The Flow of International Trade

Excellent visualization of the scale of exports and imports around the world.

If you ever wondered why Latin America, sub-Saharan Africa, and south Asia are poor, now you know.

Via Cafe Hayek.

The Wide Macroeconomic Latitude for Success

The phrase “wide latitude” comes from the age of sail. It means that you are taking a passage between two land masses that’s wide enough that you can safely get through with low visibility. It’s the Drake Passage instead of the Straits of Magellan.

One lesson of macroeconomics is that there is a wide latitude of outcomes for a variety of policy inputs. This means there are a lot of situations in which good policies can turn out poorly, and bad policies can turn out well.

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Just to be clear, I don’t like Trump. I liked Clinton less. And I wasn’t very fond of Obama and hmmm … McCain, Kerry, Gore, and so on. In retrospect, I wish I’d been more tolerant of Romney. Bush II struggled to be OK in my book. With BIll Clinton, well, it’s hard to argue with success, but I do think having a foil helped.

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Peter Navarro is Trump’s top economic advisor. He is a not-so-famous business school professor, who’s pushed a variety of macroeconomically odd populist ideas over the last 25 years.

WIlbur Ross is Trump’s nominee for Secretary of Commerce. He’s an investor in the Gordon Gecko mold: he buys distressed assets, gambling that some of their poor performance is due to poor management, and therefore fixable. He is not an economist.

Larry Summers is a macroeconomist (and a medium-lister for a Nobel Prize in the future). He’s also a former cabinet secretary, and got chased out of the leadership at Harvard for being too conservative (even though he worked in both the Obama and Clinton White House’s). I have some personal reasons for not liking Summers much, but I am warming up to him in his position as a Democratic eminence grise. It helps me that he was a strong internal critic of the Obama stimulus package.

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All of the above is a preamble.

Summers spoke out this week about Navarro and Ross’ view of the macroeconomy.

… The paper authored by Ross, the billionaire investor appointed as commerce secretary, and Navarro, the economist named as the head of Trump's newly formed White House National Trade Council, goes "beyond any set of doctrine that has been taken up by any administration in my lifetime."

… "The logic of it, the arguments made, are so far out of the mainstream of any kind of responsible economic thinking that they are the economic equivalent of creationism."

…

"So if this paper is to be a guide to US economic policy, and I'm not sure at all sure it will be ... but the kind of thinking that is implicit in that paper goes beyond any set of doctrine that has been taken up by any administration in my lifetime," he said.

I added the italic emphasis, and I think it’s important: a lot of people suspect that the Trump administration will not follow through on a lot of things they do to capture attention.

Even so, I think it’s clear this is a riduculously harsh opinion from someone with both expertise and experience.

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The problem for you as a student in thinking about policy and macroeconomics is that we can’t do experiments very well on this stuff.

Trump and his people could be right.

But policy is kind of like a roll of the dice. Trump has gotten the opportunity to roll. If he rolls well, does that mean he has some particular insight to rolling dice better than others?

He might. But the way to figure that out is to look, over and over, and different situations in which similar choices were made. Scientifically, we can’t have a good sense of whether Trump’s peoples’ ideas are good or not until 20 or 30 years down the road when we can look back at a whole bunch of similar situations.

Summers, speaking from experience, is noting implicitly that there isn’t much past evidence that positions like Trump’s have worked out well, on average.

Utah the Rich State or Utah the Poor State?

Rich States, Poor States* is a popular economic analysis in Utah. In large part, this is because Utah ranks very high in their analysis (# 1 in economic outlook for most of the last 10 years).

It’s difficult to deny that Utah is on a pretty good run. Macroeconomically, the state has been thriving since the resource extraction downturn of the late 1980’s.

The position of Rich States, Poor States is that this is due to economic policies pursued by Utah’s politicians. They rank Utah # 1 in 3 of 15 policy choices: having a flat income tax, having little or no estate tax, and having a low minimum wage. These are politically conservative policies (no surprise there in Utah), and clearly the publication is cheerleading for more of those.

The thing is, a measure of economic outlook ought to have predictive power for GSP (the state level version of GDP). EconBrowser reports a bunch of regressions and charts that show … pretty much no relationship at all. Here’s an example:

This shows last year’s ALEC ranking (lower is better), versus the differenced logs (approximate growth rates) of this year’s GSP. If ALEC is on to something with their rankings of policies, the red curve should be downward sloping. It isn’t.

None of this says that Utah’s policy choices are bad. But it does say that they are no better or worse than other states.

* The full cite is Laffer, A.B., Moore, S., and Williams J., Rich States, Poor States, 2016, 9th ed., American Legislative Exchange Council: Arlington, VA.

U.S. Urban-Centered Mega-Regions

National Geographic reports an excellent job with a new version of an idea I included in my text starting with version 2.0. This is that much of macroeconomics is about where you live.

So check out this article entitled “Four Million Commutes Reveal New U.S. ‘Megaregions’”. I do think they need a better editor: it’s not the megaregions that are new, but rather the use of four million commutes to map that out.

Anyway, they produced this map:

Each line on here is someone’s commute. The shading is chosen to indicate the hubs for commuting that have evolved because this is an emergent process. Those are based on an algorithm rather than personal preferences. Interestingly, it determined something that most Cedar City and St. George residents know, but that seems lost on SUU administrators and Utah state officials: we’re in the Las Vegas megaregion, not the Salt Lake City one. If SUU feels like an afterthought across the state, now you know why.

This is based on an academic article entitled “An Economic Geography of the United States: From Commutes to Megaregions” that appeared on PLOS|one. That’s not required, but even so it has lots of maps that even an uninterested reader might find interesting.

Why Is Macro So Hard? Voters Sometimes Get What They Want

The news this week is that President-Elect Donald Trump has convinced executives at Carrier to not move a production facility from Indiana to Mexico.

The backstory to this is that the business had bottom line reasons for wanting to move to Mexico, and government officials (with the explicit backing of the currently powerless Trump) bought them off with tax dollars.*

Here’s Larry Summers view:

Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders.

This is similar to this H.L. Mencken quote from just over a century ago:

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.

If that seems like a micro-offense, please recognize that those were different times.

Hat tip to Greg Mankiw for noting Summers’ turn of phrase, and to Don Boudreaux for repeating this Mencken quote many times through the years.

P.S. A couple of days after posting this, Tim Worstall posted a similar quote:

Populism: the unpardonable sin of offering the populace what they appear to want rather than what they ought to.

* On the negative side, in the short-run, we’re all investors in Carrier whether we want to be or not. In the long-run, this may solidify the dangerous precedent of corporate executives holding out for government handouts. On the positive side, it’s still early … perhaps Trump will just do this once to establish credibility that obviates it’s future need.

An Example of Bizarro Journalism About Cuba

After I wrote this, Tim Worstall linked to a supportive article about Castro.

The only data charted in it is GDP of Cuba, versus two comparables: The Dominican Republic, and Jamaica.

The chart is used to support the position that Castro did OK.

Except the variables charted are not corrected for either inflation or population growth.

That's kind of like asserting that Castro was great because he taxed away nominal wealth (with an inflation tax) but let people have babies.

Putting the Cart Before the Horse

Macroeconomics is generally not an experimental science. It’s observational.

One of the advantages of an experimental science is that you can control causes to isolate their effects. You can come up with different stories about what the causes are, but in principal you can confirm whether those stories are supported by the data. In some sense, you can go “fishing”.

In an observational science, you have to get your story about causality straight first. By that I mean what effects you expect to see and what you should not see. Then you can go and check your data.

Unfortunately, we’re bombarded with GDP data, but not with stories about the causality that generates it. This leaves a lot of room for getting things wrong.

Which brings us to Trump’s nominee for Secretary of Commerce: Wilbur Ross. Here’s his theory (taken from a Wall Street Journal editorial entitled “Trump’s Money Men”):

… Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. …

The causality Ross presumes is pretty clear: “… trade deficits … weaken…”

This is weird: GDP (and trade deficits) are something we measure after they occur. They’re a description of what did happen, not an explanation of how it happened.

It’s more correct to say that a trade deficit might be a symptom of a weak economy, rather than a cause.

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Ross is making a ridiculous logical mistake here, but one that is all too common in thinking about macroeconomics.

First off, GDP is what we count up after production and consumption happen. And as we’re counting, perhaps we divvy it up into different bins, including (gross) exports and (gross) imports.

• This is analogous to going to one of those old-fashioned machines where you put in a quarter and it dumps out a handful of, say, Skittles. That’s your macroeconomy.
• Then you count up your Skittles. That’s your measure of your economy’s GDP.
• Then you divide up the Skittles by color, and call the yellow ones exports. And then you announce that if you’d gotten more yellow Skittles you would have gotten more Skittles in total.

A child might make that mistake. An adult should not.

Secondly, there are interconnections within GDP besides Y = C + I + G + X. Let me introduce 4 alternative variables:

• DP►DC, this is Domestic Production that goes into Domestic Consumption
• DP►FC, this is Domestic Production that goes into Foreign Consumption
• DC◄DP, this is Domestic Consumption that comes from Domestic Production
• DC◄FP, this is Domestic Consumption that comes from Foreign Production

My notation is a little bit weird: do not think of the the ► as a >, or the ◄ as a <. But there is a method to my madness.

Note that DP►DC and DC◄DP have to end up with the same number (although you might make a measurement error here or there).

In terms of the conventional textbook items:

• C + I + G = DP►DC (or DC◄DP)
• Gross Exports = DP►FC
• Gross Imports = DC◄FP
• GDP = DP►DC + DP►FC – DC◄FP (or DC◄DP + DP►FC – DC◄FP)

The cool thing about this is that we can think of these new variables in this way. Remember the fable about getting a mule to move with a carrot and a stick? The stick is work, and the carrot is your reward:

• DP►DC, means that your carrot and stick are balanced
• DP►FC, means that you’re all stick
• DC◄FP, means that you’re all carrot

Now let’s think about some naive policy ideas.

Let’s export more! So we’re going to make DP►FC bigger. This means we have to both work more here, and somehow get foreigners to buy stuff they weren’t before. Maybe we could advertise to make the latter happen. But there’s only two ways to handle the former part: actually work harder (by using more stick), or divert some of our work by making DP►DC smaller to make DP►FC larger. Except that we can’t make DP►DC smaller without making DC◄DP smaller. If you think about it, this amounts to giving away our carrots. So there you have it: a proposal to increase exports either means more stick or less carrots.

Let’s import less! You can probably see where this is going. This means making DC◄FP smaller. One way to do that would be to make DC◄DP larger. That way we could keep the number of carrots the same, but just get less of them from foreigners. But again, it gets weird: we’re getting the same number of carrots, but because DC◄DP = DP►DC, we have to work harder. So there you have (part of) it: you get more imports with more stick and no extra carrots. You can work out on your own that you could also get less carrots with the same amount of stick.

I understand that these examples are not easy. But that’s the point: trade policy is not something that most people think about very clearly … including people we put in charge.