Economic Doctors Have Misdiagnosed the Economy

Real Clear Markets ^ | November 15, 2016 | Ray Keating

[expat_panama]

Too often, when listening to politicians talk about what ails our economy, I feel like I'm watching a television medical drama. And I don't like doctor and hospital TV shows.

It's a faulty formula. Early in the hour, a patient shows up in dire trouble. The doctors misdiagnose the ailment, and try various mistaken treatments. Eventually, with the patient's life hanging in the balance, somebody figures out what's really going on, offers a remedy, and viewers await the next episode.

During the 2016 presidential campaign, there was a great deal of bad diagnoses served up on the U.S. economy.

As a proposed successor to President Barack Obama, Hillary Clinton ran, more or less, a status quo campaign. In her view, the patient was pretty darn healthy. Such a conclusion missed glaring symptoms that something was desperately wrong.

For example, after the deep recession running from the end of 2007 to mid-2009, real annual economic growth during the subsequent recovery/expansion period has averaged a mere 2.1 percent. In contrast, growth has averaged 3.1 percent over the past six decades, and 4.3 percent during recovery/expansion periods. So, economic growth has been running at less than half the rate it should have been during the past seven-plus years.

However, Donald Trump - now President-elect Trump - saw that the patient was very ill. And while he threw about an assortment of possibilities of what might be wrong, he clearly was passionate about trade being a key negative - another misdiagnosis.

Trump railed about trade deficits. But that meant ignoring that U.S. trade deficits tend to rise during good economic times - as strong domestic growth attracts imports, and investors see the benefits of investing in the U.S. - and shrink during slowdowns and recessions, as was the case during the 2007-09 recession, as well as the 1990-91 slowdown and recession, and the economic mess prevailing during 1979 to 1982.

Free trade deals also were criticized by President-elect Trump, especially NAFTA. But free trade has expanded opportunities for U.S. entrepreneurs, businesses, workers and consumers. Consider that real U.S. export growth has been strong to 17 of the 20 nations with which we have free trade agreements since those agreements went into effect. That includes our NAFTA trading partners. Since we've had trade accords with both countries, growth in exports to Canada and Mexico have run well ahead of U.S. economic growth. In fact, real merchandise exports to Mexico under NAFTA have grown at nearly four times the growth experienced in real U.S. GDP.

On trade, whether individuals and businesses exchange domestically or across borders, it's critical to understand that the economy is not a zero-sum game. Under free trade, more robust growth in places like Mexico and China mean expanded opportunities for U.S. businesses and workers.

Trade deals have not harmed the U.S. economy. Rather, our economic woes largely have been about anti-growth Obama-nomics. That is, increased taxes, hyper-regulation, expanded government spending and debt, and a lack of leadership in advancing free trade have raised costs, created uncertainty, and undermined private investment and entrepreneurship.

Contrary to fictional TV doctor shows, however, when it comes to the economy, no guarantee exists that someone is going to offer the right diagnosis and treatment. To the extent that President-elect Trump focuses on sound policy prescriptions of substantive tax and regulatory relief, and reining in the size of government, while putting aside anti-trade snake oil, the U.S. economy will recover and return to robust growth.

Ray Keating is an economist and a novelist. His latest thriller is Wine Into Water: A Pastor Stephen Grant Novel.

[expat_panama]

Here are a couple money quotes:

Trade deals have not harmed the U.S. economy. Rather, our economic woes largely have been about anti-growth Obama-nomics.

trade deficits tend to rise during good economic times

trade has expanded opportunities for U.S. entrepreneurs

Usually when people say that they look at deficits, measure them, and check jobs/wealth/income.  

[ConservativeMind]

What’s great about this is that excise taxes will allow trade to freely occur.

Trump isn’t talking about “trade bans.”

[Hardastarboard]

The author makes the mistake of focusing on one aspects of Trump’s “diagnosis” - that free trade is hurting us. There are arguments to be made on both sides of that line (I’m not going there), but Trump also noted that a lot of what is killing us is corporate taxes and regulations. Fix a lot of that, and you’ll have more economic growth generally. That will cure a lot of what’s wrong with America pretty quickly.

[billyboy15]

“Trump railed about trade deficits. But that meant ignoring that U.S. trade deficits tend to rise during good economic times - as strong domestic growth attracts imports,...”

*If Trump brings mfg jobs home from overseas the deficit in trade since the products will be domestic.

[expat_panama]

No he's not. His dot-gov website ditches the dump-NAFTA talk and he's talking negotiating new trade deals.

OK, so it's actually renegotiating new existing trade deals but I'm hard pressed to see a difference.

[ConservativeMind]

You don’t understand how other countries have been penalizing our exports over what we’ve done to theirs.

[expat_panama]

Trump also noted that a lot of what is killing us is corporate taxes and regulations.

Looks like it's on the front burner now; from here.

Factories have closed and jobs have moved overseas because the government has imposed crushing regulations and taxes...

[nathanbedford]

Trade deals have not harmed the U.S. economy. Rather, our economic woes largely have been about anti-growth Obama-nomics. That is, increased taxes, hyper-regulation, expanded government spending and debt, and a lack of leadership in advancing free trade have raised costs, created uncertainty, and undermined private investment and entrepreneurship.

I am inclined emotionally to agree with this assessment but I certainly cannot credit the author's reasoning or data for that conclusion. For example, he compares the rate of growth on trade with Mexico to the ready growth of GDP, a false basis for comparison when one considers that it is very easy to double and quadruple growth from a low level and very hard to double and quadruple growth of the GDP. So I find his data misleading and his method of arguing dubious.

More, even if he is correct that "trade deals and not harm the US economy" one must ask whose economy? If we are talking about machine shop operators in the rust belt servicing the automobile industry, they certainly have been hurt. If we are talking about Apple selling telephones manufactured in China, probably they have been helped. If we are talking about Silicon Valley and IT service providers, they too have been helped. If we are talking about aging tool and die makers too old to learn a new trade, they clearly have been hurt.

It seems to me the problem with trade is much like the problem with automation and the advent of robots, ultimately the benefits will outweigh the problems but there are victims and there is always a lag time between the initial pain and the ultimate gain.

I think the country needs a serious debate about our trade policy and that must start with real data and honest analysis. The problem is both Democrats and Republicans have been taking special interest money and virtually left the trade deals to be negotiated by K St. who do not represent Joe Sixpack who is losing his manufacturing job to sexy new industries with lots of lobbying money to spend. A further problem is that the political process has to inflict pain on one segment or another. Trump is proposing tariffs which would, for example, inflict pain on consumers in order to protect manufacturing workers. Politicians don't like to inflict pain and they certainly don't like to be caught doing it. That is why we our trade posture is as distorted as it is because of the ideological bent of the Bush and Clinton administrations and the wanton disregard of American sovereignty by the Obama administration. Congress certainly does not want to put its fingerprints on any measures causing pain. We will see what Obama does.

[wastoute]

As I recall the politicians encouraged the “menial” jobs to chase cheap labor overseas so our folks could be “freed up” to take better jobs that somehow never materialized...

[bert]

Trade deficits are not sovereign but rather between individuals and companies. America has no trade deficit with China. Rather, American companies and individuals have an imbalance in trade.

Personally I have a trade deficit with two Chinese companies. One sells empty Canon ink cartridges and the other sells 150 ml wash bottles. I order them on ebay, pay with pay pal, and they are delivered by US mail within the week. There will never be an instance where these Chinese companies need the services my company sells. If I wanted a container load, I would buy from Alibaba listing.

Kuwait buys my services and I doubt I will ever buy anything from Kuwait. Kuwait has a trade deficit with me

[Crucial]

Yet you do have to have exports, even if imports will surpass them. There is a point where the difference between them can mean economic ruin, particularly in a debt economy. Trump also wants to curtail regulation which is a good step forward.

[Paul R.]

Good points.

That said, an awful lot of pain has been inflicted without, until now, a political price having to be paid.

The following numbers are fictional, but illustrate another point:

If, say, Harley Davidson has increased motorcycle sales to China from $100,000 in 2006 to $1,000,000 in 2016, that looks great, and, indeed, it is, for them. But if the importation of motorcycle parts from China to the US has also increased, from $1,000,000 in 2006, to $10,000,000 in 2016, at the expense of US vendors, that’s not so great.

Further, and these are not, so far as I know, fictional numbers, per a NBC piece I saw a while back, Harleys, when all is said and done, cost 3x in China, what they do here. So, while the interest in Harleys is high in China, few are sold there.

[expat_panama]

...a point where the difference between them can mean economic ruin...

It never has, in fact economic ruin happens when imports fall and exports soar.  Yeah, it doesn't make sense and everyone "knows" it ain't so, but when it comes to feeding my family I work with what is and I take a pass on what everyone knows and what makes sense.

[ConservativeMind]

“Trump is proposing tariffs which would, for example, inflict pain on consumers in order to protect manufacturing workers.”

Tariffs are simply taxes. You seem to believe that the excise tax being raised, while the income tax goes lower, is a net negative. Excise taxes only penalize buying products that never employed a single US worker and never paid a single US tax, likely made in a country that penalizes our own US products introduced into that country. As for Mexico, we even have millions of their citizens in our jails at daily rates of $180 and the rest roam free without background checks.

The idea that we won't see a net benefit as we move forward with excise taxes under Trump is fallacious.

[ßuddaßudd]

I believe they have lied to protect and cover 0bama . .

[nathanbedford]

You commenced by quoting me as follows:

“Trump is proposing tariffs which would, for example, inflict pain on consumers in order to protect manufacturing workers.”

But then you conclude with the following as though you had never even read what you quoted:

The idea that we won't see a net benefit as we move forward with excise taxes under Trump is fallacious.

What you write in between either has nothing whatever to do with my reply or is otherwise utterly irrelevant.

The point of my reply was that trade policy inevitably forces choices possibly hurting some parts of our economy while it may or may not favor other parts of our economy. Heretofor those choices have not been part of the consciousness of the voting public to a degree that is interfered with the special interests control over that policy.

You might be right, it might be on balance better to make consumers pay more for imported goods in order to shelter manufacturing jobs, or it might not. Mere conclusionary language, or distortion of data, or emotional appeals no matter how compelling concerning illegal immigrants, does not help us as a nation operating as a representative democracy decide who gets hurt and who gets helped.

[Scott from the Left Coast]

“Under free trade, more robust growth in places like Mexico and China mean expanded opportunities for U.S. businesses and workers.”

This is a money quote and it’s a stop-the-presses quote...this is not necessarily true at all (that U.S. businesses and workers will see net expanded opportunities) if the robust growth in Mexico and China is due to cannibalizing American industry to achieve it.

[ConservativeMind]

Your position states a tax in isolation, which is not any known reality being proposed. I countered by illustrating the folly of that fallacy.

One can propose all sorts of things in isolation and have them be “accurate,” but not useful.