Paul Krugman on tariffs and the trade balance

by on January 2, 2017 at 12:52 am in Economics, Uncategorized | Permalink

Here is a long post on those topics, worth a careful read and it contains many good points.  But, Nobel Prize in trade or not, I am not convinced by all of it.  On his first topic, I do not think a Trump administration will give us a pure VAT, rather I think the final outcome (if there is one), will indeed be more like a tax on (some) imports and various subsidies to exports; Jared Bernstein suggests the same.  On the second topic, given that the U.S. dollar is a global reserve currency, I don’t think it has to be the case for model-embedded reasons that “…reduced openness to trade should also inhibit capital flows”, though it is likely the case for broader political economy reasons (if they mess around with your trade, you are more afraid to invest your capital).  Krugman’s claim “…trade deficits are always a temporary phenomenon”, while technically correct, represents an odd, sudden conversion (reconversion?) to Don Boudreauxism, and a return to the kind of 2006 analysis/worries that predicted America would see a dollar crisis.  Yes, temporary along some time horizon.  But is the American trade deficit, which by now has persisted for decades, best and most usefully modeled as something due to flip because of an intertemporal budget constraint?  Maybe.  But maybe not, as that view has performed extremely poorly in predicting the value of the dollar.  (Most of all, it depends on the country, but it’s least likely to be true for America.  And what about “dark matter“?)  On most days, you’ll find more takers on the intertemporal budget constraint approach to macro over at Minnesota, and no I don’t think the “different models for different questions” trope gets one out of this box.  At the macro level, that constraint either kicks in or it doesn’t.  Finally, toward the end of the post there is an overestimate of how much an implied dollar depreciation is likely to persist in the forward rate in a manner that would limit investment from abroad.  For the USD, predicted movements as embedded in the futures or forward rate are generally quite small relative to movements due to “news”; of course the same isn’t always true for Argentina and other disaster-prone countries.

Here are comments from Brad DeLong.

1 mulp January 2, 2017 at 2:26 am

It looks like a VAT except with lots of tax dodges which will multiply until it’s got more holes than Swiss cheese.

For example, I’m sure imported oil will be given an exemption from not being tax deductible, based on taxing imported oil being a job killer because the price of all oil would rise to the global price plus 20%.

That such a tax would result in non-global oil drill baby fracking and choking off oil imports at zero profits, but killing ExxonMobil profits as the global price sinks to $30 again.

The one tariff that would be truly pro-American is $50 a barrel tariff on imported oil. That would trigger frantic drill baby frack in the US and screw Russia and Saud Arabia and other oil dictators.

But Tillerson is a sign Trump is going to restore Reagan Bush Bush-Cheney killing of US oil production in the interest of ExxonMobil and the Saudis and Putin. Between Carter and Obama, US oil workers suffered nothing but job losses by conservative energy policy.

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2 Alex January 2, 2017 at 6:22 am

Doesn’t the Trump administration rather stand for a pivot away from the cold-war front lines and towards the front-line of the “islamist papal state” (Saudi Arabia) as well as the West’s single biggest wage-increase-impediment (China)?

With regards to oil wages, catering to Russia instead of “true pro-American”s should still be better than the Saudis, since you’re catering to more labour-intense drilling.

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3 prior_test2 January 2, 2017 at 2:37 am

Really, isn’t deletion the best thing for DeLong’s comments, in keeping with how he runs his web site?

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4 Rich Berger January 2, 2017 at 7:45 am

I’d take the observations of economists more seriously if they had “skin in the game”, as Taleb says. They get to spin airy theories that rarely get a decisive test.

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5 Ray Lopez January 2, 2017 at 9:18 am

Krugman’s piece was good as was TC’s, DeLong’s was OK, all these guys are talking past each other. Since so many factors go into exchange rates (which are nonlinear, as any investor in Fx knows) it’s easy to see that all authors are talking past each other, emphasizing different points. I liked this: (Krugman) “Current account + Capital account = 0” – not true in practice, as world trade shows a non-zero surplus due to statistical error. Krugman: “What I did can be interpreted as the special case with a linear PPF. And if you have no idea what I’m talking about, congratulations” – an attempt to look (wonkish). PPF = Production Possibilities Frontier. And Krugman’s special case is just that, Krugman talking to himself to make himself look impressive to his readers. Bravo! Much ado about nothing as Rich Berger says (who Krugman reads, or at least somebody like me pretending to be Krugman, from another joke thread a while ago) as economists don’t have skin in the game. As to the heavy Bradford DeLong who says “3. Foreigners will retaliate.” to tariffs, this is incompetent analysis (par for the course, again, talking past somebody by assuming a different prior) since the USA is an oligopoly when it comes to buying (a monopsony) so it’s unlikely foreigners can retaliate much. So a tariff will indeed raise revenue for the USA and arguably open up foreign markets to US exporters, thus enabling even more trade, assuming of course the tariffs are not quotas nor are too high.

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6 carlospln January 3, 2017 at 12:24 am

‘investor in FX’

Heh-heh-heh…

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7 anon January 2, 2017 at 10:49 am

A bag contains some combination of colored balls. Without opening the bag, economists talk about the possible colors, and the possible impact, if the bag is ever opened.

Economics is grand, but when you have a policy that could be anything, it is hard to look sensible in analysis.

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8 Lon January 2, 2017 at 11:18 am

…but, but consider all the great accomplishments for mankind by economists in the past year of 2016. What would we do without their continuous stream of concise wisdom ??

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9 Lanigram January 2, 2017 at 7:46 pm

Economist – a good gig if you can get it. You can say or predict anything and get away with it – the unscrewable pooch.

Economists should be held to the same standard as building contractors – skin in the game.

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10 GoneWithTheWind January 2, 2017 at 11:03 am

I would favor a VAT to replace all federal income taxes but not in addition to existing taxes. I would also prefer that it apply across the board with no exceptions or exemptions. I would also be opposed to any subsidies.

“Foreigners will retaliate.” Well of course. Who cares. They already do many of these things and we didn’t retaliate or if we did it didn’t amount to anything.

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11 Gorobei January 2, 2017 at 11:32 am

Ok, so you shift the tax burden from wage-earners to retirees? Long-term, I agree with you, but the short-term effects of what looks like a 40% sales tax are going to be a problem.

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12 GoneWithTheWind January 2, 2017 at 5:51 pm

I would like to see the tax burden shouldered by everyone; rich, poor, young, old, working and free loading. Everyone, no exceptions. The good thing about a sales/VAT tax is that the individual can control it by controlling their consumption and it doesn’t discourage productivity. I don’t think it needs to be anywhere near 40%. The trick is to put the VAT on everything and everyone no exceptions/exemptions.

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13 Lanigram January 2, 2017 at 7:47 pm

Scrooge!

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14 GoneWithTheWind January 3, 2017 at 10:22 am

Thank you. I’ll take that compliment.

15 JWatts January 3, 2017 at 3:11 pm

“I don’t think it needs to be anywhere near 40%”

20% with no loop holes would probably do it, assuming it only attempts to replace current income taxes. However, many states have a sales tax of 10%. So, you’d end up with a 30% sales tax rate at a minimum. Which would lead to a lot more attempts at sales tax avoidance.

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16 GoneWithTheWind January 3, 2017 at 5:59 pm

If citizens choose to avoid taxes in a legal manner then good on them. If they do it in an illegal manner well, that is why we have courts. A recent study determined that half of the working people in Los Angeles were working under the table to avoid California and federal taxes. That which is allowed will continue.

17 dearieme January 2, 2017 at 11:16 am

Once one begins to doubt whether KKKrugman is “all there”, should one bother with his attempts to return to intellectual activity?

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18 Peter Dorman January 2, 2017 at 4:15 pm

With all due respect (and there’s a lot), I think PK is completely wrong in his analysis of this issue. He’s just following the standard open economy macro approach, but it’s still bonkers. An explanation is here:

http://econospeak.blogspot.com/2016/12/paul-krugman-on-protectionism-and-trade.html

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19 bill reeves January 2, 2017 at 4:55 pm

I’m a non practicing graduate economist from Chicago (went Silicon Valley). But I find the citation of Paul Krugman to be quite counterproductive on a generalist site like MR. Mr. Krugman no doubt has economics chops but his public pronouncements are so ridiculously politicized that citing him in arguments here can only degrade the respect and impact that this site seeks to have on the debate. His prediction about the stock market post-Trump was truly the last straw for me. He is not a trustworthy voice. He shouldn’t be on your site.

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20 Lanigram January 2, 2017 at 7:49 pm

It took you until the election to discover PK is a political hack?

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21 bill reeves January 2, 2017 at 4:59 pm

Lest someone argue that I am calling for his censorship. I am not. I am simply calling for you to not cite him in serious economic debates because his presence degrades the arguments of everyone else. By all means let Paulie K. continue to expound…..every time he opens his mouth he degrades his ability to influence people.

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22 JWatts January 3, 2017 at 3:13 pm

By citing him, you open up a topic of debate and allow the obvious rebuttals to Paul Krugman’s arguments. If you attempt to ignore him, then effectively you are giving his arguments greater weight, but not countering them.

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23 TallDave January 5, 2017 at 12:43 am

The situation of an administration in the United States is very different than in much of the rest of the OECD, which has so many party-slate and parliamentary countries. Trump may not get very far on trade restrictions, the Tea Party is still the beating heart of the GOP. The institutions of the political right are probably more powerful than Trumpism in the hallways of DC where policies are hammered out at arms’ length between the WH and Congress.

Not convinced a consumption tax is a good idea, as taxing something usually means getting less of it, one way or another, and consumption is the purpose of the economy, production and jobs really only exist to provide consumption.

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