Showing posts with label Tariffs. Show all posts
Showing posts with label Tariffs. Show all posts

Thursday, August 8, 2019

How To Prevent--And Cure--The Next (Or Any) Recession Or Depression (Updated)

With a recession likely coming later this year or next year at the latest, it is important to realize the causes so such recessions can be cured or even prevented in the first place.  Enter Rodger Malcolm Mitchell, the guru of Monetary Sovereignty, penned this important and timely article.

He notes that every single recession and virtually every depression in history has been preceded by a cut in federal deficit spending, or worse, a federal surplus.  That is not coincidence, since cutting the federal deficit slows the growth of the money supply, and surpluses actually shrink the money supply, all else being equal.  (Federal deficit spending = spending new dollars into existence.)  A growing economy requires a growing supply of money, and when the money supply fails to keep up with the demand for money for too long, the economy reacts by shrinking.  Thus, barring a truly massive increase in private debt (i.e. more money lent into existence by banks), deficit cuts ultimately result in recessions and surpluses result in depressions or at least really long and deep recessions.  And recessions and depressions can only be cured by increasing the money supply dramatically, typically by increasing federal deficit spending.  That's it.

And this makes perfect sense, since GDP is literally nothing more than a money measure.  To wit, GDP = Federal Spending + Nonfederal Spending + Net Exports.  Kinda hard to grow that without sufficiently growing the money supply as well.

Everything else is basically a sideshow, but that said, sometimes sideshows can be significant too.  Take the current Trump Trade War, for example.  This lose-lose, negative-sum game would have been recessionary by now had it not been for the massive growth in the federal deficit occurring at the same time, and eventually it may still cause the next recession in spite of the deficit.  But if the Republicans decide to cut federal spending because of manufactured deficit hysteria, that will cause a far worse recession or depression, on top of the consequences of the trade war.  And Wall Street recklessness can indeed cause financial crises, which of course can have knock-on effects on Main Street as well, as we have seen numerous times already.  Though even that is most likely due to the fact that stock market crashes--or any other asset price crash--will shrink the money supply, all else being equal.  And that is especially true when there is a "credit crunch" where banks suddenly refuse to lend as much as before, as we have seen in the wake of both the 1929 and 2008 stock market crashes (but not 1987).

What about oil and gasoline prices?  True, 10 out of the past 11 recessions have been preceded by sharp increases in fuel prices.  And that makes sense in a country in which oil is the lifeblood of the economy.  But even this is more nuanced than one may think.  Neither increases in interest rates alone nor increases in fuel prices alone seem to be enough to cause a recession by themselves unless such increases are truly extreme, which is very rare.  But the simultaneous combination of significantly large increases in both (that is, a sharp hike in the Fed Funds Rate by more than 2.00-2.50% AND at least a doubling of crude oil prices within a year or two) appears to be sufficient to cause a recession.  Of course, given how rare it is for recessions to not be preceded by cuts in deficit spending, it is not clear if sufficient deficit spending can be enough to prevent an oil-induced recession while interest rates are also hiked to prevent or cure inflation.  But at the very least, increasing federal deficits will cure such recessions once the inflation dragon is defeated.

The Fed recently cut the Fed Funds Rate by 0.25 percentage points (25 basis points), while noting that there would not likely be any more cuts this year.  And the stock market lurched downward upon that announcement, and lurched down again the following day thanks to Trump's further escalation of the trade war, and yet again following China's predictable retaliation.  Cutting interest rates is basically like pushing on a string, and in any case it may be too late to fully prevent the next recession that is largely induced by Trump's trade war.

Overall, we know what causes virtually all recessions and depressions.  That means we also know how to prevent and cure them as well.  That is, when recession hits, or ideally before it hits, we should increase federal deficit spending, or at least refrain from cutting it.  It's really not rocket science.

Wednesday, June 20, 2018

Protectionism Without Tariffs and Trade Wars? Easy-Peasy

Looks like Trump's asinine trade war (not just with China, but also our own allies as well) has now begun in earnest.  And that does not bode well at all for our economy OR theirs, since no one really wins a trade war.  Smoot and Hawley must both be spinning in their graves right now, as any history buff will note.

You may remember that one of our previous posts outlines the TSAP's rather nuanced position on tariffs and trade, but we should also elaborate more on how it is possible to have an intelligent and rational kind of protectionism that does NOT depend on tariffs, quotas, or any other beggar-thy-neighbor policies.  For example, since our federal government is Monetarily Sovereign, they can easily afford to do the following to actually protect important domestic industries, as the ever-insightful Rodger Malcolm Mitchell notes:

  • Federal government purchases from domestic suppliers, even at higher than import prices.
  • Federal tax breaks for selected industries
  • Direct federal cash infusions (i.e. direct subsidies) to the selected companies.
And that is true because, as he also notes, a Monetarily Sovereign government like ours literally has the unlimited ability to create and spend its own sovereign currency.  All federal government spending, without exception, involves the ad hoc creation of brand new dollars every time, arcane and archaic rules notwithstanding.  No need to bring the proverbial coals (i.e. tax/tariff dollars) to Newcastle only to effectively destroy them.  And unlike tariffs and quotas, these measures result in a positive-sum game rather than a zero or negative-sum game. 

Of course, all of these things are proverbial carrots, so what about the sticks, you ask?  Even then, most tariffs (and quotas) are far too blunt an instrument, are prone to backfiring, and should be narrowly tailored and used only as a last resort (i.e. to enforce specific trade and other agreements that are being blatantly flouted, and/or for strictly Pigouvian reasons), if even at all.  If outsourcing/offshoring of American jobs is the real concern, it would be far better to start by closing the ludicrous loopholes in the corporate tax code that encourage outsourcing/offshoring of such jobs in the first place.  The latter tactic is the basis for Bernie Sanders' Outsourcing Prevention Act, which would also end or claw back subsidies for American corporations that send jobs overseas.  And his other big idea, the Rebuild America Act, would create additional jobs rebuilding America's obsolete, neglected, and/or crumbling infrastructure as well.  

Note that Trump had clearly stolen, bastardized, and ran with several of Bernie's ideas while combining it all with empty rhetoric and beggar-thy-neighbor policies.  That is, when Trump's ideas are anything even close to coherent, as opposed to the usual incoherent verbal defecation that he is famous for.

But make no mistake.  Our nation's once-great manufacturing base has been hollowed out for decades, and much of it is currently rotting and rusting thanks to the neoliberal "free trade" scam brought to us by Reagan (and Thatcher in the UK) and embraced by both corporate parties ever since.  We ignore it at our own peril.  And the genuine political left would truly do well to abandon this highly toxic and corrosive ideology yesterday.

Saturday, March 10, 2018

Our Position on Tariffs and Trade

With Donald Trump essentially starting a trade war with his latest import tariffs (25% on steel, 10% on aluminum), the TSAP must clarify our often ambiguous position on tariffs and trade.  Unlike both corporate political parties, we have always rejected the so-called "free trade" scam as the neoliberals typically define it (we aren't called the True Spirit of America Party for nothing, you know), but have nonetheless gone back and forth over the years on the question of just how protectionist we ought to be.

We believe that protectionism is indeed a razor-sharp, double-edged sword, and can backfire if done excessively or improperly, but if done wisely and properly (unlike Trump's bass-ackwards version) it can work well.  No one really wins a trade war, so trade policy must be based on more than beggar-thy-neighbor policies.  Thom Hartmann wrote an excellent article on how properly implemented tariffs can, in conjuction with subsidies and other important measures, contribute to the goal of protecting vital American industries and the jobs that go with them.

While we are not against tariffs, protective or otherwise, any tariffs should be carefully targeted to those essential goods and countries for which we have a significant trade deficit today.  Unlike Trump's rash and hamhanded version of protectionism that is prone to backfiring, tariffs should not be applied to raw materials that American industry uses to make finished goods, nor should they apply indiscriminately to unnecessarily include our allies as well.  They should apply primarily to situations where workers in other countries are grossly underpaid to make the good in question and/or environmental standards are more lax than ours.  And they should never be done in isolation, but rather other measures should be done along with it, such as subsidies for crucial domestic industries, "Buy American" clauses in government stimulus packages, and even more importantly, closing the ludicrous loopholes in the corporate tax code that encourage outsourcing and offshoring of American jobs.  The latter tactic is the basis for Bernie Sanders' Outsourcing Prevention Act, which would also end or claw back subsidies for American corporations that send jobs overseas.  Note that Bernie was not against tariffs, and even advocated for some level of protective tariffs in 2016 before Trump cribbed his idea, bastardized it, and successfully stole his thunder as a result.

Alternatively, or in addition to the above, the TSAP also supports the Buffett Plan.  In 2003, the legendary Warren Buffett came up with a simple and very clever idea to close America's yawning trade gap by issuing tradeable Import Certificates (IC) to American exporters equal to the dollar value of exports.  And anyone holding these tradeable certificates would be allowed to import the same dollar amount of these certificates, thus being a similar idea to cap-and-trade.  The inevitable result would be trade balance, as every dollar worth of imports would have to be offset by a dollar worth of exports.  While the downside is that prices will inevitably go up somewhat as a result, the upside is that jobs will return to America and workers' wages would also go up as well, so the net effect would be beneficial overall.  And if tariffs still exist and/or ICs are auctioned by the government, the revenue could be directly refunded to the people to further help offset the price hikes for any affected goods and services.

But make no mistake.  Our nation's once-great manufacturing base has been hollowed out for decades, and much of it is currently rotting and rusting thanks to the neoliberal "free trade" scam brought to us by Reagan (and Thatcher in the UK) and embraced by both corporate parties ever since.  We ignore it at our own peril.  And the left would do well to abandon this highly corrosive ideology yesterday.