GDP, GNP, and foreign investment

by on December 6, 2017 at 12:26 am in Economics, Uncategorized | Permalink

A few of you have written me to ask what I think of Paul Krugman’s recent posts on tax reform and evaluating it by gnp rather than gdp, the latter being an emphasis in the GOP literature.  Paul notes correct that a lower corporate rate will attract foreign investment, and the returns to that investment, by definition, will not accrue to American citizens.  So far, so good.

Paul reproduces the following graph for the Czech Republic, ratio of gnp to gdp:

If the GOP literature focuses on gdp, it is fine enough to criticize it on that basis.  What worries me, however, is that the corrective doesn’t go nearly far enough.  Gnp isn’t the right standard either, nor is gnp/gdp, rather it is welfare, either nationally or globally.

From that gdp/gdp ratio graph, you might come away with a grim view of life in the Czech Republic, but consider this cheerier picture of consumption, which nearly triples over a twenty year period:

Pretty awesome.  And under the standard story of the Czech economy, investment from abroad, most of all from Germany, has helped drive those gains.  Germany invested more, that boosted wages, improved the local political economy, and transferred some technology and entrepreneurial skills.  It is standard international economics, or for that matter Solow model, that capital-rich, lower-return economies should invest in their poorer peripheries (which is not to say it always works out that way).

It’s entirely fair to note that Czech household debt to gdp has risen to about thirty percent.  Still, in the U.S. it is about eighty percent, so the Czechs are not in dire straits just yet.  Private debt to gdp seems to run about 136 percent, compared to about 200 percent in the U.S.

Of course, this still could end up as a bad deal for the Czechs.  They might waste their foreign investment, the accompanying wage gains, the associated external benefits, and end up having to snap back their consumption and see their whole country owned by Germany, China, and others.  But that’s not the baseline case.  The default assumption is that these are gains from trade like other such gains, in this case gains from trading with foreigners who wish to invest.  They are not lesser gains or gains to somehow be subtracted from the overall calculus.

Here is a useful point of contrast.  Let’s say I advocated high taxes on foreign trade, on the grounds that “half of the gains from those trades are shared with foreigners,” and therefore we ought to, post-tariff, trade more with fellow citizens, so that only Americans get those gains.  We all know why that argument generally is wrong, noting there are some second best cases where tariffs can improve welfare.  It’s still wrong when the trades involve foreign investments.

So it is misleading to induce people to mentally downgrade foreign investment as a source of welfare gains.  I get that Krugman doesn’t quite say that, but that is the impression his discussion and diagram produces on the unwary.  Technically, he might only be criticizing the Republicans internally, using their own gdp standard.  The actual produced impression is to cause people to doubt that a lot of foreign capital inflow fully counts as a gain from trade.

America of course is in a quite different position than is the Czech Republic.  But the gains from foreign investment into the United States also ought not to be downgraded, either explicitly or by implied presumption.

1 Alan December 6, 2017 at 12:57 am

Tyler, what do you predict for per-capita consumption of the poorest 50%, 90%, 99% of the USA under the GOP plan vs no change in current tax legislation?

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2 Al December 6, 2017 at 12:26 pm

A) increaees in growth rate improves the welfare of all
B) sounds like you really, really, care. You of course give all of your discretionary income. I know you are not a hypocrite.

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3 clockwork_prior December 6, 2017 at 1:01 am

‘America of course is in a quite different position than is the Czech Republic.’

Having not changed in the last generation from being a Soviet client state to joining the world’s largest free trade and free movement zone, nor having been split from the country formerly known as Czechoslovakia in 1992, among other things. The selling of a major automobile company to a foreign company is at least somewhat comparable, though.

Which leads to the question of why not compare the Czech Republic and Slovakia to see what other insights might be offered? Otherwise, one would almost think that the cherry picking going on would be too obvious for long time, if not necessarily loyal, readers.

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4 msgkings December 6, 2017 at 2:06 am

“Otherwise, one would almost think that the cherry picking going on would be too obvious for long time, if not necessarily loyal, readers.”

I picture ol’ prior in a smoking jacket, hitting send and chuckling to himself after taking a drag on a German cigarette. ‘That’ll show them’ he thinks, having scored another victory in the drive for supercilious troll mastery.

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5 clockwork_prior December 6, 2017 at 5:15 am

You are truly an imaginative individual, which may explain why it is so difficult to actually pay any attention to facts. Why compare the U.S. and the Czech Republic when one can actually compare the two halves of what was formerly called Czechoslovakia, and see how those GNP/GDP, FDI, and consumption comparisons look. After all, that just might provide a bit more insight into the discussion.

Some 2015 State Dept. info for the unimaginative – ‘The flow of FDI into Slovakia has declined since 2007 due to changes in the government’s investment policies which decreased the attractiveness of the business environment. A recent survey conducted by the foreign chambers of commerce in Slovakia concluded that Slovakia is ceding its position as a regional FDI leader to the Czech Republic. The investors criticized Slovakia’s tax system, malfunctioning judiciary, and the excess bureaucracy in applying for available EU funding. A low rate of investment in R&D, poor infrastructure, and lack of interest in technical education also threaten Slovakia’s position as top FDI destination in the region.

—————————————————————–

Most recent FDI has been focused on the expansion of businesses already operating in Slovakia (including investments in production facilities and job creation), as opposed to new investors entering the country. According to a recent EC study, FDI inflows to Slovakia as a percentage of the country’s GDP fell from nearly 9 percent in the 1999-2003 period to the current level of 2 percent. The stock of FDI reached over 42 billion euros in 2012. Inward flow of FDI to Slovakia was 670 million euros in 2013. Nevertheless, this data is not representative of actual FDI volume, as it does not take into account investments by entities active in the Slovak market but incorporated abroad. The banking, insurance, and energy sectors attracted most FDI inflows in 2013.’ https://www.state.gov/e/eb/rls/othr/ics/2015/241740.htm

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6 German Catholic December 6, 2017 at 2:51 am

I agree with you clockwork_prior.
Economists are so concerned about causality/engodeneity/scientific method…. and then Krugmann just posts a GNP to GDP graph from the Czech republic which look like it hits rock bottom in 2010 (it declined from 100% to 93%… is this good/bad/does that even matter??).
Of course, this happens exactly due to low wages and low taxes, the people havent benefited while the benefits are only to foreign capital holders – for all this no proof was given (actually, the “far right” government of the Visegrad countries often makes that case for the last one- so I guess Krugman has something nice now to say about them??).
Of course, this is totally comparable to the US – see your nice post prior – plus add that the Visegrad countries joined this small unimportant institution called EU and they border this less important exporter of Germany….
Of course, we should only write about the Czech Republic (Visegrad), all other European countries are just not comparable to the US in this specific examples…

Im looking forward to Krugman fanboys Noah Smith, Brad DeLong, Matthe Iglesias to follow up on this post (“Republicans are so dumb, see what God Krugman said…”).
Meanwhile Tyler is the last resistance: he knows Krugmans post is garbage, but he cant be too harsh on Krugman as he still wants to (as we all now) join the cool kids party hosted by the “liberals” (a word hijacked by the US left)… so Tyler then posts this.

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7 Butler T. Reynolds December 6, 2017 at 7:06 am

‘but he cant be too harsh on Krugman as he still wants to (as we all now) join the cool kids party hosted by the “liberals”’

Because we know that going the other route works wonderfully: screaming, throwing insults, hurling f-bombs, and calling people “cucks” are well proven tools of persuasion.

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8 Catholic German December 6, 2017 at 8:27 am

nice world view you have where the alternative to “not being too harsh” is screaming, calling people cucks….

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9 TMC December 6, 2017 at 8:29 am

Tyler hit a nice sweet spot in between. Not too mean to put anyone off, but if you read the post, the criticism is there, if only you are not reading to confirm your … priors.

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10 Catholic German December 6, 2017 at 12:14 pm

probably true and tylers engages with a wide range of views- maybe thats why i like reading him. which other main stream commentator is like him in that regard? who from the left actually respects conservative, let alone nationalist (a la trump or sailer), thoughts? (both are honest questions)

11 Jeff R December 6, 2017 at 11:04 am

Paul notes correct that a lower corporate rate will attract foreign investment, and the returns to that investment, by definition, will not accrue to American citizens.

I didn’t read the post this is alluding to, but is Krugman really going all America First on us? That seems…inconsistent, to put it mildly. Not to mention it ought to boost domestic investment, too. The German’s aren’t the only people sensitive to changes in ROI!

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12 We live in interesting times December 6, 2017 at 11:21 am

I spent a few days in the Dark Ages (before cell phones and personal computers) touring behind the Wall. Any improvement is beneficial.

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13 Viking December 6, 2017 at 1:52 am

Most economists seem too be neutral on trade deficits, as the theory goes that voluntary transactions will maximize total utility.

Assume 60 percent of Americans are home owners, and 40 percent renters. Further assume 2 scenarios:

A: All rental housing is owned by foreign investors. (Like 1700s through 1800s Ireland with absentee land owners?)
B All rental housing is owned by Americans.

It seems hard to come up with a scenario where (A) leads to better welfare for the average American than (B).

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14 ChrisA December 6, 2017 at 4:51 am

Well currently foreign investors don’t own 100% of US rental houses, most of the owners are US residents. If we do move to a place where 100% of the owners are foreigners then presumably it is because the US owners had better alternatives for their money than holding rental property, so overall a net gain in utility has occurred for US property owners. In terms of renters, it is hard to see how the picture changes, so should be no change in utility there (unless you experience di-utility by the sheer disgust at paying money to foreigners). Actually there could well be increases in utility as well for renters since if the owners are now foreign they are not a voting block in the US and one could well expect new political policies that then favor renters over owners.

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15 Viking December 6, 2017 at 11:12 am

I think there is one point you’re not considering,at least not explicitly:

If all landlords were foreign, the rent payments (minus maintenance and similar costs) leave the US economy. By this one time disinvestment of selling off the real estate, the return is a permanent trade deficit from housing.

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16 ChrisA December 6, 2017 at 12:38 pm

Again American owners must be better off otherwise they wouldn’t sell. Its like when you make something and then sell it, you are better off even despite you not having the thing anymore.

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17 chuck martel December 6, 2017 at 6:39 pm

If all landlords were foreign, the rent payments . . . leave the US economy.

Presumably the landlord purchased the property from an American owner and paid for it in US dollars, obtained by some previous exchange with another American, although he could have bought it from another foreigner in a different currency. Nevertheless, if he’s renting the property to an American he’ll be paid in US funds, which will eventually be used in an exchange with an American entity. US funds inevitably return to the US, they don’t leave the economy.

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18 Doug December 6, 2017 at 5:52 am

America wastes a tremendous amount of resources assuring that the price of housing can never go down. Whether it’s onerous land use restrictions that drive up the cost of living, massive government spending in 2008 to prop up the market, or distortionary ZIRP.

Let the Chinese buy all the housing stock. Homeowners will no longer be a sacrosanct political class. Then nuke the housing market and let the foreigners take the pain.

The Orient has a long history of running huge trade surpluses with the West, making horrible investments, and the West essentially getting all those exported goods for free. Thus is exactly what happened when China hoarded silver in the 17th century by exporting lacquerware. The whole world remonetized to gold and their reserves became worthless.

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19 TMC December 6, 2017 at 8:31 am

More recently, the Japanese of the 90s and their real estate deals.

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20 athEIst December 6, 2017 at 9:35 am

The Orient has a long history of running huge trade surpluses with the West,

Do you have a good source? I knew the British thought they could sell their manufacturers in the Yangtze Basin, but the Chinese were not buying. So they had to pay out silver(and later opium) to buy the silks and porcelin they wanted resulting in huge trade surpluses favoring China. I’m a bit vague on The whole world remonetized to gold and their reserves became worthless

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21 Viking December 6, 2017 at 11:20 am

I did find one source:

https://seekingalpha.com/article/422081-324-years-of-the-gold-to-silver-ratio-and-195-silver

There are a few periods from late 1800s on that someone hoarding silver would be hurt, if the price reference is gold.

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22 athEIst December 9, 2017 at 1:41 pm

That was interesting and informative, ad tho it be,

23 Marian Kechlibar December 6, 2017 at 3:00 am

Czech here. No sense in comparing the USA with Czechia, our bargaining position in international relations is about as strong as that of New Hampshire alone.

These days, we are in an aftermath of a national election, in which the populist parties gained about 60 % of the Parliament seats and the formerly mainstream parties have been reduced to about a quarter of the seats together.

This development has many reasons (among others, the migration crisis in neighboring Germany and repeated attempts of Brussels and Berlin to redistribute the newcomers across the rest of the EU), but one issue that I heard repeatedly in the campaign and that was much more prominent than before, is the impression that CZ is an economic colony of the Germans and that the spoils that go to them are way too big. Especially the massive and readily observable difference between salaries/wages of Czechs and Germans doing literally the same work for the same employer (such as Volkswagen group or Lidl mall chain) grates on voters’ nerves more than ever before. There used to be complacency about this difference, because of the expectation that the gap is going to close slowly over the years. But this promised convergence is extremely slow, if extant at all, and people are showing frustration over it. Especially if taking into consideration, that the total amount of dividends leaving CZ for the Western mother companies is about the size of the whole state budget.

If anything, this resentment will result in further growth of the populist vote here.

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24 So Much For Subtlety December 6, 2017 at 3:44 am

This is not unreasonable or unexpected. The Germans add a lot of value, collectively and as individuals. Naturally that will be resented. Now I have never seen the Czechs as ZMP workers but I can believe they add much less value than German workers. So will they, like the Malays and Indonesians, cut off their own nose to spite their face? Will they choose to be poorer as long as they do not have to live with a comparison with the Germans in their faces every day? Probably. The Germans are, if you like, the new Jews of Eastern Europe.

However that German strength means they will inevitably be the dominant power in Europe – and the Czechs, so close to them, are especially vulnerable. What can they do about it? The Czechs rejected rule from Vienna and after getting rid of that nice Franz Josef, ended up inviting in a much less pleasant Josef. They have now rejected rule from Moscow. What else does that leave? They can hope for a Habsburg-like benign, tolerant, mildly corrupt, bureaucratic, generally efficient but secular and socialist rule from the EU. But they are still living next door to the Germans.

So if not Vienna or Moscow, Berlin. Should have stuck with Otto.

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25 A Truth Seeker December 6, 2017 at 4:43 am

“The Czechs rejected rule from Vienna and after getting rid of that nice Franz Josef, ended up inviting in a much less pleasant Josef.”

Did they invite in Hitler too?

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26 Marian Kechlibar December 6, 2017 at 5:26 am

“I can believe they add much less value than German workers”

Less, perhaps yes, but it is nowhere near the 3 to 1 difference of their wages.

Remember that the German investors brought their methods of work with them. A Volkswagen-owned factory in CZ runs on the same principles as a Volkswagen-owned factory in DE. So does Lidl or Kaufland. There is no unique slovenly Czech way of work in action. The German know-how came together with the investment. If you slack off, they will fire you – the Czech labor law is quite friendly to the employer, moreso than in Germany proper, if still a far cry from the US “employment at will”.

The real reason for the discrepancy is that the Czech employees were, for a long time, willing to accept lower wages. Collective bargaining here is mostly a joke. German trade unions are way more aggressive. This might be coming to an end, though.

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27 Catholic German December 6, 2017 at 8:40 am

I love how people have it both ways with Germans..

czechs say: germans earn too much.
EU countries say: germans earn too little and thats why they have a competitive edge over other countries https://www.ft.com/content/a7758d5e-8566-11e6-8897-2359a58ac7a5

PS: swiss salaries are even higher than german ones – hint: its not due to their strong unions
PPS: go ahead with your stronger unions – i bet you gdp per capita will explode as it did during communism in eastern europe

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28 A Truth Seeker December 6, 2017 at 8:50 am

“PS: swiss salaries are even higher than german ones – hint: its not due to their strong unions PPS: go ahead with your stronger unions – i bet you gdp per capita will explode as it did during communism in eastern europe”

Evidently, Eastern Europe was known for its strong, independent unions, which coukd easily challenge the owners of the means of production.

29 Marian Kechlibar December 6, 2017 at 9:01 am

I am a comparatively well-paid rightwinger and I do not really care for stronger or weaker unions. But I grew up in a deindustrialized city and I can observe the differences, resentment etc.

Do you seriously believe that productivity per capita of a Czech-based VW plant is one third of a German-based VW plant? Those two factories are almost identical, and so are the worker roles. A German employee works with exactly the same tools and performs the same tasks as a Czech or a Romanian one. This unification is the source of the efficiency for the whole supranational conglomerate.

The difference is only in the willingness to accept 5 Eur per hour brutto as a “wage”.

As I said, the only reason why people here were willing to do so was the expectation that the wages are slowly going to converge to the Western level. Did not happen, too bad. The trust has been lost, same as the Ossis (former GDR) lost their hope to ever catch up with the West. As in the GDR, this leads to a populist political shift in CZ.

30 Catholic German December 6, 2017 at 11:00 am

I work in switzerland for a german company and compared to working in germany i earn 50% more (in the same company doing the exact same job).

no, i am not 50% more productive, but there are a lot of other factors before “strong union” which describes my higher pay.
there are good reasons why pays differ between countries (or even cities) – wishing that your economic situation improves (unions!) doesnt mean it magically happens

31 Hazel Meade December 6, 2017 at 12:21 pm

Why is the such a large wage difference? I mean, EU has a common market so can’t Czech citizens go to Germany in search of higher wages? And why don’t other companies move to Czech republic to take advantage of lower wages? Any restrictions preventing foreign (or domestic!) companies from setting up even more factories in the Czech republic should be looked at as the real culprit here. If Czech wages are so cheap, companies should be flocking to it to take advantage. Why is that not happening, or why is it happening so slowly ?

32 Marian Kechlibar December 7, 2017 at 2:41 am

Hazel Meade:

“If Czech wages are so cheap, companies should be flocking to it to take advantage.”

They do and we actually have only about 2 per cent unemployment right now, to the point that the employers scream for import of more cheap workers from Vietnam, Mongolia and Uzbekistan.

I am very unhappy about Uzbekistan being on the list, because that country has a major problem with jihadism and we were spared such problems until today precisely because we did not import a “community” rife with Islamic radicalism before.

33 athEIst December 6, 2017 at 9:43 am

that nice Franz Josef.

Lots of photos on the internet of Austrohungarian army hanging Serbian civilians. That sort of behavior comes from the top.

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34 Marian Kechlibar December 7, 2017 at 2:43 am

To be fair to F.J., by 1914 the guy was senile and popular opinion of the day thought of him as not being able to remember his own name in the mornings.

The atrocities in Serbia were mostly work of the military brass who tried to ape their beloved steely Prussians.

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35 clockwork_prior December 6, 2017 at 5:33 am

‘Especially if taking into consideration, that the total amount of dividends leaving CZ for the Western mother companies is about the size of the whole state budget.’

All too many Americans, when looking at their auto industry for example, seem utterly unaware of this dynamic. Or of the next level – Skoda is unlikely to be spending a lot of money buying Czech made machine tools, as VW undoubtedly already has its preferred machine tool suppliers – who ever so coincidentally just happen to be German too. But when VW installs German built machine tools in a Skoda plant (or builds a new plant entirely), the statistical picture will likely place that machine tool investment in the foreign investment category (the other option is that such machine tools are considered an import by Skoda – which conveniently ignores the fact that it is not Skoda, a local Czech company, making the decision about importing 10s of millions of euros of German made machine tools).

But don’t feel too bad, because when it comes to German employees being paid more, the same dynamic applies to how American Mercedes workers are treated in the U.S. too (though the comparison is a bit complicated there, depending on how one values 6 weeks vacation, for example, or having long term employment guarantees compared to the economic freedom of an American at will employer – like MBUSI in Alabama – to fire you at any time, for no reason at all).

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36 msgkings December 6, 2017 at 12:08 pm

Employees can leave a job for no reason at all too.

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37 Mulp December 7, 2017 at 11:27 am

Because they get the same or higher pay for not working from the government???

Because the typical household has a million in liquid assets so they do not need wage income to eat or keep the lights on???

If workers in the regions Trump won have such freedom to quit, why do they complain so much about Blue States (which place more handcuffs on employers than Red States, but nothing like those in the EU)???

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38 maros December 6, 2017 at 10:30 am

I cannot believe Tyler could commit such a blunder (omission or commission?), but…the private consumption chart is not inflation adjusted. Using inflation numbers from Czech stat bureau, cumulative inflation since 1995 is 206%, which leaves the price adjusted increase of private consumption at ~46%. Over the span of 22 years. Real GDP per capita increase for the same period is ~65%. Great for capital, sucks to be a peon, though. Isn’t this exactly the point Krugman was trying to put forward?

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39 Viking December 6, 2017 at 12:19 pm

This source says price index went from 100 to 200.

https://tradingeconomics.com/czech-republic/consumer-price-index-cpi

Using tradingeconomics, consumer spending went from went from 330 to 545.62 CZK Billion from 1996 to 2017.

https://tradingeconomics.com/czech-republic/consumer-spending (have to click on Max button to get 21 years)

While the chart does not say so, farther down on the page there is a remark: “Constant Prices”

If this chart is indeed inflation adjusted, then spending increased 60-65%. Population changed no more than 4% in the same time period. Since my (tradingeconomics) data go from 330 to 546, and Prof Cowen’s data from ~200 to ~600, it seems likely that Cowen indeed did not use inflation adjusted data.

[Czech Republic Consumer Spending

This page provides – Czech Republic Consumer Spending – actual values, historical data, forecast, chart, statistics, economic calendar and news. Czech Republic Consumer Spending – actual data, historical chart and calendar of releases – was last updated on December of 2017.

Actual Previous Highest Lowest Dates Unit Frequency
545.62 540.47 545.62 330.68 1996 – 2017 CZK Billion Quarterly
Constant Prices, SA]

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40 maros December 6, 2017 at 3:48 pm

Mea culpa…cumulative inflation since 1995 is 106%, not 206%. 206% is the price level, of course.

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41 A Truth Seeker December 6, 2017 at 4:42 am

Let us be blunt: the American people has lost its faith in its leaders. They, now, take their leaders for what they are: looters.

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42 Viking December 6, 2017 at 12:21 pm

Were you a dreamer, who got kicked out before Obama?

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43 Viking December 6, 2017 at 12:22 pm

Otherwise, how do you have such US influenced English?

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44 ChrisA December 6, 2017 at 4:53 am

It would have almost been worth having Hillary as president to get back Paul Krugman as a non-partisan economist.

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45 TMC December 6, 2017 at 8:50 am

Can’t set the clock back to 1999

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46 ʕ•ᴥ•ʔ December 6, 2017 at 5:13 am

I agree with Tyler that welfare is the crux, but I agree with some comments that the case for US working class welfare might be weak.

Are Trumpians really saying “no really, serve globalist capital before us?”

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47 ʕ•ᴥ•ʔ December 6, 2017 at 10:03 am

In the first half of his new piece Douthat is good on this betrayal of Trump voters in favor of Republican donors.

https://twitter.com/DouthatNYT/status/938421297956220929

I don’t think the second half, looking for a bright side, is so strong. ymmv.

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48 msgkings December 6, 2017 at 12:10 pm

Of course you don’t. You’re one of those optimism = stupidity IYIs.

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49 ʕ•ᴥ•ʔ December 6, 2017 at 12:19 pm

The nonpartisan Joint Committee on Taxation has done the study.

Any “optimism” rejecting that empiricism strikes me as emotional, at a minimum.

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50 Paraguayan December 6, 2017 at 12:24 pm

This is what America has become, a desperate hope that a $2.3 trillion transfer to the rich will work out ok for the bottom 90%

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51 ʕ•ᴥ•ʔ December 6, 2017 at 5:15 am

By the way, whatever happened to that trillion for infrastructure?

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52 Massimo December 6, 2017 at 5:17 am

The capital stock is not fixed. I do not really understand how meaningful is to focus on ratios. If German enterpreneurs invested in, say, automotive plants and chemical concerns, Czechs might have used those flows to invest themselves in hotels and call centers.

There are at least two fallacies here, IMHO: 1) assuming that if Wolkswagen did not rebuilt the Skoda plant, some Czechs enterpreneurs would have done it. The plant came with a firm that had know-how, brand and worldwide channels to sell the cars, the Czechs enterpreneurs did not necessarily have them. And if they had them, they could invest in another car plant anyway. 2) Why should a Czech individual worry about who is the guy that put the money needed to increase his productivity, wages and alternatives? What is this obsession on the color of the passport of the guy that become richer helping you? What is the difference with being obsessed about what religion he follows? Or if he is from nobility or common blood? Or if he is left or right-handed?

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53 Mulp December 7, 2017 at 11:38 am

West Virginia became richer when Cat earth moving equipment made by Illinois workers were bought to replace WV coal miners? WV residents became better off when investment cut total coal miner labor costs?

The question I have is why Cat is in nowhere Illinois rather than in Applacia where the heavy equipment was used to product the steel in Cat heavy equipment.

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54 ʕ•ᴥ•ʔ December 6, 2017 at 5:43 am

I think Tyler’s point is “all else being equal, money isn’t bad.”

True, but not really a guide for the allocation of tax burden.

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55 rayward December 6, 2017 at 6:37 am

The corporate tax cut is being sold to the American public as a surefire way to unleash enormous investment in productive capital in America, producing the kinds of jobs, productivity gains, and economic growth that will enrich all Americans, not just the bankers and the investors. Krugman disagrees that the corporate tax cut will accomplish that, for the reasons he cites. Cowen changes the subject.

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56 rayward December 6, 2017 at 6:50 am

The economic and business model Republicans have been selling the past 40 years is rendering America a second-class economy. Cowen doesn’t see it that way because he is a globalist and believes the gains in places like China will have positive effects in America and worldwide. I’m a globalist too, and a Sinophile, but I won’t ignore the lie that is being told to Americans to sell a tax cut. https://www.nytimes.com/2017/12/05/business/ford-china-electric-cars.html https://www.nytimes.com/2017/12/05/business/economy/tax-plan-reagan.html

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57 TMC December 6, 2017 at 8:56 am

Cowen did not change the subject. He critiqued Krugman’s method, and told the rest of the story that Krugman left out.

We need a Paul Harvey to run a column next to Krugman’s every time it runs.

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58 Dan Hanson December 6, 2017 at 5:45 pm

This is the same Krugman who declared on election day that markets would never recover to their previous highs, because of Trump.

The real question is why anyone takes Paul Krugman’s column writing seriously. He’s a hopeless partisan.

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59 Bill December 6, 2017 at 8:17 am

Foreign investment may be coming in because of your tariffs and non-tariff barriers, not because of your tax code.

How many foreign automobile manufacturers are here because of taxes, or because of domestic content requirements.

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60 We live in interesting times December 6, 2017 at 11:37 am

Or the $ was less than the Euro and it may have been less expensive to build cars here and ship to other parts (read that years ago) or perhaps we are more stable even tho it doesn’t feel like it at this time.

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61 DanC December 6, 2017 at 8:27 am

I avoid Krugman. A Jedi economist who has turned to the dark side. (Not to mention he is often a nasty person.)

I think the tax cuts can lead to an era of the “Big Deal” i.e. A lot of M&A activity. Not surprising that Trump thinks that is a good thing. And it can be. If the tax cuts lead to more benefits for one sector of the economy then others that does not mean that it is a net negative event. Screaming where’s mine is the American way but if it leads to policies that hamstrings some, because you think that makes the race fair, we just all end up limping around.

If the tax cut leads to increased investment in the US, in any sector, that is a plus. If local governments compete for those investment dollars by creating a more fostering environment for investment, that is a plus.

I am not pro-business. Like the late great Milton Friedman, I am pro-competition. Policies that encourage competition are good. A general tax cut that may benefit one sector of the economy (because of comparative advantage say) is better than having a government that rewards or punishes sectors of the economy through the political process. Allowing investors to share in the gains of the investment is not a flaw in the system. And that is true regardless of the national origin of the investor.

If some sectors of the economy do not see increased investment, ask why. What is it about those sectors that make it unattractive for investors? If investors are demanding a higher return for investing in your sector what message are they sending you?

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62 TMC December 6, 2017 at 9:14 am

Good comment. Corporate taxes have a high deadweight loss. Getting rid of them optimally, or minimizing them, is a win for society. I’d prefer this to be a criteria for evaluating taxes and regulation.

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63 Mulp December 7, 2017 at 11:48 am

Corporate taxes are a cost only if the corporation is not investing heavily.

Amazon and Tesla do not pay much corporate tax because of their massive investment rates to grow their production to compete aggressively with many bigger corporations that have high profits because they invest far far less.

Wal-Mart profits suffered when they started competing with Amazon with as much effort as Amazon competed with Wal-Mart. Wal-Mart profits suffered when they started investing in workers to compete with stores like Target that were investing in better workforce.

Investing cuts profits, and taxes.

So, how can taxes which fall with investing be limiting investing?

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64 Hazel Meade December 6, 2017 at 12:26 pm

If some sectors of the economy do not see increased investment, ask why. What is it about those sectors that make it unattractive for investors? If investors are demanding a higher return for investing in your sector what message are they sending you?

Good comment. These are questions that should be asked about every economic issue.
If the market isn’t doing X – ask why, before you decide there is a market failure and demand government intervention.

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65 B.B. December 6, 2017 at 9:24 am

I think a distinction should be made between (1) foreign fresh greenfield investment, which raises the capital stock; and (2) foreigners just buying up existing capital.

In category (2), workers and consumers do not gain anything. Just the old owners of the capital get a one-time windfall. Such investment provokes nationalist outcry about foreigners taking over the country.

In category (1), there is more capital and more productivity to boost wages and employment.

In the US, there is a big difference between Toyota building auto assembly plants in Indiana and foreigners buying up housing in top neighborhoods in Los Angeles.

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66 Mulp December 7, 2017 at 12:32 pm

What about Tesla building a big car factory in California? And a battery factory in Nevada? Both to be replicated in the US and around the world….

Or building a new rocket factory in California?

Why did Elon Musk invest so aggressively where corporate taxes are crushing and kill off investing?

Why haven’t coal and oil corporations with high profits been building car and space factories in the really poor low tax States, like Alabama, West Virginia, Kansas,…?

With tax cuts looming to promote more investing to produce more profit from competition, GE is ending it’s century of manufacturing lighting products which is extremely competitive to massive investment kicked off by government picking winners: low energy consuming 500-1500 lumen lamps with standard Edison screw sockets.

I argue the tax cuts are going to slash investing as defined in economy theory in the 60s when I was first exposed to economics. In fact, Milton Friedman argued high corporate and business taxes promoted too much investment in factories, new technologies like aluminum cans and plastics, and too much electric power and telephone capital requiring getting consumers to buy more electric appliances and talk on the telephone too much.

Instead, rent seeking will be favored by tax policy, the opposite of the 60s when tax favored activity today was called usury then, and monopoly predatory pricing then.

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67 jorgensen December 6, 2017 at 9:31 am

“But the gains from foreign investment into the United States also ought not to be downgraded, either explicitly or by implied presumption.”

As that foreign investment gets advanced it will necessarily drive up the trade deficit. The burden of those capital flows will fall primarily on American manufacturing.

The GOP is currently too stupid to understand the connection between trade and capital flows. If tax reform results in foreign investment driving up the trade deficit, Trump etc will blame the Canadians and Mexicans for “cheating”.

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68 misc December 6, 2017 at 11:19 am

It is not at all surprising for Krugman to display shocking ignorance, but you have to wonder if he’s actually been to Eastern Europe in the past 10 or so years. Far from being a cautionary tale for the evils of foreign investment, Eastern Europe has benefited massively from EU membership and the signs of economic development and increasing wealth are obvious.

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69 Mulp December 7, 2017 at 12:34 pm

Czech consumers are benefiting from remittances sent back from Germany and UK, et al.

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70 spencer December 6, 2017 at 11:37 am

In general economists view foreign capital inflows to finance investment as a good thing but foreign capital inflows to finance consumption as questionable.

By comparing Czechoslovakia and the US Cowen is ignoring this difference.
The inflow to Czechoslovakia fincneed investment while the inflow to the US financed consumption. Since 1980 US savings ( including the federal deficit as negative savings) has been less than US investments every year. But if you assume that the federal budget had been zero, than savings would have exceeded investment every year except for a few years in the late 1990s when the US was in an investment driven boom and the federal budget was in surplus. So it is easy to see that the US savings-investment gap ( equal to the current account deficit ) was used to finance consumption.

The Reagan tax cuts managed to change the US from the world’s greatest creditor nation to the world’s greatest debtor nation and the Republicans are now repeating the same policies. So why should you expect different results.

Looked at this way it is easy to see why the Republican tax cuts were a major factor in the poor performance of US manufacturing.

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71 Mulp December 7, 2017 at 12:44 pm

“few years in the late 1990s when the US was in an investment driven boom”

I argue the net investment in the late 90s was still negative. Public infrastructure was at best holding constant at the beginning, but by 2000 was depreciating faster than investment. And lots of factories were being closed in what is now Trumpland during that time.

Inflating house prices with asset churn is not investing. Doubling the price of 50s housing in California while 50s housing in Trump land is abandoned is not an indication of economic investing. “Investing” in rent seeking businesses is no better when done by Wall Street mortgage brokers than when done by the Mafia loan sharks.

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72 Hazel Meade December 6, 2017 at 12:06 pm

Paul notes correct that a lower corporate rate will attract foreign investment, and the returns to that investment, by definition, will not accrue to American citizens.

Only if you think that the jobs created by the foreign investment don’t count as a “return” to American citizens.
In the abstract, the pay that US citizens get from foreign owned companies is a return. Employees invest labor in exchange for a guarenteed payment instead of investing capital in exchange for a variable return. But both salaried employees and foreign investors “profit” from the enterprise. So US citizens do benefit from foreign investment – they just get paid in salary instead of dividends.

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73 Mulp December 7, 2017 at 12:52 pm

Upper Midwest autoworkers benefit from Asian building of autofactories in the South paying lower wages?

If 10,000 UAW workers are replaced by 8,000 non-union workers paid 60% the wages, is US welfare increased?

If it’s good for Asian automakers to displace US autoworkers, is it much worse for Elon Musk to build a new autofactory in crushingly high tax California using a lot of US source investment In his campaign to displace US autoworkers?

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74 Hazel Meade December 7, 2017 at 2:04 pm

US consumers also benefit from the ability to buy cheaper cars, those consumers might include Upper Midwest autoworkers.
Let’s say you suffer a loss of income of 10%, but the cost of living goes down by 20%. Is that a net loss?

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