Must-Read: David Rennie: An Economist reporter dishes on Trump’s ‘priming the pump’ interview

Posted on by Brad DeLong

Must-Read: The word from the Economist: Donald Trump has no clue how integrated the U.S. is with the rest of the world economy, and his court is full of sycophants who have no interest in educating them—who take their job to be to “chime in and agree with whatever the president had just said, rather than offering candid advice…”

David Rennie: An Economist reporter dishes on Trump’s ‘priming the pump’ interview: “On trade deals… [Trump] seems to think that… if the Mexicans seem to be doing well out of the deal at all… https://www.pri.org/stories/2017-05-12/economist-reporter-dishes-trumps-priming-pump-interview

…then that shows you that others are taking advantage of America. And that’s just not how trade works…. He was on the very point of withdrawing from NAFTA… but then he’d had a nice phone call from the prime minister of Canada and the president of Mexico. And they asked him “could you think again? Maybe we should renegotiate instead of withdraw completely?” And so out of respect for them, he agreed to do that…. People in the inner circle… said it was a lot more chaotic…. The reason the Canadians and the Mexicans called the president was that people in the inner circle of team Trump were very anxious…. They called [Canada and Mexico] and said, “You need to call [the president]. Right now.” People inside the White House also called the new Agriculture Secretary Sonny Perdue… [saying], “You need to come over here now! You need to! He’s about to withdraw from NAFTA.” So Sonny Perdue literally asked his staff to draw up a map of the bits of America that had voted for Donald Trump and the bits of America that do well from exporting grain and corn through NAFTA….

It was kind of like being in a royal palace several hundred years ago, with people coming in and out, trying to catch the ear of the king. That’s the feel at the Trump Oval Office…. There is a “Tudor court” side to it. And the role of some pretty senior figures, including cabinet secretaries, was to chime in and agree with whatever the president had just said, rather than offering candid advice.

There was a moment with Steve Mnuchin…. [Trump] said, “As soon as I started talking about China being a currency manipulator, they cut it out.”…  What was striking was… Mnuchin… chimed in and said, “Oh yeah. The day he became president, they changed their behavior!” And factually, that’s just not right. It’s quite striking to see a cabinet secretary making that point in that way….

A lot of the reporting has said that there are two completely different factions… a moderate, globalist one led by… Kushner… a dark, nationalist, angry view… Bannon… locked in a fight…. We came away with a different impression…. Donald Trump is a nationalist with a grievance. He thinks that the world has taken advantage of America for too long, and it’s time for America to be tougher and gruffer and more assertive and more selfish. If there are different voices, it’s a question of tactics…. I don’t think that a globalist, moderate wing is somehow going to win the argument and change Donald Trump. He is who he is…

Sarah Birnbaum: An Economist reporter dishes on Trump’s ‘priming the pump’ interview: “The Economist’s own analysis was even more scalding than the snarky tweets… https://www.pri.org/stories/2017-05-12/economist-reporter-dishes-trumps-priming-pump-interview

…The magazine declared:

The impulsiveness and shallowness of America’s president threaten the economy as well as the rule of law.

The article goes on to compare Trump to a modern-day Henry VIII… never a good thing:

Donald Trump rules over Washington as if he were a king and the White House his court. His displays of dominance, his need to be the centre of attention and his impetuousness have a whiff of Henry VIII about them. Fortified by his belief that his extraordinary route to power is proof of the collective mediocrity of Congress, the bureaucracy and the media, he attacks any person and any idea standing in his way…

Ouch.

Should-Read: One of the many, many ways in which Steve Mnuchin and Gary Cohn have failed to do their job

Posted on by Brad DeLong

Should-Read: One of the many, many ways in which Steve Mnuchin and Gary Cohn have failed to do their job is that Donald Trump still believes that a country the US is running a bilateral trade deficit with is somehow exploiting us—rather than selling us good stuff cheap, and lending us the money to buy the good stuff cheap at ridiculously low interest rates. Step up your game, boys! Please:

Barry Eichengreen: Is Germany Unbalanced or Unhinged?: “The question… is why Germany should seek to reduce its current-account surplus… https://www.project-syndicate.org/commentary/german-external-surplus-requires-public-investment-by-barry-eichengreen-2017-05

…One answer is to get out of Trump’s sights. A better answer… is that doing so would be good for a world economy in which investment is in short supply, as evidenced by record-low interest rates. It would be good for Southern Europe, which needs to export more, but can only do so if someone else, like the largest Northern European economy, imports more. Most of all, more investment in infrastructure, health, and education would be good for Germany itself. Well-targeted public investment can raise productivity and boost living standards, ameliorate concerns about inequality… address Germany’s economic weaknesses… there are exactly zero German universities in the top 50 globally. More public funds would make a difference…

Must- and Should-Reads: May 14, 2017

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Dani Rodrik: Can Macron Pull it Off?

Posted on by Brad DeLong

Should-Read: Dani Rodrik: Can Macron Pull it Off?: “Le Pen received more than a third of the second-round vote… And turnout was apparently sharply… indicating a large number of disaffected voters… https://www.project-syndicate.org/commentary/macron-germany-eurozone-fiscal-union-by-dani-rodrik-2017-05

…Macron was helped in this age of anti-establishment politics by the fact that he stood outside traditional political parties. As president, however, that same fact is a singular disadvantage…. Macron’s economic ideas resist easy characterization…. Many of Macron’s economic plans do indeed have a neoliberal flavor…. lower the corporate tax rate from 33.5% to 25%, cut 120,000 civil service jobs, keep the government deficit below the EU limit of 3% of GDP, and increase labor-market flexibility (a euphemism for making it easier for firms to fire workers). But he has promised to maintain pension benefits, and his preferred social model appears to be Nordic-style flexicurity–a combination of high levels of economic security with market-based incentives.

None of these steps will do much… creating jobs…. Since the eurozone crisis, French unemployment has remained high, at 10%–and close to 25% for people under 25 years old…. Macron… has proposed a five-year, €50 billion ($54.4 billion) stimulus plan, which would include investments in infrastructure and green technologies, along with expanded training for the unemployed. But, given that this is barely more than 2% of France’s annual GDP, the stimulus plan on its own may not do too much to lift overall employment. Macron’s more ambitious idea is to take a big leap toward a eurozone fiscal union, with a common treasury and a single finance minister….

Macron’s unabashedly Europeanist policies are not just a matter of politics or principle. They are also critical to the success of his economic program. Without either greater fiscal flexibility or transfers from the rest of the eurozone, France is unlikely to get out of its employment funk soon. The success of Macron’s presidency thus depends to a large extent on European cooperation. And that brings us to Germany….

Having portrayed the eurozone crisis not as a problem of interdependence, but as a morality tale–thrifty, hard-working Germans pitted against profligate, duplicitous debtors–German politicians will not have an easy time bringing their voters along on any common fiscal project. Anticipating the German reaction, Macron has countered it: “You cannot say I am for a strong Europe and globalization, but over my dead body for a transfer union.” That, he believes, is a recipe for disintegration and reactionary politics: “Without transfers, you will not allow the periphery to converge and will create political divergence towards extremists.”… Macron is almost certainly right…

Weekend reading: the #WorkingPaperTuesday edition

Posted on by Kavya Vaghul

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Building off a piece from last week, Nick Bunker takes a second look at a new research on income inequality in the United States, which explores some reasons for why one-year income inequality has increased while lifetime income inequality has not changed too much.

Equitable Growth released two new working papers, one of which takes a look at the consequences that bad credit reports have on credit and the labor market, while the other discusses some of the contradictions present in a well-known critique of Keynesian economics.

Researchers and policymakers generally agree that the benefits of early childhood education make it a worthwhile investment in the United States. But there is much less agreement on how to build high-quality programs and sustain the cognitive gains made in preschool. Kavya Vaghul explains that another important consideration that is often missing from the conversation is preschool classroom diversity.

A new issue brief dives into the importance of raising the minimum wage to spur far-reaching economic growth in the United States, surveying the work of several academics in Equitable Growth’s network of scholars. Together, the work helps elucidate whether and how the minimum wage affects family incomes and job opportunities and offers ideas for how to structure future minimum wage policies.

“After Piketty: The Agenda for Economics and Inequality,” a new book published by Harvard University Press, was released this week, featuring several essays reflecting on what gaps still remain to be researched following economist Thomas Piketty’s best-seller “Capital in the Twenty-First Century.” See an excerpt from one of the essays by Suresh Naidu here.

What were the economic ramifications of opening up the United States to more trade with China in 2000? According to new research, one consequence may have been fuel added to the housing bubble as increased competition from Chinese imports weakened the labor market. Nick Bunker further explores the connection.

Links from around the web

Through a series of interviews, Matthew Desmond tackles the relationship between homeownership and inequality in the United States, highlighting how the benefits of home mortgage interest and other real estate tax deductions overwhelmingly accrue to the upper-middle class and the wealthy. [new york times]

Speaking of housing, it may be surprising that the quality of subsidized or assisted housing conditions are pretty equal for children of different races. The problem, however, as Gene Demby points out, is that the location of subsidized housing significantly varies for black and white children, which ultimately influences their life outcomes. [npr]

The “robot apocalypse,” the idea that technologies and automation could increasingly push out workers, is not in fact coming, argues Greg Ip. It may actually be that many low-productivity sectors need to start adopting them to improve the productivity and living standards of workers. [the wall street journal]

Leila Morsy highlights new research on the connection between parents’ incarceration and their child’s cognitive and behavior outcomes, suggesting that mass incarceration may be intrinsically linked to education policy. [the american prospect]

With Mother’s Day around the corner, Valerie Wilson analyzes the Current Population Survey to show the unique role that African American mothers play in the economic well-being of their families. Black moms work more hours and are much more likely to work. [epi]

Friday figure

Featured in “The importance of raising the minimum wage to boost broad-based U.S. economic growth” and originally from “How raising the minimum wage ripples through the workforce”

Should-Read: Sarah Kliff: Donald Trump has no idea what health insurance costs

Posted on by Brad DeLong

Should-Read: Sarah Kliff: Donald Trump has no idea what health insurance costs: “The Economist asked the president about the fact that many Americans are expected to lose coverage… https://www.vox.com/policy-and-politics/2017/5/11/15624328/trump-health-insurance-costs

…This was Trump’s response:

The state governments are in much better position to, you know, help people. In terms of, you know, just the size, the mere size of it. But we’re putting in $8bn and you’re going to have absolute coverage. You’re going to have absolute guaranteed coverage…

Trump makes a promise of “guaranteed coverage.” But the Republican bill doesn’t deliver on that. When the Congressional Budget Office analyzed the last version of the American Health Care Act, it estimated that 24 million fewer Americans would have coverage…. The more recent iteration of the bill adds an additional $8 billion to fund high-risk pools… not nearly enough….

There’s also this other line in the response that caught my eye, where Trump discusses how he thinks health insurance ought to work.

Insurance is, you’re 20-years-old, you just graduated from college, and you start paying $15 a month for the rest of your life and you really need it, you’re still paying the same amount and that’s really insurance…

The fact that Trump settles on $15 as the appropriate amount to pay for health insurance betrays a lack of familiarity with the actual cost of coverage. You do not have to be a health policy expert to get this—just someone who has ever purchased a health plan.

Most voters I talk to don’t have this expectation…. They know, from their experience, that health coverage is not as cheap as $15, and have more realistic assumptions than the one Trump makes….

There is a lengthy exchange in the Economist interview over the future of Obamacare’s cost-sharing reduction subsidies…. This is a huge deal for insurance companies… the thing that keeps them up at night, deciding whether or not to sell Obamacare coverage in 2018. Trump’s answers here certainly won’t give the industry a better night’s sleep. Here is the exchange:

TRUMP: We’re subsidizing it and we don’t have to subsidize it. You know if I ever stop wanting to pay the subsidies, which I will.

ECONOMIST: You’d pull the plug on that? If this bill doesn’t go through you’d stop those subsidies?

TRUMP: No, this bill only gives them one month. They don’t realize that, that’s another thing. Good point. This bill gives them one month, it gave, you know the subsidy…

ECONOMIST: The continuation of the subsidy?

TRUMP: The subsidy to the insurance companies, yes. Anytime I want because actually.

ECONOMIST: But my question is if the bill doesn’t pass.

TRUMP: In actuality Congress has to approve it. Congress…

ECONOMIST: If the bill doesn’t pass would you cut the subsidies?

TRUMP: If the bill doesn’t pass, I’d be in a different position. Because, if the bill didn’t pass the Republicans would have let me down. And then I’d have to decide what I want to do because I want people to have health care.

Within the span of a few sentences, Trump seems to hint that he is ready to stop paying the subsidies—but that his course of action may be tempered by what Congress does on the Obamacare repeal strategy…. White House Chief of Staff Reince Priebus made reassuring calls to legislators that reportedly put Democratic leadership at ease. Trump, however, wants to make it clear that these payments are not a done deal[:]… he could end the subsidies “anytime I want.”… Trump is destabilizing the Obamacare marketplaces and raising the possibility of collapse. Whether he understands that is an open question…

No, Sarah, whether Trump understands it is not an open question.

Trump does not understand it.

Trump does not understand it any more than he understands that he did not invent the phrase “priming the pump”, that his plans do not do what people mean when they say “prime the pump”, nor that steam-driven catapults are not a realistic design choice to launch modern fighter jets off of Ford-class aircraft carries.

How the opening to China may have partially fueled the U.S. housing bubble

Posted on by Emilie Openchowski
Chinese workers prepare to send off goods meant for export in Beijing.

The U.S. housing bubble burst more than 10 years ago, but the exact reasons for its inflation are still under debate. Consider the timing of the bubble (roughly 2002 to 2006) with the opening of the U.S. economy in 2000 to increased trade with China. A string of recent research finds that increased competition from Chinese imports leads to a significant deterioration in local labor markets. Perhaps there was some connection between these two trends as some U.S. households loaded up on debt in response to a weaker labor market. A recent working paper makes exactly that argument.

The paper is by economists Jean-Noël Barrot and Erik Loualiche of the Massachusetts Institute of Technology, Matthew Plosser of the Federal Reserve Bank of New York, and Julien Sauvagnat of Bocconi University. The four economists look to see if there was a difference in the amount of debt that households took on depending on how much import competition increased in their local economies. For those concerned that they might be finding a relationship that isn’t causal, the authors use an instrument for increased importation—a decline in shipping costs—that shouldn’t be connected to other factors increasing household debt.

Barrot, Loualiche, Plosser, and Sauvagnat find that increased import competition does explain a good amount of the variation in household debt. Areas with higher import competition saw higher increases in household leverage. An increase in competition of about one standard deviation explains about 30 percent of the difference in the growth of household debt. To get a sense of this magnitude, the authors find that a standard deviation increase in house prices also explains about 30 percent of differences in household debt.

Looking into the kind of debt that households take on in response to this shock, the four economists find that mortgage debt is the biggest part of the increase. Specifically, refinancing existing mortgages and home equity lines of credit are the biggest part of the increase, not new mortgages. This result fits in with the hypothesis that homeowners were taking out loans to deal with the loss of a job or a weakening labor market.

Previous studies of the cause of the housing boom emphasized the increases in credit supply, including the role of mortgage securitization and foreign savings flowing in the United States. What this new paper does is look at the source of increased credit demand in some areas of the United States. For many Americans, it appears that more debt and leverage wasn’t due to a desire to simply spend more, but instead a way to deal with a significant income drop. Access to credit served as a way to paper over some of the underlying problems in local labor markets.

Of course, the household bubble eventually burst and revealed the extent of those problems—an implosion that many Americans are still struggling to overcome.

After Piketty: “A Political Economy Take on W/Y”

Posted on by Shonda Williams

The following is an excerpt from chapter five of After Piketty: The Agenda for Economics and Inequality, entitled “A Political Economy Take on W/Y” by Suresh Naidu:

In her “Open Letter from a Keynesian to a Marxist,” Joan Robinson writes: “Ricardo was followed by two able and well-trained pupils— Marx and Marshall. Meanwhile English history had gone right round the corner, and landlords were not any longer the question. Now it was capitalists. Marx turned Ricardo’s argument round this way: Capitalists are very much like landlords. And Marshall turned it round the other way: Landlords are very much like capitalists.”1 In his big red book, Piketty tries, like Henry George and a long stream of economists of the left before him, to perform the Marxian maneuver of turning what he sees as an upside-down argument right-side-up. Piketty argues that modern capital is very much like land—a source of rent. It is supplied inelastically, commands a share of output despite having little in the way of opportunity cost sacrificed in its provision, and in its influence and skewed distribution returns us to a financialized neofeudal Gilded Age. Thus, an economy dominated by modern capital winds up as a rentier economy: an economy of robber barons, credentialed aristocrats, social conflict over distribution, and government captured by the rich.

But Piketty cannot quite manage to pull his maneuver off. He winds up trapped by the Marshallian apparatus he has built. In it, capital— wealth—is treated more as a stock of accumulated savings rather than a claim on future output, and so it looks less like Ricardo’s land owned by parasites and more like, well, neoclassical- economic capital, the profit from which is the proper and socially useful reward for thrift.

As Piketty’s book shows, capital—wealth—takes many forms, which run from real estate to financial assets, such as corporate shares and loans, and even to slaves. Wealth is most accurately conceptualized as a claim on future resources. It results from purchases of durable property rights over assets, such as machines, houses, patents, or oilfields, that are either productive (in which case people bid to use them) or extractive (in which case people pay to keep legal process from being used against them). The salience of wealth matters, and depends on how much of the economic pie it lays claim to. If the economy has produced a lot of output relative to capital, then it can cover the claims owed to holders of wealth with little effort. But if economy-wide output is relatively low, it will take much more of society’s resources to cover the obligations owed to wealth holders. Piketty’s book suggests that as global income growth (g) slows, society will need to fetter capital with taxes at the global level—or else see a new class of owner-rentiers gobble down more and more of the social pie.

The book is a template for good popular economics: historical and substantively important insights disciplined by original, carefully constructed data and an analytical framework inspired, but not fettered, by the mathematical models of the field.

This is not normal economics.

But unlike much economic writing on the left, economists would recognize it as economics (for better or worse).

In the text, if not in the models, the book also brings politics to the forefront of the analysis. The big movements in the series Piketty documents are driven by politics and policies. But the politics are exogenous to the model. They are not an endogenous part of the framework. Thus, Piketty has to delicately sail his way between the Scylla that is the “market fundamentals” of supply and demand for capital and labor, and the Charybdis that is the independent role of politics and policies.

More from After Piketty

Extracted from After Piketty, edited by Heather Boushey, J. Bradford DeLong & Marshall Steinbaum published by Harvard University Press, $35. Copyright @ 2017 by the President and Fellows of Harvard College. All rights reserved.

Must- and Should-Reads: May 10, 2017

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Tim Duy: The Fed Is on the Right Side of Its ‘Transitory’ Bet

Posted on by Brad DeLong

Should-Read: Tim Duy: The Fed Is on the Right Side of Its ‘Transitory’ Bet: “The Fed is betting that residual seasonal adjustment issues negatively impacted the first-quarter gross domestic product and that the data does not reflect the true pace of economic growth… https://www.bloomberg.com/view/articles/2017-05-08/the-fed-is-on-the-right-side-of-its-transitory-bet

…If they are correct, then the pace will pick up over the next two months and they will likely hike rates in June…. So far it looks like the Fed is on the right side of their bet. The employment report for April reveals solid job growth and low unemployment as the economy charged into the second quarter…. [I see] a fairly large residual seasonal impact in the first quarter that has been growing over time… [with] the offset… currently concentrated in the third quarter…. This won’t be the last word on seasonal adjustment issues in the GDP data. The BEA is working on addressing these issues and may hopefully be able to resolve the situation in the near future….

Early indications… are that the data will be there to justify a June move…