"In the 1960s, there were fears that the US would be overtaken by the Soviet Union. I can still recall the late 1980s, when pundits insisted we needed an industrial policy to avoid being overtaken by Japan."
In the early 1980s, I moved out of research and into corporate work doing mainly regulatory affairs and drug safety in the biopharma industry. I was at an annual meeting of the biotechnology group where I worked and most of the speakers were covering a wide range of international issues (as an aside, I recommended we invite a very young Paul Krugman who came and gave a nice talk on international trade and economics). Clyde Prestowitz spoke at the meeting and at that time he was at the Commerce Dept in the Reagan administration and an outspoken "worrier" about Japan and gave a very gloomy talk about how Japan's industrial policy was endangering the US. While Japan was buying up a lot of US real estate, the economic takeover never happened. Nor is it like to happen with China either.
One more anecdote, though the actual reference must be somewhere in my paper archives. Japan's Ministry of International Trade and Industry was busy trying to set policy for companies. The relatively small motorcycle company, Honda, was starting to manufacture automobiles and the recommendation was for them to leave this sector to the then giants, Datsun and Toyota. The CEO ignored that advice and of course Honda became one of the premier auto manufacturers in the world.
The Ministry of International Trade and Industry actually prohibited Honda from exporting cars to the USA, using a regulation allowing exports only by makers who exported by a certain date. Honda beat the deadline by welding together golf carts (IIRC) sufficiently to meet the regulatory definition of a car, and shipping it over. Honda's Accord became the #1 selling car model in the USA.
I’ll continue shouting this from the rooftops wherever I read someone repeating that the sanctions on Russia are tough. They’re not. They’re highly targeted and circumscribed. If the phrase “secondary sanctions” doesn’t appear in a discussion of sanctions, then I know the author is unaware of by far the strongest tool in our sanctions arsenal. We are only gradually and belatedly beginning to use secondary sanctions.
Yes, but that supports my point. Economists are not good at predicting the effect of industrial policies. In March 2022, experts were almost unanimous in claiming that the sanctions would severely hurt Russia, even though secondary sanctions were not in place. In addition, there are significant political problems with sanctioning countries like Turkey and India.
In any case, Trump will soon be president and he'll hand Putin a victory.
Agreed. Just like with monetary policy, analysts see a “tightening” of sanctions (for example, as measured by number of sanctions) and think the sanctions are strict. Subsequently, if exports to Russia through third-party countries skyrocket, they mistakenly reason from a quantity change and conclude that sanctions don’t work without considering the significantly higher prices Russia is incurring:
There's been lately this talk about how controlling for sanctions makes Acemoglu's result about "democracy implies growth" go away. It's hard to square that with "sanction do not work" narrative.
I would not claim they have precisely zero effect. For instance, Russia is getting a lower price for its oil from India than it got before the sanctions.
Given the sex-divide between support for Trump and Harris, I could see a number of women saying that they will vote for Trump, or are undecided, as a safety measure, when actually they plan on voting for Harris.
I'm still thinking this will be the election when the prediction markets are proven to be fallible. Though it is a very stressful nailbiter. I'll feel gutted if a person guilty (in my mind) of at least two counts of felony murder of US citizens is elected to the presidency again.
Polls change their algorithms when they've been proven wrong. They underadjusted the last two times. There's no reason to think they'll continue underadjusting.
"As you can see, Trump’s margin with noncollege-educated white voters ended up being higher than the polls suggested. But his current 27-point advantage is almost equal with that 2020 result. "
And if you scroll down, the polls undercounted Biden's margin with black and hispanic voters.
"Given the sex-divide between support for Trump and Harris, I could see a number of women saying that they will vote for Trump, or are undecided, as a safety measure, when actually they plan on voting for Harris."
A lot of men will find it very difficult to find a woman to date or marry unless they have a lot of money. This will be the modern-day version of Lysistrata (Spike Lee's take on this in 'Chi-Raq' was quite compelling). Very few of Trump's male supporters are in any position to emulate him.
I was thinking more of already married women. If a woman feels any sort of even just potential threat from her husband or male partner she's far more likely to lie or fudge when responding to a poll.
"Distance, debt and voting for Donald Trump top the list of reasons singles looking for a relationship wouldn’t consider a potential partner"
By middle age the numbers of men and women are approximately equal. Over a population this should lead to an equal balance of interests. Prior to that, on average, it should prefer women's interests (with more males than females from birth until middle age). To the extent this isn't seen it is likely due to ingrained patriarchical power structures. (More men than women leads to dating and marriage society leaning toward women's average preferences, while more women than men lead to the opposite. Some wiggle room for the relative proportions of homosexual activity. And of course this varies based on milieu.)
Also, in some corners, some analysts were predicting that sanctions on Russia would erode the dollar’s status as a reserve currency. However, that prediction did not pan out.
And a city-state, and that makes almost every policy a de facto macroeconomic policy, with effects on imports and export.
Subsidize worker training, when many industries are exporters. Building industrial parks, land-forming the huge Jurong Island, for state-owned petro-chemical complexes built with state capital. Singapore-owned airport and airlines. Much more.
Singapore has a public policy of running permanent current account trade surpluses, and also of importing labor who live in barracks and similar conditions (the workers were ring-fenced in during the C19 hysteria).
Singapore is probably the most pro-business government on the planet and subsidizes business accordingly. This may be good idea, especially for a city-state.
Certainly, state-subsidized enterprise and protectionism has worked for Singapore.
However, Singapore, unlike most nations, is of a manageable size, and has a strong Han Chinese component. I am not sure the Singapore model would work in the US, due to political problems and the general unwieldy-ness of large nations. Likely not.
The US needs a simple fix, like higher general tariffs and border controls, but no industrial policy per se.
But anyone who thinks Singapore represents free trade or free enterprise is deeply deluded. Some right-wing think tanks say so, as it fits their narratives.
I actually agree that governments should be pro-business. Very pro-business, like Singapore.
But there is no such thing as global free, fair, or foul trade. Michael Pettis and Dani Rodrik are interesting scholars in this field.
International trade is always in large part an artifice of government regulations, taxes and subsidies.
“Does the field of foreign policy even have a model?” Well, Realism sort of does, but it’s a bad one.
Putin acts like Muscovite autocrats have been acting since before NATO, the founding of the US or even Anglo settlement of North America, and “Realists” tell us the problem was US policy and NATO expansion. NATO is the solution, not the problem. As the Swedes, Finns, Estonians, Latvians, Lithuanians and Poles have all rationally concluded.
Sanctions were way over-sold, and some of the Russian-phobic boycotts were stupid and counter-productive, but increasing the friction in Russian economic efforts is a reasonable way to help Ukraine.
There is a curious mixture of hubris and naivete when Westerners make foreign policy.
Plans to convert Iraq and Afghanistan into democracies, and constantly referring to various Islamo-fascists as "moderates."
Russia is Russia and not like Western Europe. China is China, and is not adapting Western values regarding human rights, free speech or even economic rights or models.
The idea that the Western liberal democracy is an ideal...is hardly universal.
Side point: The globalist commercial community is always Nevill Chamberlain. They always prefer peace and commerce (sensibly, from their point of view), regardless of human rights or impending threats. It was the same with the Nazis, pre-WWII.
Today the word is "escalation" whenever Ukraine or Israel take actions to defend themselves.
These are governments, not people. People have cultural preferences too, but we all, all of us, come from small tribes. Tribes in which a few may have dominated at times, but in which all members had to get along to some extent, had to be able to accept others speaking their piece.
You've got people in China and Russian pushing back against official statements and policy, and you've got people in the West bludgeoning people to get in line. It is all prehistoric tribal political variations writ large. There's nothing especially unique to Iraq/Afghanistan, Russia, China, or the West. The current status quo is merely just that, the status quo.
While there is certainly nothing wrong with trade deficits driven by marginal return on capital vs. available savings disparities - as was the case for Korea after embracing a market economy (and being dirt poor, hence low savings)- it is an entirely different matter when the trade deficit is driven by a fiscal deficit (mostly consumption). South korea did not have a (meaningful) government deficit in its high growth phase.
I am also puzzled by how the economist consensus is so sanguine about US growth when fiscal deficits are monstrous...
I completely agree that the US budget deficit is a big problem. I also agree that this might contribute to the trade deficit. But that doesn't make the trade deficit a separate problem--it's the budget deficit that is the problem.
Policy makers permit the nonprofessionals to preempt the field. Take the Senate Banking Committee Monetary Policy Report to the Senate in 1981:
"The Committee's admonition against short-run money supply fluctuations echoes the views of extreme monetarists such as Beryl Sprinkel, the Under-Secretary of the Treasury for Monetary Affairs. In testimony before the Joint Economic Committee, on April 8 Mr. Sprinkel recommended that the Federal Reserve completely ignore interest rates and focus exclusively on the adjusted monetary base or adjusted bank reserves. These extreme monetarist prescriptions would have a disastrous effect on our financial and economic system if they are taken seriously by the Federal Reserve."
And when they call for Pigou taxation of negative externalities and progressive taxation of consumption for redistribution, it's called mainstream economics. :)
Sumner's notion of "industrial policy" is far to expansive. It's basically just Pigou subsidization of positive externalities such as reduced risk of supply disruptions in wartime (Chips), and second best subsidies for zero CO2 emitting technologies so long as the negative eternality of the CO2 emission themselves are missing (IRA) and "infant exporter" subsidies when the subsidized industry is expected to become a world class exporter with a significant market share (Boeing). Of course firms just looking for old fashioned protectionism will they to call such favoritism "industrial policy" (US automakers).
But even for this reduces scope, Sumner's criticism are well taken as industrial policy is almost never expected according to theory.
Great summary of the arguments. Industrial policy takes many forms. Here in Scotland the disease is most virulent in the form argued by Mariana Mazzucato in the Entrepreneurial State - another undoubted expert!
Scott, I have a question about the argument that trade fosters peace. I should say first that I'm a big fan of trade and would like the argument to be true. I am not sure we can confidently say that it is. Sure, there is a correlation between trade and peace, but that could just be because warring nations do not trade with each other. Has anyone actually tried to establish the correlation is causal?
I don't know about empirical studies, but certainly trade provides at least some disincentive to invade other countries, relative to a no-trade economy. China is far more invested in (non-commodity) trade than Russia, and thus has more to lose from warfare.
Europe has become more peaceful since the EU was created.
The "trade leads to peace" argument is a museum-piece now.
Russia integrated with Europe more and more and more, and sold gas and oil...and then invaded Ukraine on a tyrant's whim. 600,000 dead and we are still counting. Trench warfare, with drones.
Ever since Tiananmen Square (1989), China has become more oppressive domestically, and more belligerent internationally, even as trade globally exploded.
Even Japan is arming up, facing the Beijing threat. Those two nations do a lot of trade.
Also, consider what trade might do...induce Western liberal democracies, dependent of China/Russia goods, to go the Neville Chamberlain route.
Certainly, the are powerful global businesses with connections into those two countries, just like certain international businesses wanted to keep working with the WWII Nazis....
But the globalists are far larger today and ever talking about "de-escalating." Which means standing down.
"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical."
Adam Smith got it right 250 years ago.
"But Olson reckoned very few goods, if any, are truly strategic."
Well, there is at least one truly strategic good: oil
You can't successfully prosecute a war of conquest without plentiful access to it. It's unfortunate that Russia has a lot of oil within its borders.
The people who are constantly telling us that China is a threat but seem silent about Russia, seem to forget this. China must import all of its oil and it knows this; they are very unlikely to be stupid enough start war in which they will be easily cutoff from the resource that would allow them to fight it. Russia on the other hand can fight wars of its choosing because no one can cut if off from its oil supply.
I've been arguing for some time that Russia is far more of a threat than China. I thought people would wake up with the Ukraine invasion, but when pundits have their minds made up, facts aren't enough to cause them to change their minds.
""The aging workforce is a very big problem in residential construction in a place like Pennsylvania," Metcalf said, adding that restrictive federal immigration policies have limited the construction workforce, which is disproportionately made up of immigrants." [Ben Metcalf, managing director of the Terner Center for Housing Innovation at UC Berkeley]
Perhaps wanting to preference high-skill immigration is an example of economists opining outside of their area of expertise?
I also favor more low skilled immigration. I mentioned high skilled in that passage you quote as I was trying to find common ground with industrial policy people on a few issues.
> Don’t do regional policies. Italy has proved beyond any doubt that they do not work. Do sound economic policy, and hope that these policies either help the region, help people move to better regions, or both.
What's the reasoning behind this one? I read, for example, that Texas is able to build more solar because it has less impeding regulation.
I was thinking of Italian federalization efforts, but googling the term, it seems to mean stuff like subsidies for regions made by the central government. Not an economist, sorry.
Is relative advantage an argument for country-level monopoly creation? As either this, or country-level export tariffs or minimum-pricing, would allow maximum extraction from relative advantage (hopefully without crossing the line that destroys the relative advantage).
"A uniform 10% import tariff and a uniform 10% export subsidy roughly offset, netting out to free trade. "
Can you expound on this, because I'm not picturing it.
"Research subsidies might help, but by far the surest way of encouraging innovation is to attract talented people and give them an economic system where innovation is rewarded."
Right now the US economic system encourages business formation and innovation from-and-through larger companies moreso than innovation from talented individuals (some exceptions exist, though these people are usually wealthy). How do we get an economic system that rewards outside of direct business formation by the innovator?
A subsidy is a negative tax. If you apply a subsidy and an equal tax it nets out to zero. This is standard tax theory--not really controversial. Recall that exports are the way we pay for imports.
It seems to me that some of these "large businesses" were started by innovative individuals. In general, government regulation of business favors large companies. So if you wish to level the playing field for smaller companies, cut government regulations.
So it still encourages exports over imports, but the net income result to the country is zero?
"So if you wish to level the playing field for smaller companies, cut government regulations."
Except the anti-trust ones. This is personal on my end as I'm not other-oriented enough to be a salesperson, and the qualities involved in sales are basically necessary to build a sustainable business enterprise. I should probably get over this, but I do wonder how many other relatively smart, or even brilliant, people are out there like me. I think in general we tend to dead-end as employees, with the smarter and more credentialed among us occasionally being group leaders, academics, or getting really lucky and getting employed in an R&D or skunkworks group.
A tariff discourages both imports and exports, to a roughly equal extent. An export subsidy encourages both imports and exports, to a roughly equal extent.
This is counter intuitive enough that it took a bit of thought to grasp, but I think I get it now. Over a long enough time, currency will tend toward equilibrium in trade, because it has to. It's just that most people don't think of China, for instance, as 'importing' T-bills (or other dollar denominated assets).
Even with a gold standard, too much of an imbalance in trade will either lead to no gold to buy with, making local exports cheaper, or an excess of gold, which causes country-level inflation, thus making imports cheaper even with the tariff.
Subsidize the exports and you're effectively imposing local inflation (by making the exported goods more expensive in your country relative to the export destination countries). This makes importing goods relatively cheaper. But tariff those imported goods by the same amount of the subsidy, and the net effect is just some local inflation, which the export subsidy also directly counteracts the effects of through the fact that it is a subsidy passing money into the local economy (inflation still occurs, but people don't feel it as their paychecks have increased by the same amount, on average).
"When these proposals involve a government takeover of the economy, they are called socialism or communism." Or fascism. Don't forget fascism. The economic aspect of fascism is popular with one of the political parties and it's not the one run by "literal Hitler."
Please show a quote, preferably with video to back it up, of who it was who called someone "literal Hitler".
Fascism: "A system of government marked by centralization of authority under a dictator, a capitalist economy subject to stringent governmental controls, violent suppression of the opposition, and typically a policy of belligerent nationalism and racism. "
I count four postulates, one of which is economic, and being as generous as possible to you I grant that one to the Democratic party. Again, being as generous as possible to you, I assign another two to the Republican party under Trump. So 2 to 1 in favor of Fascism being a better fit for Rs instead of Ds.
Meanwhile the definitions of Socialism and Communism are totally organized around economics, with maybe, at best, one other postulate relating to equality of people, depending on the type of Socialism or Communism. For this reason I think they are better terms to use when talking about economics.
"In the 1960s, there were fears that the US would be overtaken by the Soviet Union. I can still recall the late 1980s, when pundits insisted we needed an industrial policy to avoid being overtaken by Japan."
In the early 1980s, I moved out of research and into corporate work doing mainly regulatory affairs and drug safety in the biopharma industry. I was at an annual meeting of the biotechnology group where I worked and most of the speakers were covering a wide range of international issues (as an aside, I recommended we invite a very young Paul Krugman who came and gave a nice talk on international trade and economics). Clyde Prestowitz spoke at the meeting and at that time he was at the Commerce Dept in the Reagan administration and an outspoken "worrier" about Japan and gave a very gloomy talk about how Japan's industrial policy was endangering the US. While Japan was buying up a lot of US real estate, the economic takeover never happened. Nor is it like to happen with China either.
One more anecdote, though the actual reference must be somewhere in my paper archives. Japan's Ministry of International Trade and Industry was busy trying to set policy for companies. The relatively small motorcycle company, Honda, was starting to manufacture automobiles and the recommendation was for them to leave this sector to the then giants, Datsun and Toyota. The CEO ignored that advice and of course Honda became one of the premier auto manufacturers in the world.
Good comment. Back in the 1990s, Krugman did a great job exposing the fallacies of the neo-mercantalists.
The Ministry of International Trade and Industry actually prohibited Honda from exporting cars to the USA, using a regulation allowing exports only by makers who exported by a certain date. Honda beat the deadline by welding together golf carts (IIRC) sufficiently to meet the regulatory definition of a car, and shipping it over. Honda's Accord became the #1 selling car model in the USA.
I’ll continue shouting this from the rooftops wherever I read someone repeating that the sanctions on Russia are tough. They’re not. They’re highly targeted and circumscribed. If the phrase “secondary sanctions” doesn’t appear in a discussion of sanctions, then I know the author is unaware of by far the strongest tool in our sanctions arsenal. We are only gradually and belatedly beginning to use secondary sanctions.
https://www.ft.com/content/be8f3264-ac16-4fd9-b1ba-4e5e6fba466b
Yes, but that supports my point. Economists are not good at predicting the effect of industrial policies. In March 2022, experts were almost unanimous in claiming that the sanctions would severely hurt Russia, even though secondary sanctions were not in place. In addition, there are significant political problems with sanctioning countries like Turkey and India.
In any case, Trump will soon be president and he'll hand Putin a victory.
Agreed. Just like with monetary policy, analysts see a “tightening” of sanctions (for example, as measured by number of sanctions) and think the sanctions are strict. Subsequently, if exports to Russia through third-party countries skyrocket, they mistakenly reason from a quantity change and conclude that sanctions don’t work without considering the significantly higher prices Russia is incurring:
http://jpkoning.blogspot.com/2024/10/a-glass-half-full-take-on-caucasus.html?m=1
There's been lately this talk about how controlling for sanctions makes Acemoglu's result about "democracy implies growth" go away. It's hard to square that with "sanction do not work" narrative.
I would not claim they have precisely zero effect. For instance, Russia is getting a lower price for its oil from India than it got before the sanctions.
Given the sex-divide between support for Trump and Harris, I could see a number of women saying that they will vote for Trump, or are undecided, as a safety measure, when actually they plan on voting for Harris.
I'm still thinking this will be the election when the prediction markets are proven to be fallible. Though it is a very stressful nailbiter. I'll feel gutted if a person guilty (in my mind) of at least two counts of felony murder of US citizens is elected to the presidency again.
In the two other elections Trump was significantly underestimated by the polls, but surely this election he's overestimated.
Polls change their algorithms when they've been proven wrong. They underadjusted the last two times. There's no reason to think they'll continue underadjusting.
They did indeed change in 2020, to little effect.
https://www.nbcnews.com/politics/2024-election/steve-kornacki-polls-off-2020-trump-biden-harris-rcna176619
"As you can see, Trump’s margin with noncollege-educated white voters ended up being higher than the polls suggested. But his current 27-point advantage is almost equal with that 2020 result. "
And if you scroll down, the polls undercounted Biden's margin with black and hispanic voters.
"Given the sex-divide between support for Trump and Harris, I could see a number of women saying that they will vote for Trump, or are undecided, as a safety measure, when actually they plan on voting for Harris."
A lot of men will find it very difficult to find a woman to date or marry unless they have a lot of money. This will be the modern-day version of Lysistrata (Spike Lee's take on this in 'Chi-Raq' was quite compelling). Very few of Trump's male supporters are in any position to emulate him.
I was thinking more of already married women. If a woman feels any sort of even just potential threat from her husband or male partner she's far more likely to lie or fudge when responding to a poll.
From August 2020: https://www.pewresearch.org/short-reads/2020/08/20/key-takeaways-on-americans-views-of-and-experiences-with-dating-and-relationships/
"Distance, debt and voting for Donald Trump top the list of reasons singles looking for a relationship wouldn’t consider a potential partner"
By middle age the numbers of men and women are approximately equal. Over a population this should lead to an equal balance of interests. Prior to that, on average, it should prefer women's interests (with more males than females from birth until middle age). To the extent this isn't seen it is likely due to ingrained patriarchical power structures. (More men than women leads to dating and marriage society leaning toward women's average preferences, while more women than men lead to the opposite. Some wiggle room for the relative proportions of homosexual activity. And of course this varies based on milieu.)
Also, in some corners, some analysts were predicting that sanctions on Russia would erode the dollar’s status as a reserve currency. However, that prediction did not pan out.
Good point.
Singapore is a dirigiste economy.
And a city-state, and that makes almost every policy a de facto macroeconomic policy, with effects on imports and export.
Subsidize worker training, when many industries are exporters. Building industrial parks, land-forming the huge Jurong Island, for state-owned petro-chemical complexes built with state capital. Singapore-owned airport and airlines. Much more.
Singapore has a public policy of running permanent current account trade surpluses, and also of importing labor who live in barracks and similar conditions (the workers were ring-fenced in during the C19 hysteria).
Singapore is probably the most pro-business government on the planet and subsidizes business accordingly. This may be good idea, especially for a city-state.
Certainly, state-subsidized enterprise and protectionism has worked for Singapore.
However, Singapore, unlike most nations, is of a manageable size, and has a strong Han Chinese component. I am not sure the Singapore model would work in the US, due to political problems and the general unwieldy-ness of large nations. Likely not.
The US needs a simple fix, like higher general tariffs and border controls, but no industrial policy per se.
But anyone who thinks Singapore represents free trade or free enterprise is deeply deluded. Some right-wing think tanks say so, as it fits their narratives.
I actually agree that governments should be pro-business. Very pro-business, like Singapore.
But there is no such thing as global free, fair, or foul trade. Michael Pettis and Dani Rodrik are interesting scholars in this field.
International trade is always in large part an artifice of government regulations, taxes and subsidies.
“Does the field of foreign policy even have a model?” Well, Realism sort of does, but it’s a bad one.
Putin acts like Muscovite autocrats have been acting since before NATO, the founding of the US or even Anglo settlement of North America, and “Realists” tell us the problem was US policy and NATO expansion. NATO is the solution, not the problem. As the Swedes, Finns, Estonians, Latvians, Lithuanians and Poles have all rationally concluded.
Sanctions were way over-sold, and some of the Russian-phobic boycotts were stupid and counter-productive, but increasing the friction in Russian economic efforts is a reasonable way to help Ukraine.
There is a curious mixture of hubris and naivete when Westerners make foreign policy.
Plans to convert Iraq and Afghanistan into democracies, and constantly referring to various Islamo-fascists as "moderates."
Russia is Russia and not like Western Europe. China is China, and is not adapting Western values regarding human rights, free speech or even economic rights or models.
The idea that the Western liberal democracy is an ideal...is hardly universal.
Side point: The globalist commercial community is always Nevill Chamberlain. They always prefer peace and commerce (sensibly, from their point of view), regardless of human rights or impending threats. It was the same with the Nazis, pre-WWII.
Today the word is "escalation" whenever Ukraine or Israel take actions to defend themselves.
These are governments, not people. People have cultural preferences too, but we all, all of us, come from small tribes. Tribes in which a few may have dominated at times, but in which all members had to get along to some extent, had to be able to accept others speaking their piece.
You've got people in China and Russian pushing back against official statements and policy, and you've got people in the West bludgeoning people to get in line. It is all prehistoric tribal political variations writ large. There's nothing especially unique to Iraq/Afghanistan, Russia, China, or the West. The current status quo is merely just that, the status quo.
Scott,
Not sure I buy your trade deficit argument.
While there is certainly nothing wrong with trade deficits driven by marginal return on capital vs. available savings disparities - as was the case for Korea after embracing a market economy (and being dirt poor, hence low savings)- it is an entirely different matter when the trade deficit is driven by a fiscal deficit (mostly consumption). South korea did not have a (meaningful) government deficit in its high growth phase.
I am also puzzled by how the economist consensus is so sanguine about US growth when fiscal deficits are monstrous...
I completely agree that the US budget deficit is a big problem. I also agree that this might contribute to the trade deficit. But that doesn't make the trade deficit a separate problem--it's the budget deficit that is the problem.
Policy makers permit the nonprofessionals to preempt the field. Take the Senate Banking Committee Monetary Policy Report to the Senate in 1981:
"The Committee's admonition against short-run money supply fluctuations echoes the views of extreme monetarists such as Beryl Sprinkel, the Under-Secretary of the Treasury for Monetary Affairs. In testimony before the Joint Economic Committee, on April 8 Mr. Sprinkel recommended that the Federal Reserve completely ignore interest rates and focus exclusively on the adjusted monetary base or adjusted bank reserves. These extreme monetarist prescriptions would have a disastrous effect on our financial and economic system if they are taken seriously by the Federal Reserve."
Wasn't Volcker supposed to be targeting reserves?
And when they call for Pigou taxation of negative externalities and progressive taxation of consumption for redistribution, it's called mainstream economics. :)
Sumner's notion of "industrial policy" is far to expansive. It's basically just Pigou subsidization of positive externalities such as reduced risk of supply disruptions in wartime (Chips), and second best subsidies for zero CO2 emitting technologies so long as the negative eternality of the CO2 emission themselves are missing (IRA) and "infant exporter" subsidies when the subsidized industry is expected to become a world class exporter with a significant market share (Boeing). Of course firms just looking for old fashioned protectionism will they to call such favoritism "industrial policy" (US automakers).
But even for this reduces scope, Sumner's criticism are well taken as industrial policy is almost never expected according to theory.
Great summary of the arguments. Industrial policy takes many forms. Here in Scotland the disease is most virulent in the form argued by Mariana Mazzucato in the Entrepreneurial State - another undoubted expert!
Scott, I have a question about the argument that trade fosters peace. I should say first that I'm a big fan of trade and would like the argument to be true. I am not sure we can confidently say that it is. Sure, there is a correlation between trade and peace, but that could just be because warring nations do not trade with each other. Has anyone actually tried to establish the correlation is causal?
I don't know about empirical studies, but certainly trade provides at least some disincentive to invade other countries, relative to a no-trade economy. China is far more invested in (non-commodity) trade than Russia, and thus has more to lose from warfare.
Europe has become more peaceful since the EU was created.
The "trade leads to peace" argument is a museum-piece now.
Russia integrated with Europe more and more and more, and sold gas and oil...and then invaded Ukraine on a tyrant's whim. 600,000 dead and we are still counting. Trench warfare, with drones.
Ever since Tiananmen Square (1989), China has become more oppressive domestically, and more belligerent internationally, even as trade globally exploded.
Even Japan is arming up, facing the Beijing threat. Those two nations do a lot of trade.
Also, consider what trade might do...induce Western liberal democracies, dependent of China/Russia goods, to go the Neville Chamberlain route.
Certainly, the are powerful global businesses with connections into those two countries, just like certain international businesses wanted to keep working with the WWII Nazis....
But the globalists are far larger today and ever talking about "de-escalating." Which means standing down.
Putin and Xi are rotten to the core.
This perhaps does not quite count as a model of foreign policy, but it is a pattern.
https://hwfo.substack.com/p/global-peace-by-us-president
"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical."
Adam Smith got it right 250 years ago.
"But Olson reckoned very few goods, if any, are truly strategic."
Well, there is at least one truly strategic good: oil
You can't successfully prosecute a war of conquest without plentiful access to it. It's unfortunate that Russia has a lot of oil within its borders.
The people who are constantly telling us that China is a threat but seem silent about Russia, seem to forget this. China must import all of its oil and it knows this; they are very unlikely to be stupid enough start war in which they will be easily cutoff from the resource that would allow them to fight it. Russia on the other hand can fight wars of its choosing because no one can cut if off from its oil supply.
I've been arguing for some time that Russia is far more of a threat than China. I thought people would wake up with the Ukraine invasion, but when pundits have their minds made up, facts aren't enough to cause them to change their minds.
" I favor trade sanctions on Russia, a carbon tax to address global warming, more high skilled immigration to help our tech industries. "
How about low-skilled immigration as well? https://www.businessinsider.com/arizona-pennsylvania-swing-state-home-prices-surge-housing-shortage-2024-10
""The aging workforce is a very big problem in residential construction in a place like Pennsylvania," Metcalf said, adding that restrictive federal immigration policies have limited the construction workforce, which is disproportionately made up of immigrants." [Ben Metcalf, managing director of the Terner Center for Housing Innovation at UC Berkeley]
Perhaps wanting to preference high-skill immigration is an example of economists opining outside of their area of expertise?
I also favor more low skilled immigration. I mentioned high skilled in that passage you quote as I was trying to find common ground with industrial policy people on a few issues.
> Don’t do regional policies. Italy has proved beyond any doubt that they do not work. Do sound economic policy, and hope that these policies either help the region, help people move to better regions, or both.
What's the reasoning behind this one? I read, for example, that Texas is able to build more solar because it has less impeding regulation.
I agree about Texas, not sure how that relates to the Italy comment.
I was thinking of Italian federalization efforts, but googling the term, it seems to mean stuff like subsidies for regions made by the central government. Not an economist, sorry.
Is relative advantage an argument for country-level monopoly creation? As either this, or country-level export tariffs or minimum-pricing, would allow maximum extraction from relative advantage (hopefully without crossing the line that destroys the relative advantage).
"A uniform 10% import tariff and a uniform 10% export subsidy roughly offset, netting out to free trade. "
Can you expound on this, because I'm not picturing it.
"Research subsidies might help, but by far the surest way of encouraging innovation is to attract talented people and give them an economic system where innovation is rewarded."
Right now the US economic system encourages business formation and innovation from-and-through larger companies moreso than innovation from talented individuals (some exceptions exist, though these people are usually wealthy). How do we get an economic system that rewards outside of direct business formation by the innovator?
A subsidy is a negative tax. If you apply a subsidy and an equal tax it nets out to zero. This is standard tax theory--not really controversial. Recall that exports are the way we pay for imports.
It seems to me that some of these "large businesses" were started by innovative individuals. In general, government regulation of business favors large companies. So if you wish to level the playing field for smaller companies, cut government regulations.
So it still encourages exports over imports, but the net income result to the country is zero?
"So if you wish to level the playing field for smaller companies, cut government regulations."
Except the anti-trust ones. This is personal on my end as I'm not other-oriented enough to be a salesperson, and the qualities involved in sales are basically necessary to build a sustainable business enterprise. I should probably get over this, but I do wonder how many other relatively smart, or even brilliant, people are out there like me. I think in general we tend to dead-end as employees, with the smarter and more credentialed among us occasionally being group leaders, academics, or getting really lucky and getting employed in an R&D or skunkworks group.
A tariff discourages both imports and exports, to a roughly equal extent. An export subsidy encourages both imports and exports, to a roughly equal extent.
This is counter intuitive enough that it took a bit of thought to grasp, but I think I get it now. Over a long enough time, currency will tend toward equilibrium in trade, because it has to. It's just that most people don't think of China, for instance, as 'importing' T-bills (or other dollar denominated assets).
Even with a gold standard, too much of an imbalance in trade will either lead to no gold to buy with, making local exports cheaper, or an excess of gold, which causes country-level inflation, thus making imports cheaper even with the tariff.
Subsidize the exports and you're effectively imposing local inflation (by making the exported goods more expensive in your country relative to the export destination countries). This makes importing goods relatively cheaper. But tariff those imported goods by the same amount of the subsidy, and the net effect is just some local inflation, which the export subsidy also directly counteracts the effects of through the fact that it is a subsidy passing money into the local economy (inflation still occurs, but people don't feel it as their paychecks have increased by the same amount, on average).
"When these proposals involve a government takeover of the economy, they are called socialism or communism." Or fascism. Don't forget fascism. The economic aspect of fascism is popular with one of the political parties and it's not the one run by "literal Hitler."
Please show a quote, preferably with video to back it up, of who it was who called someone "literal Hitler".
Fascism: "A system of government marked by centralization of authority under a dictator, a capitalist economy subject to stringent governmental controls, violent suppression of the opposition, and typically a policy of belligerent nationalism and racism. "
I count four postulates, one of which is economic, and being as generous as possible to you I grant that one to the Democratic party. Again, being as generous as possible to you, I assign another two to the Republican party under Trump. So 2 to 1 in favor of Fascism being a better fit for Rs instead of Ds.
Meanwhile the definitions of Socialism and Communism are totally organized around economics, with maybe, at best, one other postulate relating to equality of people, depending on the type of Socialism or Communism. For this reason I think they are better terms to use when talking about economics.
JD Vance??
https://www.reuters.com/world/us/jd-vance-once-compared-trump-hitler-now-they-are-running-mates-2024-07-15/
:)
Ha ha!
I don't think Netherlands are much better than Germany or Ireland much better than Britain.
They are rated more free market.
Sure, but I don't think they're richer.
Netherlands is clearly richer than Germany. With Ireland, I suppose you can argue about measurement issues involving multinationals.
Easy to check on data.worldbank.org:
Country Most Recent Year Most Recent Value (gdp/capita)
Germany 2023 52,745.8
Netherlands 2023 62,536.7
Ireland 2023 103,684.9
United Kingdom 2023 48,866.6