Tariffs do not in general help trade deficits
That is the topic of my latest Bloomberg column, here is one bit:
The most important factors behind trade balances include savings decisions, fiscal policy, economic growth rates, wealth levels and demographic characteristics such as the age of the population. As economist Joseph Gagnon bluntly put it: “None of the studies found any role for trade barriers.”
Currency manipulation can be an important factor, and that has been a problem in the past with China. But it is not a problem right now; if anything, China is propping up the value of its currency. Nor is currency manipulation a problem with Canada, Mexico or the European Union, other targets of Trump’s tariffs.
Insofar as currencies do matter, currency appreciation is one very direct mechanism that limits the potential for tariffs to improve the trade balance. If a country slaps tariffs on imports, that does make those imports more expensive and thus lowers the demand for them. But then the value of the domestic currency will rise, which in turn makes it harder for domestic exporters. There is no guarantee that these effects will cancel each other out exactly, but it is difficult to get much of a trade balance boost through this mechanism, given these offsetting effects.
Standard stuff people, standard stuff. A bunch of you should know better.
Games we played
I always loved games and card games, and they played a big role in family life. It was one activity that everyone, including my grandmother, could partake in enthusiastically, and on a more or less equal footing.
The big card game was euchre, yes euchre. It is a trick-taking game with trumps, think of it as a much simpler bridge. The jacks are the strongest cards, and they are called the Right and Left Bower. The dramatic moment would come when you played with four people, and one player would announce that he or she wanted to “play it alone,” feeling confident of winning enough tricks without cooperation from the partner.
I recall sister Holly and I going to school, chatting with other kids, and being mystified that they never had heard of or played euchre. According to Wikipedia, it is “commonly played” in “Australia, Canada, Great Britain, New Zealand, Upstate New York, and the Midwestern United States.” I am not sure I have ever met another human being who mentioned the game of euchre of me, not outside the family that is. Not even when I was living in New Zealand. Arguably it has Alsatian origins? At the time I assumed it was vaguely Scots-Irish, due to the family origins.
Somehow the custom of the game was transmitted through my grandmother’s “Uncle Benny,” have you ever wondered who really was an actual uncle back then?
We loved the French card game Mille Bornes. You are in a road race and trying to accumulate miles. Different types of cards were for hazard, remedy, safety, and distance. The card colors in that game were so nice, and I much preferred it to any American card game. The flat tire cards were my particular favorite. And looking back, one has to wonder whether the family ever played by anything resembling the actual proper, written rules of the thing.
As an aside, my sister and I regarded my grandmother as “speaking French,” even though I do not think this extended much beyond playing Mille Bornes, singing “Frere Jacques” and knowing a few worlds like “merci.”
I learned poker and blackjack, but never loved them. I would play solitaire over the summer when I was alone. Rummy and hearts were part of the family repertoire too. I also liked to read books about games.
As my sister and I grew up and reached our early teens, Scrabble become dominant. But if someone was tired and didn’t feel like concentrating too much, we would switch back to euchre. At Scrabble I did very well.
When I was eight or nine, my Uncle Tom taught me the rules to chess, but at first the game did not interest me, not until I was ten years old. The very first time I played he beat me with the Queen Anne’s mate trick, culminating in Q x f7. I felt swindled — why were we playing this kind of game?
Overall I am struck by what a rich menu of games we had back then. Loyal MR readers will know I am no Luddite, but I never wish we had had more technologically advanced games at our disposal. I recall also that only games brought the whole family together, because television was too divisive, due to diversity of taste. Two of us could find common shows, but it stopped there. My sister and I watched Dragnet and Adam-12 together, with my mother I watched Star Trek, and with my father Frankenstein movies. My grandmother watched only soap operas.
I also find that games and gaming are some of my most vivid and enduring memories from childhood. A lot of the rest has escaped into the fog. Today, however, I don’t play games at all.
Denmark fact of the day
Denmark’s state-run postal service, PostNord, is to end all letter deliveries at the end of 2025, citing a 90% decline in letter volumes since the start of the century.
The decision brings to an end 400 years of the company’s letter service. Denmark’s 1,500 postboxes will start to disappear from the start of June.
Transport Minister Thomas Danielsen sought to reassure Danes, saying letters could still be sent and received across the country. One company said it was prepared to take over deliveries.
Postal services across Europe are grappling with the decline in letter volumes. Germany’s Deutsche Post said on Thursday it was axing 8,000 jobs, in what it called a “socially responsible manner”.
Here is the full story, via Anecdotal.
Thursday assorted links
Boettke on the Socialist Calculation Debate
An excellent EconTalk episode with Pete Boettke on the socialist calculation debate.
I like Boettke on the three Ps.
The three Ps–property, prices, and profits and loss. Property incentivizes us. Prices guide us. Profits lure us to new changes and losses discipline us.
Today, “incentives matter” is often considered the first lesson of economics. But not so in the 1930-1940s.
Yeah, it’s so weird to read 1930s economics. Hayek’s colleague, H.D Dickinson, at LSE–when he teaches his course on economics of planning, his first statement is, ‘We will truck with no incentive talk here.’ Okay. Lange, in his famous paper on socialism, says that incentives are psychological problems and therefore not economic theory.
Pete’s new book on the socialist calculation debate with Candella and Truit is very good and available here.
How AI is changing and will change the world of writing
Here is my 68 minutes with David Perell, who is excellent in such settings:
Here is David’s Twitter take, here is a short bit on how to use different AI tools. Here is the transcript. Self-recommending.
My Conversation with Carl Zimmer
Here is the audio, video, and transcript. Here is part of the episode summary:
He joins Tyler to discuss why it took scientists so long to accept airborne disease transmission and more, including why 19th-century doctors thought hay fever was a neurosis, why it took so long for the WHO and CDC to acknowledge COVID-19 was airborne, whether ultraviolet lamps can save us from the next pandemic, how effective masking is, the best theory on the anthrax mailings, how the U.S. military stunted aerobiology, the chance of extraterrestrial life in our solar system, what Lee Cronin’s “assembly theory” could mean for defining life itself, the use of genetic information to inform decision-making, the strangeness of the Flynn effect, what Carl learned about politics from growing up as the son of a New Jersey congressman, and much more.
Here is an excerpt:
COWEN: Over time, how much will DNA information enter our daily lives? To give a strange example, imagine that, for a college application, you have to upload some of your DNA. Now to unimaginative people, that will sound impossible, but if you think about the equilibrium rolling itself out slowly — well, at first, students disclose their DNA, and over time, the DNA becomes used for job hiring, for marriage, in many other ways. Is this our future equilibrium, that genetic information will play this very large role, given how many qualities seem to be at least 40 percent to 60 percent inheritable, maybe more?
ZIMMER: The term that a scientist in this field would use would be heritable, not inheritable. Inheritability is a slippery thing to think about. I write a lot about that in my book, She Has Her Mother’s Laugh, which is about heredity in general. Heritability really is just saying, “Okay, in a certain situation, if I look at different people or different animals or different plants, how much of their variation can I connect with variation in their genome?” That’s it. Can you then use that variability to make predictions about what’s going to happen in the future? That is a totally different question in many —
COWEN: But it’s not totally different. Your whole family’s super smart. If I knew nothing about you, and I knew about the rest of your family, I’d be more inclined to let you into Yale, and that would’ve been a good decision. Again, only on average, but just basic statistics implies that.
ZIMMER: You’re very kind, but what do you mean by intelligent? I’d like to think I’m pretty good with words and that I can understand scientific concepts. I remember in college getting to a certain point with calculus and being like, “I’m done,” and then watching other people sail on.
COWEN: Look, you’re clearly very smart. The New York Times recognizes this. We all know statistics is valid. There aren’t any certainties. It sounds like you’re running away from the science. Just endorse the fact you came from a very smart family, and that means it’s quite a bit more likely that you’ll be very smart too. Eventually, the world will start using that information, would be the auxiliary hypothesis. I’m asking you, how much will it?
ZIMMER: The question that we started with was about actually uploading DNA. Then the question becomes, how much of that information about the future can you get out of DNA? I think that you just have to be incredibly cautious about jumping to conclusions about it because the genome is a wild and woolly place in there, and the genome exists in environments. Even if you see broad correlations on a population level, as a college admission person, I would certainly not feel confident just scanning someone’s DNA for information in that regard.
COWEN: Oh, that wouldn’t be all you would do, right? They do plenty of other things now. Over time, say for job hiring, we’ll have the AI evaluate your interview, the AI evaluate your DNA. It’ll be highly imperfect, but at some point, institutions will start doing it, if not in this country, somewhere else — China, Singapore, UAE, wherever. They’re not going to be so shy, right?
ZIMMER: I can certainly imagine people wanting to do that stuff regardless of the strength of the approach. Certainly, even in the early 1900s, we saw people more than willing to use ideas about inherited levels of intelligence to, for example, decide which people should be institutionalized, who should be allowed into the United States or not.
For example, Jews were considered largely to be developmentally disabled at one point, especially the Jews from Eastern Europe. We have seen that people are certainly more than eager to jump from the basic findings of DNA to all sorts of conclusions which often serve their own interests. I think we should be on guard that we not do that again.
And:
COWEN: If we take the entirety of science, you’ve written on many topics in a very useful way, science policy. Where do you think your views are furthest from the mainstream or the orthodoxy? Where do you have the weirdest take relative to other people you know and respect? I think we should just do plenty of human challenge trials. That would be an example of something you might say, but what would the answer be for you?
I very much enjoyed Carl’s latest book Air-Borne: The Hidden History of the Air We Breathe.
Germany fact of the day
German borrowing costs surged by the most in 17 years on Wednesday, as investors bet on a big boost to the country’s ailing economy from a historic deal to fund investment in the military and infrastructure.
The yield on the 10-year Bund surged 0.21 percentage points to 2.69 per cent, its biggest one-day move since 2008, with markets braced for extra government borrowing.
Chancellor-in-waiting Friedrich Merz late on Tuesday agreed with the rival Social Democrats (SPD) to exempt defence spending above 1 per cent of GDP from Germany’s strict constitutional borrowing limit, set up a €500bn off-balance sheet vehicle for debt-funded infrastructure investment and loosen debt rules for states.
Here is more from the FT, noting that crowding out is still “a thing.” Of course it is wrong, or at least not obviously correct, for the article to report that “investors bet on a big boost to the country’s ailing economy…” I would sooner regard this as bad news for German consumption, naming that trying to address some of their problems will involve significant opportunity costs. Share prices did go up, and in part you can think of this as a transfer of resources from German individuals to defense and infrastructure firms. You might think additional German defense spending is necessary, as I do, but still that does not boost living standards. The additional infrastructure might, let us hope they are able to find ways to cut other spending along the way, surely it is not all super-efficient?
Janan Ganesh’s latest FT Op-Ed is titled “Europe must trim its welfare state to build a warfare state,” let us hope they can make that work. So far I am waiting to see the evidence.
Wednesday assorted links
1. Some new survey results on work from home.
3. Liu Jiakun wins the Pritzker Prize, photos at the link.
4. The ideology of AI governance. Can AI rule be interpretable to humans? Weird stuff, don’t worry I don’t understand it either.
5. Three Wikipedia pages for great economists.
6. Robert Mundell singing on the David Letterman show. And the direct YouTube links.
Is Social Security a Ponzi Scheme?
Elon recently re-opened the perennial debate about whether Social Security is a ponzi scheme. Here’s my, lightly edited post from 2011.
Elon is in good company calling social security a ponzi scheme. First up is Nobel prize winner Paul Samuelson who wrote:
The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!
How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired.
…A growing nation is the greatest Ponzi game ever contrived.
Samuelson wrote that in 1967 riffing off his classic paper of 1958. By “as far as the eye cannot see” he apparently meant not very far because it soon became clear that the system could not count on waves of youths or rapid productivity growth to generate the actuarially unsound returns that made the program so popular in the early years.
Milton Friedman and Paul Samuelson rarely agreed on much but Friedman also called social security a Ponzi scheme. In fact, he called it The Biggest Ponzi Scheme on Earth but perhaps Friedman is too partisan so let’s go for a third Nobel prize winner who recognizes the Ponzi like nature of social security, none other than…..Paul Krugman (writing in 1996):
Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in). (ital added, AT)
Of these, I agree the most with Krugman. Social Security is not necessarily a Ponzi scheme but it only generated massive returns in the past because of its Ponzi-like aspects. The Ponzi-like aspects are now over and social security is turning into what is essentially a forced savings/welfare program with, as Krugman recognizes, crummy returns for average workers. Social security is thus a Ponzi scheme which has not gone bust but it has gone flat.
The Role of Unrealized Gains and Borrowing in the Taxation of the Rich
Of relevance to some recent debates:
We have four main findings: First, measuring “economic income” as currently-taxed income plus new unrealized gains, the income tax base captures 60% of economic income of the top 1% of wealth-holders (and 71% adjusting for inflation) and the vast majority of income for lower wealth groups. Second, adjusting for unrealized gains substantially lessens the degree of progressivity in the income tax, although it remains largely progressive. Third, we quantify for the first time the amount of borrowing across the full wealth distribution. Focusing on the top 1%, while total borrowing is substantial, new borrowing each year is fairly small (1-2% of economic income) compared to their new unrealized gains, suggesting that “buy, borrow, die” is not a dominant tax avoidance strategy for the rich. Fourth, consumption is less than liquid income for rich Americans, partly because the rich have a large amount of liquid income, and partly because their savings rates are high, suggesting that the main tax avoidance strategy of the super-rich is “buy, save, die.”
Here is the full piece by Edward G. Fox and Zachary D. Liscow. Via the excellent Kevin Lewis.
Should OneQuadrillionOwls be worried?
IMO this is one of the more compelling “disaster” scenarios — not that AI goes haywire because it hates humanity, but that it acquires power by being effective and winning trust — and then, that there is a cohort of humans that fear this expansion of trust and control, and those humans find themselves at odds with the nebulously part-human-part-AI governance structure, and chaos ensues.
It’s a messy story that doesn’t place blame at the feet of the AI per se, but in the fickleness of the human notion of legitimacy. It’s not enough to do a good job at governance — you have to meet the (maybe impossible, often contradictory) standards of human citizens, who may dislike you because of what you are or what you represent in some emotional sense.
As soon as any entity (in this case, AI) is given significant power, it has to grapple with questions of legitimacy, and with the thorniest question of all — how shall I deal with people who are trying to undermine my power?
Here is the relevant Reddit thread. Change is tough!
Tuesday assorted links
1. Perplexity, Deutsche Telekom, and an AI smartphone.
2. GPT 4.5 and Bishop Berkeley!
3. Stocks vs. flows, blah blah blah you still can compare two numbers.
4. “That men once stood before the Rokeby Venus and gawped means nothing to us.”
5. GDP forecasts getting worse.
6. Australian who blood saved the lives of 2.4 million babies dies. James Harrison, RIP.
Regime Uncertainty
Robert Higgs coined the term regime uncertainty to illustrate the challenge faced by business under Franklin Roosevelt’s New Deal, when a flurry of unpredictable legislation such as the expansive and often unclear mandates of the National Industrial Recovery Act (NIRA), attempts at court packing, abrupt tax increases, and shifting labor policies, meant businesses couldn’t reliably forecast returns or risks. Uncertainty magnified bad policy causing investment to collapse and remain unprecedently low.
For the eleven-year period of 1930 to 1940, net private investment totaled minus $3.1 billion. Only in 1941 did net private investment ($9.7 billion) exceed the 1929 amount.
The data leave little doubt. During the 1930s, private investment remained at depths never plumbed in any other decade for which data exist.
Real options theory explains why uncertainty can reduce investment even more than predictable but unfavorable policies. Suppose you’re deciding whether to build a factory in North Carolina or South Carolina. Both locations are viable, but one of the Carolina’s might offer a tax concession—though the decision won’t be announced for six months. Even if investing immediately would still be profitable without the concession, you might choose to delay building the factory. The potential benefit of waiting (the real option) only needs to offset the costs associated with waiting. Thus, even modest uncertainty can incentivize investors to delay big investments. Recent studies confirm Higgs’ insights: spikes in uncertainty strongly correlate with declines in private investment.
Ok, so where do we stand? We are now at a greater level of uncertainty than anything over the last 40 years, barring the worst weeks of the 2008 financial crisis (updated graph as of today!). Investment has begun a modest decline. Some, very preliminary data (take with a grain of salt) are already predicting a recession.
Tariff policy is especially bad because it is uncertainty about bad events. Here are comments from the latest ISM survey (h/t Joe Weisenthal).
Much of the Trump administration’s agenda promises long-term benefits, but chaos and uncertainty threaten its success. Tariff policy, in particular, is bad economics and even worse foreign policy. Even if Trump’s tariff strategy stabilizes, global responses—and their ripple effects—remain unpredictable and with potentially severe downsides. This uncertainty could spark an economic downturn, jeopardizing the administration’s otherwise strong policies.
All of this is unnecessary. We need to get back to the best case for a Trump Presidency.
New results on AI and lawyer productivity
From a new piece by Daniel Schwarcz, et.al., here is part of the abstract:
This article examines two emerging AI innovations that may mitigate these lingering issues: Retrieval Augmented Generation (RAG), which grounds AI-powered analysis in legal sources, and AI reasoning models, which structure complex reasoning before generating output. We conducted the first randomized controlled trial assessing these technologies, assigning upper-level law students to complete six legal tasks using a RAG-powered legal AI tool (Vincent AI), an AI reasoning model (OpenAI’s o1-preview), or no AI. We find that both AI tools significantly enhanced legal work quality, a marked contrast with previous research examining older large language models like GPT-4. Moreover, we find that these models maintain the efficiency benefits associated with use of older AI technologies. Our findings show that AI assistance significantly boosts productivity in five out of six tested legal tasks, with Vincent yielding statistically significant gains of approximately 38% to 115% and o1-preview increasing productivity by 34% to 140%, with particularly strong effects in complex tasks like drafting persuasive letters and analyzing complaints. Notably, o1-preview improved the analytical depth of participants’ work product but resulted in some hallucinations, whereas Vincent AI-aided participants produced roughly the same amount of hallucinations as participants who did not use AI at all.
Of course those are now obsolete tools, but the results should all the more for the more advanced models.