Sunday, June 26, 2016

The elusive upside of Brexit

By James Pethokoukis of AEI.
"One reason, some free-marketeers have argued, that Britain needed to vote to leave the EU was to escape big government Brussels. If Brexit, then no longer would Britain be “a serf-nation under the European yoke, [it] gains control of its economy and sweeps away the burdens of regulation and tax.”

But then I bounced over to the Index of Economic Freedom to see what it had to say about the UK. Not only did it rank #10, just ahead of the US, but also there’s this glowing report:
Economic freedom has been on an upward path in the United Kingdom over the past five years. … Disciplined fiscal adjustments have helped to restore economic dynamism, steadily reducing the budget deficit. The corporate tax has been cut from 28 percent to 20 percent. … With an effectively institutionalized legal system that enforces the rule of law and guarantees security of contracts, the U.K. is able to benefit fully from open-market policies and a relatively efficient regulatory environment. The labor market is well developed and vibrant. …
Since 2010, the U.K. has experienced the strongest growth in the G20 thanks to the performance of its three main economic sectors: services, manufacturing, and construction. Unemployment is at a six-year low, and retail sales are robust. … Corruption is not a major problem, although a few high-profile scandals have damaged political reputations in both major parties. The 2011 Bribery Act is considered one of the world’s most sweeping anti-bribery laws. The rule of law is well established within an independent legal framework. Private property rights and contracts are very secure, and the court system is efficient. Protection of intellectual property rights is effective. … The efficient and transparent regulatory framework encourages entrepreneurship. With no minimum capital required, it takes less than a week to establish a business. The labor market is relatively flexible. … EU members have a 1 percent average tariff rate. Trade agreements are currently being negotiated with countries that include the United States and Japan. The United Kingdom generally treats foreign and domestic investors equally under the law. The overall stability of the financial system has been restored. The banking sector is highly competitive and offers a wide range of financial services.
I see. So, not Hong Kong on the Thames, but also not so bad. The Leave campaign also promised — perhaps now revoked — to spent the money now sent to Brussels on the National Health Service. Hmm."

Krugman Might Be Wrong On Multipliers

See On the Alesina Hypothesis by Greg Mankiw. He responded to something Krugman said about an article that Mankiw wrote in the NY Times last Sunday. First an excerpt from that article. Then the more recent post from Mankiw.
"When Barack Obama took office in 2009, the economy was in the midst of the Great Recession. President Obama’s advisers relied on standard Keynesian theory when they proposed a large increase in government spending to energize the economy. The stimulus package was the administration’s first economic policy initiative. As the economy recovered, the administration supported tax increases to shrink the budget deficit.

But even at the time, there were reasons to doubt this approach. A 2002 study of United States fiscal policy by the economists Olivier Blanchard and Roberto Perotti found that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending.” They noted that this finding is “difficult to reconcile with Keynesian theory.”
Consistent with this, a more recent study of international data by the economists Alberto Alesina and Silvia Ardagna found that “fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases.”"
Now the newer post:
"In my  recent NY Times article, I explored several hypotheses to explain slow growth. One was based on work by Alberto Alesina and Silvia Ardagna suggesting that the standard Keynesian view of tax and spending multipliers is inconsistent with the international evidence. 

Paul Krugman says the Alesina-Ardagna work has been "refuted."  Nothing could be further from the truth.  See this recent paper by Alesina, Favero, and Giovazzi on fiscal consolidations, which reports evidence consistent with the earlier work and is forthcoming in the peer-reviewed Journal of International Economics.  (By the way, this work is also consistent with the Romers' finding of large tax multipliers, much larger than the literature finds for spending multipliers.)

To be sure, these issues continue to be debated. Remember: My piece was presenting hypotheses about what has been happening in the economy, not taking a stand about which one is right. From my perspective, the Alesina work suggests a still plausible hypothesis."

Some commentary on Brexit: Let’s ‘raise a glass to freedom’

From Mark Perry.
"There has been a lot of media and pundit commentary about Brexit, here’s a roundup of some comments that I think are especially interesting and illuminating:

1. John Bolton writing in the Boston Globe, “Brexit Victory Is a True Populist Revolt” (emphasis mine):
During 43 years of British EU membership, UK citizens came increasingly to believe they were losing control over those governing them. Decisions were made in an utterly opaque EU bureaucracy, with British interests routinely overwhelmed by those of other EU members, especially Germany. Nonpartisan analyses concluded that approximately 60 percent of all legislation enacted by Britain’s Parliament was dictated, in whole or in part, by decisions already breached by Brussels bureaucrats or EU diplomats.
The outcome was a true populist revolt. Only a few members of the elite supported Brexit, but the middle class was overwhelmingly in favor. The dispositive margin of victory, however, came not from the ranks of “the nation of shopkeepers,” but from blue collar, trade union members.
Immediately, the United States should do everything we can, politically and economically, to come to the side of our strongest ally in the world. Contrary to President Obama’s threat during his recent visit to London, Washington should put a bilateral US-UK free trade agreement at the very front of our diplomatic agenda. But most of all, we should welcome Britain’s departure from the EU. Happy Independence Day!
2. Megan McArdle writing in Bloomberg‘Citizens of the World’? Nice Thought, But …“:
The inability of those elites to grapple with the rich world’s populist moment was in full display on social media last night. Journalists and academics seemed to feel that they had not made it sufficiently clear that people who oppose open borders are a bunch of racist rubes who couldn’t count to 20 with their shoes on, and hence will believe any daft thing they’re told.
Or perhaps they were just unable to grasp that nationalism and place still matter, and that elites forget this at their peril. A lot people do not view their country the way some elites do: as though the nation were something like a rental apartment — a nice place to live, but if there are problems, or you just fancy a change, you’ll happily swap it for a new one.
In many ways, members of the global professional class have started to identify more with each other than they have with the fellow residents of their own countries. Witness the emotional meltdown many American journalists have been having over Brexit. Well, here’s one journalist who is not having a meltdown.
3. Matt Ridley writing in the Wall Street Journal, “The Business Case for Brexit“:
The EU is also against free trade. It says it isn’t, but its actions speak louder. The EU has an external tariff that deters African farmers from exporting their produce to us, helping to perpetuate poverty there, while raising prices in Europe. The EU confiscated Britain’s right to sign trade agreements—though we were the nation that pioneered the idea of unilateral free trade in the 1840s. All the trade agreements that the EU has signed are smaller, as measured by the trading partners’ GDP, than the agreements made by Chile, Singapore or Switzerland. Those the EU has signed usually exclude services, Britain’s strongest sector, and are more about regulations to suit big companies than the dismantling of barriers.
Even worse than in Westminster or Washington, the corridors of Brussels are crawling with lobbyists for big companies, big banks and big environmental pressure groups seeking rules that work as barriers to entry for smaller firms and newer ideas.
4. Brian Wesbury writing for First Trust PortfoliosBrexit is Freedom“:
The bottom line is that investors should ignore scare stories about what would happen if Brexit wins. Great Britain runs consistent trade deficits with the rest of Europe.Regardless of what foreign leaders say before the vote, if the British vote to leave, the rest of the EU is going to chase them to the ends of the earth. No way will they allow one of their biggest export markets to become more distant. They will beg the UK to sign a free trade deal. In addition, and this is actually great economic news, it would free the US and UK to sign a free trade deal that the EU is now holding up. Any market volatility would be short – lived and any swing to the downside would be a buying opportunity. Brexit is not a reason to sell. In fact, freedom is a good thing.
5. Tim Carney, writing in the Washington Examiner, “In the U.K.’s Tribal Battle, the Cosmopolitan Elite Tribe Just Lost“:
The EU moved political power further away from home. More power, more concentrated, benefited the tribes of cosmopolitan elites — whose tribal bonds were Twitter, Facebook, journalism and education.
The EU took power from the tribes that were more based on place and language and history. These latter tribes had been largely deprived of their ability to shape the world around them. The elite tribes, on the other hand, had actually seen their political capacities multiplied.
Now the elites of the continent have lost some power to change the UK, and the elites of the UK have lost some power to shape the continent. Meanwhile, the populace, by bringing power closer to home, has regained some of the power it naturally ought to have.
6. Michael Goodwin writing in the New York Post, “Britain’s Vote for Freedom Proves Power is with the People“:
The world is coming full circle because now it’s the Brits who are free. It took them a while, but they finally had their own Tea Party and their own revolution. I salute them for their courage. And I raise a glass to freedom.
This is Western democracy in all its grandeur. It refreshes itself not with the blood of innocents, but with the peaceful passion of ordinary people.
That’s the beauty of Brexit, and of grand old England. The people spoke, they were heard, and the wheel of history is turning. Let’s get on with it. Raise another glass to freedom."

Saturday, June 25, 2016

Taking the Low Road on Free Trade

By Chris Baecker at FEE. He manages fixed assets for Pioneer Energy Services and is an adjunct lecturer of economics at Northwest Vista College in San Antonio. Excerpts:
"Why threaten the American consumer with price hikes? Why not, for example, allow domestic steel-input consumers to benefit from rock-bottom prices that result from Chinese overproduction? How does it make sense to protect the American steel industry with a tariff of more than 500% if employment in, and value produced by, those input consumers is greater?

The answer also happens to explain why we’re lagging behind the rest of the world in the sugar trade: concentrated benefits (domestic industry) vs. dispersed costs (artificially inflated prices for consumers). Such beneficiaries typically have more clout with policymakers than consumers do. It’s this kind of rent-seeking that prevents us from being able to take advantage of the shortcomings of a centrally-planned (though certainly less so than a couple generations ago) economy like China’s, or the fact that some countries just flat out produce something more efficiently than we do.
Ironically enough, if Mr. Trump is so concerned with illegal immigration from our south, perhaps he should first take a look at the agricultural and dairy subsidies Uncle Sam doles out that put Mexican farmers out of business and drive them north to get a piece of our artificially- inflated industry."

"after the war, the world moved toward freer trade. In that time, our real exports of goods and services rose steadily, accelerating in the mid-1980s, belying the claim that “we don’t make” stuff.
 Real Exports of Goods and Services

As Harvard professor and former Chairman of the President’s Council of Economic Advisers Greg Mankiw recently pointed out in The New York Times, manufacturing is currently at an all-time high. The problem, as it were, is that we’re doing it with less manpower."

That very transformation is currently underway in the energy industry. Even after the price of oil started tanking, and rigs were idled, and jobs were being eliminated, production still increased. We became more efficient. It won’t take the same quantity of capital and labor to respond to $50 oil the next time it rises to that level. The displaced resources can be redeployed to other areas of the economy.  

There are undoubtedly industry shakeups in freer markets. Labor, capital, and entrepreneurs are reshuffled. But our society encourages innovation by safeguarding intellectual and property rights. That allows us to find new and better ways of doing things."

Nevertheless, more trade liberalization is afoot. My industry has a new market: the rest of the world, thanks to the repeal of the oil export ban last December. That’ll surely alleviate something else nearly all our leaders are prone to complain about: our trade deficit.

Current Account Balance for the United States

It’s a curious thing that you rarely hear that it’s actually only half of an equation, but it is.
The balance of payments (BoP) is basically an accounting of our international transactions. The current account (trade) is the one we always hear about when it’s in deficit. Interestingly enough, it tends to trend back toward break-even only when we’re heading toward recession. It makes sense that imports rise in good times. “We’re Americans,” I tell my students, “we like to buy stuff. We like to buy stuff so much, we rent storage facilities in which to put all our extra stuff!” Regardless, there’s nothing inherently wrong with a trade deficit.
The counterbalance is the capital account. We have a big example of that in our backyard: the Toyota plant in south San Antonio. This is foreign direct investment. That plant is in the heart of truck country. It gives Toyota direct access to that market here. And, they employ highly-skilled Texans. That seems like a win-win, a sign of strength perhaps, when a foreign company wants to locate operations here.

Foreign Investment into the USA
You actually contribute to the capital account when you crack open a Bud Light after feeding Purina to Scooby, who was hungry because you forgot to feed him while you were eating a Smithfield ham steak (that had been stored in a GE freezer) for dinner before going to see “X-Men: Apocalypse” at the AMC Rivercenter 11. All those companies are foreign-owned. The profit portion of the prices paid for those goods is exported to another country. Foreign entities saw value in the brand recognition of items Americans know and love. And they were able to buy those companies in part because they do more of something that we don’t: save.
When the consumer expenditure portion of the Gross Domestic Product [GDP] started climbing in the 1980s from 60% to almost 70% today, it was arguably fueled by the concurrent proliferation of the all-purpose credit card. Perhaps it goes without saying, but when you’re spending, you’re not saving. And when you’re borrowing, you are dissaving. Much of the consumer savings derived from more efficient global production of goods could go to more savings. Instead, it seems to go toward buying more stuff.

Consumer Credit

When you think about it though, our incentive to save has slid right alongside available interest rates.

Federal Fund Rate

A couple years after they were pushed way up to break the inflation of the 1970s, interest rates have been on a steady march downward: ~7-8% in 1980s, ~5% in the 1990s, half that in the 2000s, and now near 0%. Monetary policy that could be enticing us to invest in learning new skills, opening a new business, guarding against unforeseen events, etc., instead has nudged us toward $1,000,000,000,000 in both credit card and automobile debt this year. What was the current trade deficit again?

If bringing down the trade deficit is the goal, increasing domestic savings and investment is preferable to erecting trade barriers. And if curbing interest-bearing consumer indebtedness happens as well, all the better."

Professor rejects Marxism after traveling the globe: ‘Socialism doesn’t work’

By Kate Hardiman, writing for The College Fix. She is a student at University of Notre Dame. 
"At least one professor in America does not feel the Bern.

University of Massachusetts Dartmouth Professor Jack Stauder says his political and ideological conversion away from socialism and Marxism occurred when he actually witnessed these systems in action.

After traveling to more than 110 countries to pursue various forms of research, notably cultural anthropology, Stauder described his conversion from Marxism as a process of disillusionment.

“I gradually became disenchanted with Marxism by visiting many of the countries that had tried to shape their societies to conform to its doctrines. I was disillusioned by the realities I saw in … socialist countries – the USSR, Eastern Europe, China, Cuba, etc,” Stauder told The College Fix via email.
“I came to recognize that socialism doesn’t work, and that its ‘revolutionary’ imposition inevitably leads to cruelty, injustice and the loss of freedom,” the professor continued.

“I could see the same pattern in the many failed left-wing revolutions of Latin America and elsewhere. By combining actual travel with the historical study of socialism and revolution, I succeeded in disabusing myself of the utopian notions that fatally attract people to leftist ideas.”

Re-embracing his Western farming and ranching homes of Colorado and New Mexico also helped solidify Stauder’s rejection of leftist ideals, he said.

“Returning to my roots also helped my transition away from the leftist ideology that exists in the intellectual atmosphere of university life,” Stauder noted. “By spending my summers in the Southwest in the company of rural working people, farmers and ranchers, I developed perspectives on the real world very different from those that prevail in the academic world.”

Academic institutions are breeding grounds for leftist ideals, according to Stauder, as “academics in general are intellectuals, and hence susceptible to ideologies.”

“People seem to feel the need to believe in something, and when intellectuals abandon traditional religion, as most have done, they tend to seek substitutes,” he said.

Political campus movements against the Vietnam war in the 1960s and 1970s inspired Stauder’s initial interest in leftist political ideals. For many years, he identified as a Marxist and a radical.

These protests were common and influential on the campuses where he studied and worked, notably that of Harvard College. There, Stauder began his undergraduate career studying American history and literature and eventually switched to cultural anthropology after working with a Maya community in Chiapas, Mexico. This experience inspired him to pursue a Ph.D. in anthropology at Cambridge University in England.

Stauder’s most recent research bridges anthropology and ecology and he recently published The Blue and the Green: A Cultural Ecological History of an Arizona Ranching Community.

When asked about the current bias in academia, Stauder pointed to the overwhelming amount of research confirming a leftist bias.

“Academia has developed its own culture, a subset of the wider elite culture of the ‘new upper class’ (see Charles Murray, Coming Apart). As in all cultures, pressures exist to conform one’s thoughts and actions, and those who do not conform tend to be marginalized or suppressed,” Stauder said.

Though it may be challenging, Stauder encourages professors simply to “be individuals. Seek the truth, and stand by it.”"

Friday, June 24, 2016

Election Uncertainty Takes Toll on Business: About one-third of small firms’ owners report negative impact, according to survey

By Ruth Simon of the WSJ. Excerpts:
"the uncertainty that many small-business owners say is weighing on their operations.

Roughly one-third of 715 small-business owners surveyed in June by The Wall Street Journal and Vistage Worldwide Inc. said that uncertainty related to the November presidential election is having a negative impact on their business. Firms have reported delaying hiring, putting off investments or reducing new equipment orders."

"Overall business investment has already slowed. Nonresidential fixed investment has fallen for the last two consecutive quarters, according to the Commerce Department, the first back-to-back quarterly drops since 2009.

Companies typically pull back on capital investment and hiring ahead of an election, while consumers scale back purchases of durable goods and higher-priced items, said Brandon Julio, an assistant professor of finance at the University of Oregon Lundquist College of Business. Small businesses are more likely to be skittish because they face a higher cost of capital than larger firms and often have more trouble recovering from mistakes, he said."

"Overall, small-business confidence in June fell to its lowest level since November 2012, reversing all of the gains of the previous three months, according to the WSJ-Vistage Survey."

"Some big companies are also pointing to political uncertainty as a drag on business. High-end retailers Neiman Marcus Group Inc. and Tiffany & Co. have in recent months cited the presidential election as weighing on their shoppers."

The world would be 7% poorer if it reverted to the trade rules of the 1930s

See Brexit’s Real Impact Would Be Gradual and Global: If Britain leaves the EU it will set back the economic benefits from decadeslong push for global integration by Gregg Ip of the WSJ. Excerpts:
"the economic rationale for integration. It increases the size of the market, exposes local firms to more competition and accelerates the dissemination of new ideas via foreign investment and immigration. In 2004, academic economists Scott Bradford and Robert Lawrence estimated the world would be 7% poorer if it reverted to the trade rules of the 1930s.

The British economy was declining relative to France’s and Germany’s until it joined the EU in 1973. Margaret Thatcher became prime minister in 1979 and began loosening the state’s grip on the economy. Since then, Britain’s per capita income has grown as fast, or faster, than France’s and Germany’s."

"Critics say global integration enriches elites at the expense of the average worker. This, too, is off base. More skilled workers have gained disproportionately, but every worker is also a consumer and thus benefits when international competition makes products better and cheaper. Doug Irwin, a trade historian at Dartmouth College, says if two million American workers lose $15,000 in annual income forever—an extreme estimate of the impact of trade with China—while 320 million American consumers gain just $100 from trade, the benefits to all of society still exceed the costs.

Even immigration is, on balance, probably a plus. The Center for Economic Performance at the London School of Economics finds that EU immigrants to Britain are better educated and more likely to work than UK-born nationals, and to pay more in taxes than they collect in benefits."

"Spreading production among more plants may protect a company from protectionist impulses, but it also reduces productivity and raises costs for its customers. Multiplied across many countries and companies, the effects add up. Gary Hufbauer, an economist at the Peterson Institute for International Economics, thinks the slowdown in global trade growth since 2010, which he blames in part on protectionism, has left world GDP 2.7% smaller than otherwise."