Coal Is A State Of Mind
The big news from last nights speech is that our pundits is not learning. After all the debacles of 2016, they swooned over the fact that Trump while still lying time after time and proposing truly vile initiatives was able to read from a teleprompter without breaking into an insane rant. If American democracy falls, supposed political analysts who are actually just bad theater critics will share part of the blame.
But that aside, I was struck by Trumps continued insistence that hes going to bring back coal jobs. This says something remarkable both about him and about the body politic.
He is not, of course, going to bring back coal mining as an occupation. Coal employments plunge began decades ago, driven mainly by the switch to strip mining and mountaintop removal. A partial revival after the oil crises of the 70s was followed by a renewed downturn (under Reagan!), with fracking and cheap gas mainly delivering the final blow. Giving coal companies new freedom to pollute streams and utilities freedom to destroy the planet wont make any noticeable dent in the trend.
But heres the question: why are people so fixated on coal jobs anyway?
Even in the heart of coal country, the industry hasnt really been a major source of employment for a very long time. Compare mining with occupations that basically are some form of healthcare in West Virginia, as percentages of total employment:
Even in West Virginia, the typical worker is basically a nurse, not a miner and that has been true for decades.
So why did that state overwhelmingly support a candidate who wont bring back any significant number of mining jobs, but quite possibly will destroy healthcare for many which means jobs lost as well as lives destroyed?
The answer, Id guess, is that coal isnt really about coal its a symbol of a social order that is no more; both good things (community) and bad (overt racism). Trump is selling the fantasy that this old order can be restored, with seemingly substantive promises about specific jobs mostly just packaging.
One thought that follows is that Trump may not be as badly hurt by the failure of his promises as one might expect: he cant deliver coal jobs, but he can deliver punishment to various kinds of others. I guess well see.
For obvious reasons. Evidently the McCartney empire has been scrubbing almost all online versions; hope this lasts long enough for people to enjoy
Update: Searle, not Seattle. Damn spellcheck (or maybe the AI was making a Microsoft joke?)
Izabella Kaminska has a thought-provoking piece on the real effects of technology on wages, in which she argues that much recent innovation, instead of displacing manual workers, has displaced high-paying skilled jobs. As it happens, I sort of predicted this 20 years ago, in a piece written for the Times magazines 100th anniversary (authors were asked to write as if it was 2096, and they were looking back.)
I argued then that menial work dealing with the physical world gardeners, maids, nurses would survive even as quite a few jobs that used to require college disappeared. As it turns out, big data has led to more progress in something that looks like artificial intelligence than I expected self-driving cars are much closer to reality than I would have thought, and maybe gardening robots and post-Roomba robot cleaners will follow. Still, the point about the relative displacement of cognitive versus manual jobs seems to stand.
An aside: given the way Google Translate and such work, Seattles Searles Chinese Room Argument doesnt look as foolish as I used to think it was.
Anyway, Kaminskas point about the disruptiveness of such technological change is something we should take seriously. After all, it has happened before. The initial effect of the Industrial Revolution was a substantial de-skilling of goods production. The Luddites were, for the most part, not proletarians but skilled craftsmen, weavers who constituted s sort of labor aristocracy but found their skills devalued by the power loom. In the long run industrialization did lead to higher wages for everyone, but the long run took several generations to happen in that long run we really were all dead.
So interesting stuff. Id note, however, that it remains peculiar how were simultaneously worrying that robots will take all our jobs and bemoaning the stalling out of productivity growth. What is the story, really?
The WSJ reports that the Trump administrations budget planning assumes very high economic growth over the next decade between 3 and 3.5 percent annually. How was this number arrived at? Basically, they worked backwards, assuming the growth they needed to make their budget numbers add up. Credibility!
But the purpose of this post is mainly to explain why such a number is implausible not impossible, but not something that should be anyones central forecast.
The claimed returns to Trumpnomics are close to the highest growth rates weve seen under any modern administration. Real GDP grew 3.4 percent annually under Reagan; it grew 3.7 percent annually under Clinton (shhh dont tell conservatives.) But there are fundamental reasons to believe that such growth is unlikely to happen now.
First, demography: Reagan took office with baby boomers and women still entering the work force; these days baby boomers are leaving. Heres UN data on the 5-year growth rate of the population aged 20-64, a rough proxy for those likely to seek work:
Just on demography alone, then, youd expect growth to be around a percentage point lower than it was under Reagan.
Furthermore, while Trump did not, in fact, inherit a mess, both Reagan and Clinton did in the narrow sense that both came into office amid depressed economies, with unemployment above 7 percent:
This meant a substantial amount of slack to be taken up when the economy returned to full employment. Rough calculation: 2 points of excess unemployment means 4 percent output gap under Okuns Law, which means 0.5 percentage points of extra growth over an 8-year period.
So even if you (wrongly) give Reagan policies credit for the business cycle recovery after 1982, and believe (wrongly) that Trumponomics is going to do wonderful things for incentives a la Reagan, you should still be expecting growth of 2 percent or under.
Now, maybe something awesome will happen: either driverless or flying cars will transform everything, whatever. But you shouldnt be counting on it.
Everyone knows that stocks and interest rates have soared since the election; at the same time, if you arent worried about erratic policies from the Tweeter-in-chief, youre really not paying attention. So are markets getting it all wrong?
Ive been wondering about that and yes, in the first few hours after the election I thought, briefly and wrongly, that a crash was coming quickly. But anyway, I decided to crunch a few numbers and surprised myself. I still think markets are underrating the risk of catastrophe. But Im not as sure as I was that theres a huge Trump bubble buoying markets because when you actually look at the data, the market action has been much smaller than the hype.
Look first at stocks. Yes, theyre up since the election. But how does this rise compare with past fluctuations? Not very big, actually:
What about real interest rates? Ive been arguing that the widespread belief in serious fiscal stimulus is wrong, which means that a really big rise in real interest rates wouldnt be warranted. But it turns out that the movement isnt that big:
There was an overshoot early one, but at this point its only about 30 basis points, consistent with fiscal stimulus of maybe 1 percent of GDP. Still high, I think, but not yuge.
Inflation expectations are also up, but that may reflect various non-Trump things like growing evidence that we really are close to full employment.
I still think that markets are too sanguine. But the truth is that they havent moved nearly as much as the hype suggests, so the case for either a huge Trump effect or a huge Trump bubble is a lot weaker than you might think.
What Trump has done or tried to do over the past two years wait, its really only been two weeks? is incredibly bad. But spare a bit of attention to what doesnt seem to be happening. Has anyone heard anything, anything at all, about domestic policy development?
Remember, after the election Wall Street decided that we were going to see a big push on infrastructure, tax cuts, etc.. Some analysts were warning that progressives should be ready for the possibility that Trump would engage in reactionary Keynesianism. Worrying parallels were drawn between Trumpism and autobahn construction under you-know-who.
But if theres a WH task force preparing an infrastructure plan, its very well hidden; maybe theyre waiting to figure out how to turn on the lights. Seriously, Ive been saying for a while that there will be no significant public construction plan. Wall Street economists, at least, are starting to catch on.
Meanwhile, that Obamacare replacement is still nowhere to be seen, with GOP Congresspeople literally running away when asked about it.
Big tax cuts and savage cuts to social programs are still very much on the Congressional Republican agenda, and they could put it all together, hand it to Bannon, and have Trump sign it without reading. But Im starting to wonder: surely they planned to unveil things during the Trump honeymoon, with the public prepared to believe that it was all done with the little guys interests in mind. Even pre 9-11 Bush could count on media goodwill and supine Democrats to ram through his tax cuts.
But now? With massive public distrust, and media fully willing to do real reporting on the distribution of tax cuts, not Democrats say that the rich are the big winners? With the media infatuation on Serious, Honest Paul Ryan at least temporarily dented by his avid support for Muslim bans and all that? Maybe theyll do it anyway, but it seems a lot less certain than it did in November.
At this point Im starting to wonder whether there will be any real movement on economic policy, as opposed to random insults aimed at allies.
Its odd that the markets are, so far, not reflecting any of this; theyre basically unchanged from the levels they reached after the initial Trump Boom euphoria. But surely the odds have shifted, and theres now a real possibility that on domestic policy, at least, were in for a period of sound, fury, and tweets signifying nothing.
Cant imagine what made me think of this.
Peter Navarro, the closest thing Trump has to an economic guru, made some waves by accusing Germany of being a currency manipulator and suggesting that both the shadow Deutsche mark and the euro are undervalued. Leaving aside the dubious notion that this is a good target of US economic diplomacy, is he right?
Yes and no. Unfortunately, the no part is whats relevant to the US.
Yes, Germany in effect has an undervalued currency relative to what it would have without the euro. The figure shows German prices (GDP deflator) relative to Spain (which I take to represent Southern Europe in general) since the euro was created. There was a large real depreciation during the euros good years, when Spain had massive capital inflows and an inflationary boom. This has only been partly reversed, despite an incredible depression in Spain. Why? Because wages are downward sticky, and Germany has refused to support the kind of monetary and fiscal stimulus that would raise overall euro area inflation, which remains stuck at far too low a level.
So the euro system has kept Germany undervalued, on a sustained basis, against its neighbors.
But does this mean that the euro as a whole is undervalued against the dollar? Probably not. The euro is weak because investors see poor investment opportunities in Europe, to an important extent because of bad demography, and better opportunities in the U.S.. The travails of the euro system may add to poor European perceptions. But theres no clear relationship between the problems of Germanys role within the euro and questions of the relationship between the euro and other currencies.
And may I say, what is the purpose of having someone connected to the U.S. government say this? Are we going to pressure the ECB to adopt tighter monetary policy? I sure hope not. Are we egging on a breakup of the euro? It sure sounds like it but that is not, not, something the US government should be doing. What would we say if Chinese officials seemed to be talking up a US financial crisis? (It would, of course, be OK with Trump if the Russians did it.)
So yes, Navarro has a point about Germanys role within the euro. And if he were unconnected with the Bannon administration, he would be free to make it. But in the current context, this is grossly irresponsible.
Ive noted in the past that I get the most vitriolic attacks, not when I denounce politicians as evil or corrupt, but when I use more or less standard economics to debunk favorite fallacies. Sure enough, lots of anger over the trade analysis in todays column, assertions that its all left-wing bias, etc..
So maybe its worth noting that Greg Mankiws take on the economics of DBCFT is basically identical to mine: subsidy or tax cut on employment of domestic factors of production, paid for by sales tax. Greg and I disagree on whether replacing profits taxes with sales taxes is a good idea, but agree that all of this has nothing to do with trade and international competition because it doesnt.
I suspect, however, that Greg is being nave here in assuming that were just seeing confusion because border tax adjustment sounds as if it must involve competitive games. Theres some of that, for sure, but one reason the competitiveness thing wont go away is that its an essential part of the political pitch. Lets eliminate taxes on profits and tax consumers instead is a hard sell, even if you want to claim that the incidence isnt what it looks like. Claiming that its about eliminating a dire competitive disadvantage plays much better, even though its all wrong.
To be fair, these tax-and-trade issues are kind of two-ibuprofen stuff at best. But confusions persists even longer than usual when they serve a political purpose.
Cardiff Garcia has a nice piece trying to figure out what might happen to the economy under Trump, taking off from the classic Dornbusch-Edwards analysis of macroeconomic populism in Latin America. Garcia notes that surging government spending and mandated wage hikes tend to produce a temporary sugar high, followed by a crash. Nice idea but I suspect highly misleading, because Trump isnt a real populist, he just plays one on reality TV.
The Dornbusch-Edwards essay focused on the examples of Allendes Chile and Garcias Peru; an update would presumably look at Argentina, Venezuela, and others. But how relevant are these examples to Trumps America?
Allende, for example, was a real populist, who seriously tried to push up wages and drastically increased spending. Heres Chilean government consumption spending as a share of GDP:
Thats huge; in the U.S. context it would mean boosting spending by almost $1 trillion each year.
Is Trump on course to do anything similar? Hes selected a cabinet of plutocrats, with a labor secretary bitterly opposed to minimum wage hikes. He talks about infrastructure, but the only thing that passes for a plan is a document proposing some tax credits for private investors, which wouldnt involve much public outlay even if they did lead to new investment (as opposed to giveaways for investment that would have taken place anyway.) He does seem set to blow up the deficit, but via tax cuts for the wealthy; benefits for the poor and middle class seem set for savage cuts.
Why, then, does anyone consider him a populist? Its basically all about affect, about coming across as someone wholl stand up to snooty liberal elitists (and of course validate salt-of-the-earth, working-class racism.) Maybe some protectionism; but theres no hint that his economic program will look anything like populism abroad.
In which case, why would we even get the sugar high of populisms past? A tax-cut-driven boom is possible, I guess. But there wont be much stimulus on the spending side.
Not the usual concert joint with the NOW Ensemble, with Elliss (the songwriters) classical-trained roots very much on display. But still a great experience; their sound is like nobody elses, and theres really nothing like live performance. And the new album, which Ive been listening to (blogging has its privileges) is great. Shot on my smartphone!
Trump tantrums aside, you may be finding the whole border tax adjustment discussion confusing. If so, youre not alone; Ive worked in this area my whole life, I co-wrote a widely cited paper (with Martin Feldstein) on why a VAT isnt an export subsidy, and I have still had a hard time wrapping my mind around the Destination-Based Cash Flow Tax border adjustment that sort-of-kind-of constituted the basis for the Mexico incident.
But I have what I think may be a (relatively) easy way to think about it, which starts with the competitive effects of a VAT, then analyzes the DBCFT as a change from a VAT.
So, first things first: a VAT does not give a nation any kind of competitive advantage, period.
Think about two firms, one domestic and one foreign, selling into two markets, domestic and foreign. Ask how the VAT affects competition in each market.
In the domestic market, imports pay the border adjustment; but domestic firms pay the VAT, so the playing field is still level.
In the foreign market, domestic firms dont pay the VAT, but neither do foreign firms. Again, the playing field is still level.
So a VAT is just a sales tax, with no competitive impact.
But a DBCFT isnt quite the same as a VAT.
With a VAT, a firm pays tax on the value of its sales, minus the cost of intermediate inputs the goods it buys from other companies. With a DBCFT, firms similarly get to deduct the cost of intermediate inputs. But they also get to deduct the cost of factors of production, mostly labor but also land.
So one way to think of a DBCFT is as a VAT combined with a subsidy for employment of domestic factors of production. The VAT part has no competitive effect, but the subsidy part would lead to expanded domestic production if wages and exchange rates didnt change.
But of course wages and/or the exchange rate would, in fact, change. If the US went to a DBCFT, we should expect the dollar to rise by enough to wipe out any competitive advantage. After the currency adjustment, the trade effect should once again be nil. But there might be a lot of short-to-medium term financial consequences from a stronger dollar.
I think this is right, and I hope it clarifies matters. Oh, and no, none of this helps pay for the wall.
Its hard to focus on ordinary economic analysis amidst this political apocalypse. But getting and spending will still consume most of peoples energy and time; furthermore, like it or not the progress of CASE NIGHTMARE ORANGE may depend on how the economy does. So, what is actually likely to happen to trade and manufacturing over the next few years?
As it happens, we have what looks like an unusually good model in the Reagan years minus the severe recession and conveniently timed recovery, which somewhat overshadowed the trade story. Leave aside the Volcker recession and recovery, and what you had was a large move toward budget deficits via tax cuts and military buildup, coupled with quite a lot of protectionism its not part of the Reagan legend, but the import quota on Japanese automobiles was one of the biggest protectionist moves of the postwar era.
Im a bit uncertain about the actual fiscal stance of Trumponomics: deficits will surely blow up, but I wont believe in the infrastructure push until I see it, and given savage cuts in aid to the poor its not entirely clear that there will be net stimulus. But suppose there is. Then what?
Well, what happened in the Reagan years was twin deficits: the budget deficit pushed up interest rates, which caused a strong dollar, which caused a bigger trade deficit, mainly in manufactured goods (which are still most of whats tradable.) This led to an accelerated decline in the industrial orientation of the U.S. economy:
And people did notice. Using Google Ngram, we can watch the spread of terms for industrial decline, e.g. here:
And here:
Again, this happened despite substantial protectionism.
So Trumpism will probably follow a similar course; it will actually shrink manufacturing despite the big noise made about saving a few hundred jobs here and there.
On the other hand, by then the BLS may be thoroughly politicized, commanded to report good news whatever happens.
Trumps inaugural speech was, of course, full of lies pretty much the same lies that marked the campaign. Above all, there was the portrayal of a dystopia of social and economic collapse that bears little relationship to American reality. During the campaign Trump got away with this in part because of slovenly, craven media, but also because of persistent misperceptions. The public consistently believes that crime is rising even when it has been falling to historical lows; it believes that the number of uninsured has risen when it has also fallen to historic lows; Republicans believe that unemployment is up and, incredibly, the stock market down under Obama.
The interesting question now is whether fake carnage can be replaced by fake non-carnage. How many people can be convinced that things are getting better under the Trump-Putin administration even as they actually get worse?
Will they actually get worse? Almost surely. Unemployment will probably rise over the next four years, if only because it starts out low historically the unemployment rate has a strong reversion to the mean, and it probably cant go much lower than it is now but can go much higher. The number of uninsured will soar if Republicans repeal Obamacare, whatever alleged replacement they offer.
Crime is less clear, since we really dont know why it fell. But big further declines dont seem highly likely; certainly we wont see an end to the prevalence of urban war zones, because, you know, they dont exist in the first place.
Oh, and this team of cronies is unlikely to help raise real wages.
But can Trump voters be convinced that things are getting better when they arent? The truth is that I dont know. Views on many issues are driven by motivated reasoning, and when people say that things got worse under Obama, what they may really be saying whatever the actual question was is I hate the idea of a black man in the White House.
Still, I suspect that claiming vast job creation when people are actually finding it harder to get work and losing insurance wont work as well as the claims of carnage did. I guess well just have to see which may be hard if, as I fear, the statistical agencies are a prime target of the new regime.
Another week of complete chaos on the health reform front. Dear Leader declares that hell give everyone coverage; Republicans explain that he didnt mean that literally. CBO says the obvious, that repealing the ACA would lead to immense hardship for tens of millions; Republicans declare that this is wrong, because they will come up with an alternative any day now you know, the one theyve been promising for 7 years.
Ive written about all of this many, many, many times. The logic of Obamacare the reason anything aiming to cover a large fraction of the previously uninsured must either be single-payer or something very like the ACA is the clearest thing Ive seen in decades of policy discussion. But I dont know if Ive ever written out the fundamental principles that lie behind all of this.
So here we go: providing health care to those previously denied it is, necessarily, a matter of redistributing from the lucky to the unlucky. And, of course, reversing a policy that expanded health care is redistribution in reverse. You cant make this reality go away.
Left to its own devices, a market economy wont care for the sick unless they can pay for it; insurance can help up to a point, but insurance companies have no interest in covering people they suspect will get sick. So unfettered markets mean that health care goes only to those who are wealthy and/or healthy enough that they wont need it often, and hence can get insurance.
If thats a state of affairs youre comfortable with, so be it. But the public doesnt share your sentiments. Health care is an issue on which most people are natural Rawlsians: they can easily imagine themselves in the position of those who, through no fault of their own, experience expensive medical problems, and feel that society should protect people like themselves from such straits.
The thing is, however, that guaranteeing health care comes with a cost. You can tell insurance companies that they cant discriminate based on medical history, but that means higher premiums for the healthy and you also create an incentive to stay uninsured until or unless you get sick, which pushes premiums even higher. So you have to regulate individuals as well as insurers, requiring that everyone sign up the mandate, And since some people wont be able to obey such a mandate, you need subsidies, which must be paid for out of taxes.
Before the passage and implementation of the ACA, Republicans could wave all this away by claiming that health reform could never work. And even now theyre busy telling lies about its collapse. But none of this will conceal mass loss of health care in the wake of Obamacare repeal, with some of their most loyal voters among the biggest losers.
What theyre left with is a health economics version of voodoo: theyll invoke the magic of the market to somehow provide insurance so cheap that everyone will be able to afford it whatever their income and medical status. This is obvious nonsense; I think even Paul Ryan knows that hes lying like a rug. But its all theyve got.
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