was never reasonable to have expected market forces to protect society from the consequences of this risky behavior.


"Too Big to Take a Pay Cut"

Dean Baker says "Tyler Cowen Is on the Money":

Where Politics Don't Belong, by Tyler Cowen, Commentary, NY Times: For years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.
Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment. Furthermore, they allowed and encouraged high leverage and the expectation of bailouts for creditors... Without these mistakes, the economy would not have been so invested in leverage and ... the financial crisis would have been much milder.
But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. ... President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We've created a class of politically protected "too big to fail" institutions, and the current proposals for regulatory reform further cement this notion. ...
We should stop using political favors as a means of managing an economic sector. Unfortunately, though, recent experience with health care reform shows we are moving in the opposite direction...
One disturbing portent came over the summer when it was reported that the Obama administration had promised deals to doctors and to pharmaceutical companies under the condition that they publicly support health care reform. That's another example of creating favored beneficiaries through politics. ...
Even worse, these political deals threaten open discourse. The dealmaking may be inhibiting some people in health care from speaking out in opposition to the administration's proposals. ... The banking sector has been facing similar constraints; if bankers criticize the Treasury or the Fed, they ... could get a bad deal when the next bailout comes. When major economic sectors can be influenced in this way, are we really very far from the nightmare depicted by Ayn Rand in "Atlas Shrugged"?
So if we're looking for a major lesson from our banking mess, it is undoubtedly this: We have made a grave mistake in politicizing the economy so deeply, and should back away now. ...
In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline. We should move away from the general attitude of "too big to take a pay cut," especially when the taxpayer is on the hook for the bill. If such changes sound daunting, it is a sign of how deep we have dug ourselves in. ...


links for 2009-09-12

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