The Tariff
30% on solar cells, 20-50% on washing machines. Since the ill effects of tariffs have been know for, oh, about 250 years, said again eloquently by the Wall Street Journal in Trump starts his trade war, Let me try to offer some comments beyond the usual economist response -- comparative advantage, trade must balance, follow the money anything that goes overseas must come back, imported products are inputs too, solar cell installers need jobs too, blahdah blahdah blahdah.
Washing machines, a device unknown to the inside the beltway types, is how the rest of us clean clothes. So raising the price of washing machines is one more little sucker punch to people who wash their own clothes.
Solar panels are supposed to save the planet. Our government already subsidizes them heavily via tax deductions, credits, Solyndras, renewable mandates, and so on, with the purpose of lowering carbon emissions. If that is the purpose, then we want the cheapest panels around to compete with fossil fuels. If that means made in Malaysia, great. The planet does not care where they are made.
If the Chinese government wants to tax its citizens to send us artificially cheap solar panels, we should thank them for their generosity in helping us to save the planet. It's absolutely hilarious to see complaints that China is subsidizing its solar cell industry so merits retaliation, given how much subsidy they receive here.
Yet even Al Gore agrees that the tariff is a good idea and wants solar cells made in the US.
What's going on? I think there is a good lesson in political economy. Once a government starts subsidizing something, everyone lines up at the trough. If taxpayers are going to be on the hook, then every interest wants its share. So potentially sensible carbon policy ends up as one more boondoggle.
Related, this week I saw the brilliant post Solar panels cost twice as much to install in the US as in Australia. (HT marginal revolution.) The answer, as usual in what Mark Steyn calls the Republic of Paperwork, is the paperwork.
I loved the flowchart on what it takes to get solar installed. In particular, you see here a real person who has really done it. The rules just say ``get a permit'' but the actual process, laid out in the picture, takes many trips back and forth and negotiations with the permit granters, all on someone's paid time.
This is a lovely detailed example of a larger question -- just what is the cost of regulation? I've been having this back and forth with some liberal economist friends, who pooh pooh the idea that regulations cost a lot. And here the official paperwork act disclosures, pages of the federal register, and so on would not add up to much. Yet, it does add up, to double. And installing residential solar is pretty simple, and something governments say they want. If this example scales, than GDP is half what it could be with a simper regulatory system.
Back to tariffs. Just why is it so hard to grasp that tariffs are a bad idea? Well, it must be because it is hard, and illustrates perhaps why economics really is useful, and why "business experience" is not generally a good qualification for policy. Anything that reduces competition and drives prices up is good for an individual business. Business leaders know this. Take that business leader to Washington and he or she will quickly conclude that what's good for my business is good for yours. A tariff on everything! Reduce harmful competition everywhere! We call it the fallacy of composition. What is good for one business is not good for all businesses, because that one business is profiting at the expense of everyone else. Business or banking experience does not generalize to good policy.
(Update:) But it's not just the administration that is to blame. The trade law that the administration applies specifies that tariffs are to be imposed if domestic companies are hurt by imports. That's an absurd blatantly protectionist standard. We have relied for years on the trust that administrations would not be so stupid as to actually enforce the law as written."Well, if one comes along that is, perhaps it's time to rewrite the law. If the law said only that tariffs are imposed if american consumers are hurt by imports, or even the american economy as a whole is hurt by imports, much of this mischief would go away.
Congress can, and should fix this. Perhaps as with DACA, the Trump Administration actually executing the law as written by Congress will spur Congress to fix its absurd law. Get rid of the Jones act (all shipments to/from American ports on US built, operated, and staffed ships) while you're at it.
The Wall and infrastructure
A deal seems to be emerging, one that I advanced almost as a joke at faculty lunches. But it may happen. Give him his Wall, and get pretty much whatever you want in return.
From Trump's immigration offer
White House floated a proposal on Capitol Hill late Thursday that would offer legalization and a path to citizenship for some 800,000 so-called Dreamers in return for funding for President Trump’s wall at the Mexico-U.S. border and other changes to U.S. immigration law.And arguments for taking the offer. From William A. Galston (One of WSJ's liberals)
In all, only 37% of Americans think adding a substantially expanded wall on the southern border is a good idea. But we have reached a point at which the sentiments of the majority are politically secondary. It is unimaginable that Mr. Trump will break faith with his supporters on this matter. Any deal, broad or narrow, will have to acknowledge this reality.
My view on this:
Yes, the Wall is a bad idea on just about every policy-wonky (that's me) metric. What is it supposed to do? I guess, raise the wages of low-skilled american workers who compete with the kinds of immigrants who would cross a desert on foot illegally, and improve security, blocking the wave of Islamic terrorists who fly to Mexico, cross the border on foot, and stop to pick vegetables for a few years on the way to bombing things. If you're worried about security, we currently spend $13 billion per year on border patrol, and $6 billion on the entire FBI. Another $25 billion on the border does not seem the crying need. (Though the FBI does seem to have time on its hands lately.) On either grounds, the wall is a colossal cost-benefit waste.
But that is not the point. As Galston points out, the Wall is symbolic. President Trump campaigned on it, and wants very much to deliver some symbolic gesture to his supporters to say "I'm building the wall." Congressional democrats, centrist and never-Trump republicans can get pretty much whatever they want on policy if they will let the man have his symbolic victory.
So that is the question for our time: Can our politicians let the other side have a purely symbolic victory, in exchange for a large policy victory? Or is denying the President a symbolic victory so important that no quiet policy victory is worth the price?
My main new thought on this, which encourages me to agree with Galston -- take the deal -- is this: The Wall will never be built.
I live in California, in which our governor, 8 years of the Obama administration, and the democratic super-marjority in the state legislature, has been devoted to building a high speed train. To my mind, it is a boondoggle equal to the wall, but ignore that -- the entire political power structure in California and the Federal government has been behind this thing for 10 years. And yet not one mile of the line yet exists. It took the Union pacific 4 years to build the transcontinental railroad from Sacramento to Utah, over the Donner pass, by hand.
Such is infrastructure in the US today.
Can you imagine what will happen with the Wall, even if Congress appropriates $25 billion? It will instantly be in court. Start with environmental challenges. It will of course interrupt the migration path of the Eastern Arizona accelerati incredibilus. It will disrupt holy native lands and archeological sites. Mexicans are largely catholic, so suits will claim the wall is religious discrimination. Heck, infrastructure has to pass cost benefit tests, and good luck with that one. The contracting was improperly done. State attorney generals busy suing the Trump administration will quickly add to this one.
As with solar cells, as with the second avenue subway, as with the high speed train, as with the Keystone pipeline, good luck building any infrastructure in America today -- and especially good luck building one that makes little sense and is a highly politicized hot potato.
If they gave the President all he wanted, tomorrow, this thing would not be out of court for decades, long after a democratic congress or administration kills it.
They can afford to give him a symbolic victory. If, well, they decide that they can afford politically to give him a symbolic victory. For that is all it will ever be. And frankly, even $25 billion of waste to fix immigration would not be a bad tradeoff. The waste to our country in the current immigration system is on the back of my envelope orders of magnitude greater than that.
Looking forward to infrastructure.
As reported in the Wall Street Journal
U.S. Chamber of Commerce President Thomas Donohue last week was nearing the end of a speech urging Congress to rebuild the nation’s infrastructure when he offered another option: At least make it easier to build things when the money can be found.
“If we just fix the permitting thing this year, you would create an extraordinary enthusiasm about moving forward,” Mr. Donohue said,
...Mr. Trump and his aides have cited studies suggesting that environmental review can often take a decade,
A Government Accountability Office study of the environmental review process in 2014 cited third-party estimates that reviews average 4.6 years. Outside experts say actual review times vary widely based on the scope of a project and other environmental factors.If the average review time for, I guess, building a freeway cloverleaf, is 4.6 years, and often takes a decade, this makes my point -- don't worry about the wall!
The point of the article was that the Administration would like this to be reduced to two years. Good luck with that. The other point of the article is environmental groups lining up to fight any streamlining of the permitting process. Strategic delay rather than policy outcome is vital to them, apparently.
But the administration is right. If infrastructure is going to be built in the US, it strikes me that reforming the process for building infrastructure is the key. If home zoning and inspection requirements double the cost of residential solar cells, if prevailing wage, union work rules, and a hundred other impediments mean that subways cost billions of dollars per mile, many multiples of what they cost in France let alone China, and if permits take decades, and billions more of consultant and legal work, our problem with infrastructure is not finding the money to pay for it.
In the meantime, I offer a final suggestion to the Trump team: Offer to build a high speed train along the border instead! Just forget to put in any crossings.
(Update: I am just now reminded by a story on NPR that President Trump had, as a candidate, suggested coating the wall in solar cells. Truth is stranger than fiction.)
Re solar panels
ReplyDeleteThere are complaints the China is subsidizing solar panels and steel and aluminum etc. Those subsidies seem to involve large mis-allocations of capital to the ultimate detriment of Chinese consumers and the Chinese economy. Do the America First folks really want to deal with a China that is allocating capital optimally?
Before someone else points it out: the current actions against solar panels, steel and aluminum are not particularly against China and are not AD/CVD cases. Point remains that America is probably better off if China continues to mis-allocate capital.
Fantastic post! Great insight about the delay in building a wall--I hadn’t though of that but I think you’re right. Great last line!
ReplyDeleteIf only he would want several walls. Each one could be traded for something worthwhile. With only one wall they have to be careful not to trade it away for something insufficient. The arm wrestling may may take so long that he loses interest and the opportunity is then lost.
Delete--E5
High speed train along the wall? Well there you are sir. AMTRAK is the best choice.
ReplyDeleteIn this afternoon's news: International Trade Commission unanimously rejects Commerce Department proposal for a 300% tax on aircraft made by Bombardier of Canada.
ReplyDeleteA major association of trucking companies has announced that it will support an increase in the fuel tax to be used to fund repairs and improvements on highways and bridges.
BTW solar panels are useless eyesores. Maybe the tariff will cause some people to not buy them.
"solar panels are useless eyesores"
DeleteWhat then, fat man, is your prescription for how to keep civilisation going?
Burning up fossil fuels a million times faster than they accumulate gives us a rather short future.
--E5
The only real answer... nuclear.
DeleteSeriously.
Unfortunately, that train has passed, pressure against nuclear is too strong and cost of all permits, complaints, court processes.. that delay production means they are way too expensive.
Each NPP can replace 2-3 coal power plants or 5-10 gas-fired power plants, and if there had been a construction boom from the late 90's, with cca. 60 year lifetime, it would mean that fusion, wind, solar and fuel cells would have until 2050 to develop on their own, to replace NPPs when they start closing after 2050.
When you take all the adverse effects, even Fukushima-type accident every 20 years or so is cheaper than continuous pollution from coal-fired power plants.
Yes, solar power and wind power are cheaper than ever. And still they make only a small percentage of total grid power. We will still need years and years before solar and wind can replace fossil fuels in power generation. With political and public investment in nuclear instead of solar, nuclear could have replaced whole carbon-based power generation at least 15 years ago. If public opinion winds could suddenly change, nuclear could still replace carbon in cca. 15 years.
remarkably similar opinions toward the end of this Andrew Sullivan article from last week's NYMag:
ReplyDeletehttp://nymag.com/daily/intelligencer/2018/01/sullivan-metoo-must-choose-between-reality-and-ideology.html
Only a maniac would want to impose tariffs and thus have a lower standard of living.
ReplyDeleteOne way to get rid of the subsidy you do not like is to impose either a carbon tax or an ETS which would mean the externalties have a cost put on them.
It seems like in the past presidents tried to justify tariffs with some sort of appeal to the common good or at least an appeal to the long term good of consumers—predatory pricing of imports, the need to maintain a domestic industry that was critical to national defense and so on. These excuses were, of course, totally bogus but the pretext of an excuse was kind of nice. It signaled that the administration understood that what they were doing was harmful and sent an implicit promise to try not to let it happen too often. (Sort of like when your uncle drinks too much and falls asleep before dinner, and your aunt tells you about how hard the old guy has been working.) As far as I can tell the washing machine tariffs have absolutely no such justification. Two domestic producers said that they couldn’t compete. Tariffs were imposed. This would be discouraging under any circumstances but it is especially discouraging when the product in question is something as ubiquitous as a washer.
ReplyDeleteSheesh,
ReplyDelete"Washing machines, a device unknown to the inside the beltway types, is how the rest of us clean clothes. So raising the price of washing machines is one more little sucker punch to people who wash their own clothes."
And by the same reasoning, so is every other form of consumption tax. And it's even the wrong reasoning. Even if government employees wash their own clothes, THEY CAN BE IMMUNE FROM THE EFFECTS OF THE TARIFF. Think about it.
Government employees buy foreign made washing machines to wash their clothes. The tariff increases both the price of the foreign made washing machines AND the revenues that the government receives to pay it's employees.
It's a wash (pun intended!!).
The only thing that tariffs (and other consumption taxes) do is create a privileged set of consumers - one exposed to the effects of the taxes and another that is not.
In more government idiocy:
https://www.pbs.org/newshour/economy/making-sense/treasury-secretary-mnuchins-weak-dollar-myopia-is-dangerous
The only way to address trade imbalance is to change the relative prices of capital goods (stocks, bonds, land) versus consumer goods. Currency adjustments do not work since those adjustments affect both types of goods. A weaker dollar makes both capital goods AND consumer goods less expensive to buy.
Also John,
DeleteI presume that you remember this article written by you:
https://johnhcochrane.blogspot.com/2017/12/economists-as-public-intellectuals.html
You raked Austan Goolsbee over the coals pretty good with this diatribe:
"This is an argument by authority, by credentialism. He, Austan, has a PhD from a Big Name institution. What follows is therefore a result of that special knowledge, that special insight, that special training, that actual economists have. He doesn't have to offer logic or fact, which you won't understand, and you aren't allowed to argue back with logic or fact, unless perhaps you too have a Big Name PhD."
And then you come out with a statement like this:
"Washing machines, a device unknown to the inside the beltway types..."
You have personal / professional knowledge of how individuals that live / work inside the Washington, DC beltway get their clothes washed?
At least Austan was speaking to a subject that he has a background in.
Your use of innuendo to make an economic argument is 100 times more troubling than Austan's lapse. And the funny thing is that you didn't need to pre-suppose a consumer preference for "inside the beltway types" to make the argument.
I'm interested that you read it that way. A lesson to be extra careful on how things can be misread is always useful. The intent, for what it's worth: Cheap imported goods and wal mart prices have been crucial to the standard of living of middle america in the last few decades. Someone who wears suits every day and sends them out to the dry cleaners might not know this.
DeleteOh Frank, please..... I thought we were, here, trying to appreciate economics through humour.
DeleteOr am I mistakenly taking your words too seriously?
--E5
Your arguments are going nonsensical...
Delete"Cheap imported goods and wal mart prices have been crucial to the standard of living of middle america in the last few decades. Someone who wears suits every day and sends them out to the dry cleaners might not know this."
Because people who wear suits only buy suits made domestically? I doubt it. I doubt recall seeing Italian, English, or French made suits on Trump's hit list for tariffs.
Another more likely possibility is that someone who wears a suit every day and works inside the DC beltway might know that in the absence of wage bargaining power afforded by union membership, the standard of living for middle America is improved by the free trade of goods with other countries.
That someone might also know that maintaining that standard of living requires a relatively strong currency.
That someone might just not give a crap.
https://www.pbs.org/newshour/economy/making-sense/treasury-secretary-mnuchins-weak-dollar-myopia-is-dangerous
That someone may not give a crap, because that someone has worked all his/her life in industries that are not subject to global free market forces like...drum roll - banking and government.
Gore quoted in politico (John's link)....
ReplyDelete“This was a trade action brought by private companies. They chose a kind of midpoint in the range of alternatives. ... It could have been handled differently, should have been handled differently, but it's not an utter catastrophe.”
I don't read that as saying "the tariff is a good idea ". I usually read "not an utter catastrophe" as clearly meaning a "bad idea".
One likely result of the tariff is Chinese business opening cell factories in the USA. Will Trump enthusiasts welcome being subservient to a Chinese employer? They may end up with no choice. While Trump happily plays golf with their Chinese boss.
--E5
Prof Cochrane: This off point, but you might find it very interesting.
ReplyDelete14th Annual Demographia International Housing Affordability Survey: 92 Major Markets, 2017: 3rd Quarter
THE HOUSING AFFORDABILITY CRISIS: A MIDDLE-INCOME STANDARD OF LIVING CRISIS
London School of Economics Professors Felipe Carazzo, Paul Cheshire and Christian Hilber provide the introduction to the 14th Annual Demographia International Housing Affordability Survey. They note that "balanced assessment" of housing affordability requires "good measures." They further refer to Britain as "the originator of housing unaffordability" and the ideas of planning that have "contributed so much to the problem. " Indeed, the failure to retain well-functioning housing markets is a problem with widespread consequences. Where housing has become severely unaffordable, the standard of living has been retarded and poverty increased. This year's Survey shows that, for the 8th year a row, Hong Kong is the least affordable market, with a Median Multiple of 19.4 (median house price divided by median household income). Sydney is (again) second worst, at 12.9, followed again by #3 Vancouver at 12.6. San Jose (10.3), which is located in the San Francisco Bay Area has the fourth worst housing affordability and Los Angeles has the fifth worst housing affordability among the major markets. Before urban containment regulation, nearly all markets had housing markets that were affordable (Median Multiples of 3.0 or less). Media Release--http://www.demographia.com/
I probably agree in general with this post.
ReplyDeleteStill, I wonder why minor adjustments in international trade laws bring such passionate responses from "the right wing" or at least the "establishment right wing" or the "globalists" but ubiquitous property zoning, a much, much larger structural impediment…well, is rare;y a topic, and then gently treated.
Where are the florid and daily condemnations of property zoning?
The wall? $25 bil, and as Cochrane points out, nothing gets built anymore in the US, good or bad.
Trump's defense budget (DoD alone) is $716 billion, up 7% YOY. Nobody seems to care. Total national security spending tops $1 trillion (VA, DHS, State, black budget interest on prorated debt). The US faces no military threats. Terrorists are stateless clumps of people lacking air forces or navies, or mechanized land forces.
I suppose terrorists could enter the US through a porous Southern border, but I guess they have never tried. Terrorists appear to lack the resources to do so. Makes you wonder how much of a threat terrorists are.
We spend about 45% more on national security now than at the height of the Reagan defense build up, adjusted for inflation.
I suppose washer machines and walls are topics of the day, and so Cochrane chooses to talk about topics of the day. That is blogging.
Still, what about property zoning, or the routine criminalization of push-cart vending in the US? Not much, much bigger topics?
The wall could be used to store grain, like they once did with the Maginot Line
ReplyDeleteThe reason people find "it so hard to grasp that tariffs are a bad idea" is clear. It is quite hard to associate a cheaper washing machine, meal or car with free trade. But it is quite easy to associate losing your job due to overseas competition again as a result of free trade. The fundamental problem is that the advantages of free trade, though greater than its disadvantages are spread out among everyone. Whereas the disadvantages are concentrated with a particular group or firm, probably with lobbyists in Washington. And there is simply not a lot one can do to change this however, obviously correct the free trade argument is?
ReplyDeleteOn the issue of washing machines. LG has a huge plant being built in Tennesse and Samsung is building one in South Carolina. Tarriffs on washing machines will have little impact as US production is ramping up for the last year.
ReplyDelete"Free Trade" is like so many economic issues where the public discussion is much too simplistic. My trade theory training is perhaps outdated, but I do remember that nations who impose trade barriers without retaliation from their trading partners are made better off. If China engages in trade restrictions while the U.S. adopts "free trade", the U.S. will be worse off. No? And if U.S. trading partners engage in these practices, what is the correct response from the U.S.? Just let them take advantage of us?
ReplyDeleteI was particularly disappointed by the facile treatment of immigration. In a world with homogeneous labor and zero transactions costs, maybe open borders makes sense. Unfortunately we don't live in such a world.
How on earth would trade barriers (even without retaliation) make a country better off?
DeleteBy altering the terms of trade in your favor. By deepening the capital in protected industries. And through technological transfers. Just to name a few.
DeleteNone of these explanations result in a country being made better off. I can see why certain domestic producers would be better off. Why would you want to deepen capital in an an industry that cannot thrive without government protection for instance? You would have to prove that the benefit to domestic producers outweighed the increased costs/more limited options to the consumers.
DeleteRegarding your comment about it taking 4 years for the union pacific to build the rail from Sacramento to Utah, this is an interesting online reference as to how that was accomplished:
ReplyDeletehttps://web.stanford.edu/group/chineserailroad/cgi-bin/wordpress/faqs/
Seems like a win-win lesson on how to combine infrastructure and immigration.
Great article John, thank you!
ReplyDeleteBut let’s assume Democrats say: Let them have the wall, it will never be build anyways. It seems there still is a price for this strategy, or not? There would be years of useless planning by public authorities, decades of law suits and maybe even incomplete sections of a wall. Somebody has to pay for all this planning, the lawyers, and the judges. I guess a large part will be paid by the tax payer. That also seems like a colossal waste of money.
Best,
Frederic
"Give him his Wall, and get pretty much whatever you want in return." The main worry about this is that what Congress wants might be worse than what we already have (bad as that is).
ReplyDelete(a) Great link article on Australia vs. US installation costs for solar panels! We just had an Arizona job candidate out yesterday talking about US installation costs. As is so common with job candidates, his BLPish econometrics was fancy, but I learned more about the topic in a few minutes of googling during his talk than he told us, or, perhaps, that he knew in toto. He didn't tell us the size of the permitting fees and code costs and probably was unaware (though it didn't matter for estimating markup over MC, his objective).
ReplyDelete(b) Perversely, solar panels seem to be about the most labor-intensive way of making electricity besides hand-cranked generations. The panels themselves can be made by robots, to be sure. But most of the cost is carrying them off of the truck and nailing them to roof. Thus, solar panels may well be cost effective in India and Nigeria, if not in the US---especially given the bad grids in poor countries.