Book Recommendations

Since it's December and books are always a good gift.  The following are some of the books I've read over the past couple of years that are worth reading.  They are not in any particular order.
 

• Works of Love, Soeren Kierkegaard,  Kierkegaard's theological writing is much easier to read than his philosophical writing.  Nonetheless, he never uses a short word when a paragraph will do.  Longish book short:  love is not sentimental nonsense, it's hard work directed at people who may not be lovable.

• A First Rate Madness:  Uncovering the Link Between Leadership and Mental Illness, Nassir Ghaemi. Depending on how it's defined,  about 20 percent of the population has some type of mental illness.  This book looks at some of the more famous people in history who had mental illness and how it impacted history.  The chapters on Sherman, M.L. King, and Kennedy are especially interesting.  This book is a relatively quick read.

• West with the Wind,  Beryl Markham. An interesting autobiography of an early pilot, amongst the first to fly from Europe to North America (against the wind).  Markham was also a race horse trainer in Kenya during the first part of the 20th Century.  A very well written book, similar to Hemingway's writing about Africa.

•  Factfulness: Ten Reasons We’re Wrong About the World - and Why Things are Better than you Think, Hans, Ola and Anna Rosling.  Hans Rosling was a Swedish biostatistician who spent much of his career in Africa and Asia.  In this book he presents a compelling case that for the majority of humanity things are getting better and they are getting better fast.  This book is also a pretty quick read.  If you aren’t sure watch a couple of his TED talks on Youtube. https://www.youtube.com/watch?v=jbkSRLYSojo

• The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow, Charles C. Mann.  The book looks at some modern issues facing the planet through the lens of two competing ideologies, conservation and reducing resource use, outlined in the work of William Vogt; and technological innovation, outlined in the work of Norman Borlaug.  The account is even handed.  Vogt is the Prophet, and Borlaug the Wizard.

• Our Towns: A 10,000 - Mile Journey into the Heart of America, James and Deborah Fallows.  Jim Fallows is a writer for The Atlantic.  In this book the Fallows travel through the U.S. analyzing what might work and might not work in cities and communities that usually don’t make the headlines.  The authors also find a nation that is much more cohesive than what the national media would have you believe.  The insights of Deborah Fallows are particularly interesting because she sees things that men often overlook.  Among the cities covered are Holland Michigan and Fresno California.

• The Death of Expertise: The Campaign Against Established Knowledge and Why it Matters, Tom Nichols.  This is also a quick read.  For a number of reasons not the least of which is social media, people no longer trust experts, and are often hostile towards them.  This has accelerated the decline of civil society and the ability of the public square to solve problems.  The only shortcoming in the book, is the fact that the author does not chide experts for being the source of the problem.  A good recent example was the testimony of the law professors at the recent impeachment hearing and many opinion articles written by Paul Krugman. https://www.youtube.com/watch?v=3MBV-mKq8no

Climate Change is Real but We're Not Going to Die

"A Person is Entitled to Their Opinions but the Facts Belong to Everyone" - Don Paarlberg

I first heard about global warming in the mid 1980s in a book with the captivating title "The Future of the North American Granary."  In fact theoretical discussions of the possibility of greenhouse gases causing global warming go back until at least the 1950s if not sooner.  At that time one of the debates was whether particulate pollution would cause global cooling or if the accumulation of CO2 would raise temperatures.  The answer is that the planet is warming, and precipitation patterns are changing.  We are increasingly living in a world with fewer but stronger storms.  Also, with some exceptions it appears that the dry regions are getting drier and the wetter regions are getting wetter.

Despite what you may have heard, the world is not running out of water.  While climate change is impacting some aquifers and water basins, and the water cycle may be accelerating, the total amount of global precipitation is virtually identical from year to year.  If anything rising sea levels will lead to more precipitation.

It is almost certain that in the future sea levels will rise and will become more acidic.  This will reduce the productivity of the oceans and will pressure populations that live in coastal areas.  In other words there is a very good probability that there will be climate refugees in the future, especially from island states in the Pacific, and perhaps from countries with major river deltas such as Bangladesh.  Mosquito borne diseases will likely become more common, as the range of some species expand, and there is less winter kill off. People living in major cities in the West may need to move a few miles inland or adapt buildings that can withstand higher sea levels.  

How the West responds to these refugees will be one of the biggest issues facing developed economies in the next few decades.  One positive aspect of this fact is that the world has time to adjust and handle these refugees if it embraces the bleakness.  However, most nations individually only manage emergencies.

The Current State of Climate Change Debate

It wasn't always like this.  There are at least two examples of environmental policies that effectively addressed major problems.  The first was the Montreal Protocol, which banned chlorofluorocarbons (CFCs) and halons that were creating a hole in the ozone layer.  Since then the hole has become increasingly small.

The second is the cap and trade program that effectively reduced the generation of sulfur dioxide, the primary source of acid rain.  Since this policy was enacted, the health of forests and lakes have improved downwind of major sources of acid rain.

These two policies indicate some two important realities.  The first is that positive action is possible.  The second is that the environment and the planet is more resilient and  self-healing than environmental activists are willing to admit.

Another major concern involves agricultural productivity.  Some areas will be adversely impacted; of the major food exporters, Australia appears to be particularly adversely impacted by climate change.  In addition to warmer temperatures, Australia appears to more more susceptible to both droughts and flooding.  Fruit growing regions in the Midwest and Northeast parts of the U.S. and Canada may face additional pest pressure and the impact of warmer weather followed by frosts, which will kill premature blossoms.

Other parts of the world should see higher productivity.  This includes the Prairies of Canada and the Northern plains of the U.S., although this region, especially the Red River Valley of the North faces considerable flooding potential.  Areas such as Ukraine and Russia also stand to generate increased crop production resulting from climate change.  As a result the net effect of climate change of crop production is difficult to determine at this point.

Environmentalists also decry animal food production as not being sustainable.  Perhaps some methods of raising animals are, but it is difficult to understand how traditional pasture based systems that have been used for thousands of years would have a major impact on the environment.

It should be noted that if climate change is a threat to life on earth there are several potential technical methods to address it.  One is through the use of geoengineering; increasing cloud cover, developing ways for the oceans to capture more carbon or to reflect more light back into the atmosphere are examples.  Genetic engineering could be used to develop crop varieties that drought resistant, heat resistant, and use fewer purchased inputs such as nitrogen fertilizer.  One of the great frustrations in dealing with climate change is that many of advocates of the dangers of climate change are opponents of methods to reduce its impacts.

Climate change is real and the faster policies and technologies are put in place to address it, the smaller the impact will be.  However, the inability of climate change deniers and climate change activists to embrace the bleakness, likely makes the future impacts worse that they would otherwise be.

The Latest World Economic Forum World Competitiveness Report is Out

The World Economic Forum (think of the UN for people who actually run the world), just put out its annual rankings of global competitiveness.  If you want to sift through 600 pages of data it can be found here http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf.  In it, the competitiveness of 141 different countries are assessed on 12 broad categories.  Unlike many similar reports, the Nordics, while performing well do not dominate the list.

Overall the U.S. ranks second after Singapore, with an overall score of  84. Implicit in these figures is the fact that the U.S. can effectively compete in international markets, and what problems the U.S. faces is largely of its own making.

Large countries such as the U.S. and China score high in market size, and the U.S. ranks first in business dynamism and innovation capability.  The U.S. also ties for first with several other countries in terms of macroeconomic stability.  Inflation and interest rates are low as is unemployment.  For the most part our labor markets are in pretty good shape. Compared to most countries our educational and job training system is reasonably competent although it is not as good as Switzerland, Germany or Finland.  A big problem that perhaps helps explain the disparity of incomes in the U.S. is the low level of workers rights where the U.S. only ranks 81st. 

Despite the positive attributes there are several areas of concern.  The U.S. only ranks 20th in the strength of its institutions, and 99th in terms of shareholder governance.  This might explain the pay levels of senior management.  It also explains why The Economist calls the U.S. a flawed democracy. A nation that is governed by Executive Order and judicial fiat has serious institutional problems that transcend whoever controls the executive branch of federal or state government. 

Policies that address issues relating to corporate governance and worker rights may be more effective than raising taxes on the affluent.  This has not been a major point of discussion in the developing Presidential campaign, and a platform that promotes class warfare has seldom been successful in the U.S.

The U.S. only ranks 55th in terms of healthy life expectancy.  While the average lifespan is approaching 80, the number of healthy years appears to be stuck at around 66 or 67.  Lifestyle probably has more to do with this than the quality and access to health care.  We eat too much, don't exercise enough, and take too many drugs. 

Reflections on Turning Sixty

As I begin by seventh decade on Earth I would like to share some of what I have learned over the years.

1. If you want an attractive girlfriend play hockey for the University of Minnesota.
2. If you don't play hockey and want an attractive girlfriend move to Aarhus Denmark.
3. Danish is the sexiest accent.
4. There are few simple pleasures more rewarding than making a child or a woman laugh.
5. Death comes to us all.
6. Sheep die, cattle die, you yourself will die.  One thing never dies, the pursuit of economic rents by vested interests.
7. People who believe humans are basically good don't have a Twitter account.
8. If you are fifty years old and still talking about where you went to college be assured, your education was wasted.
9. Love is patient, kind and endures all things, it is not always tolerant, ask any parent.
10. Vegetables are not food, they are what food eats.
11.  An single Italian with a pencil and a piece of paper will design a more attractive car than a committee of Americans with the best Computer Assisted Design software.
12. Conversely, the easiest job in the world is designing the next Porsche 911.
13. Economists should be kind to environmental activists, they make the predictions of economists look incredibly accurate.
14. Cemeteries are full of irreplaceable men.  In other words you're not that special, that's okay.  
15. Dave Schweikhardt was an irreplaceable man. 
16. People don't understand the agri-food system, that doesn't stop them from having strong opinions
17. After I die and everyone who knows me dies, I will be utterly forgotten, as in point 14, that's okay too.
18.  People who review music on NPR have terrible taste.
19.  Pirate Metal is a real thing and it is awesome.
20. If you have a $500 cell phone, a subscription to HBO, and don't pay off the full balance of your credit card every month, it's not a failure of capitalism.  You are just bad with money.
21.  The Good Place taught me that rap musical about Kierkegaard is a terrible idea.
22. People in the Midwest and South take college football way too seriously.
23. The grass withers, the flower fades, but the word of the Lord endures forever.

Testing the Meatless Whopper

As part of my job I occasionally have to do something I would never choose to do.  Today I ate an Impossible Whopper to assess the difference between meat and  meat substitutes.  Meat substitutes are a major product development in the food industry and there is a lot of capital being raised by meat substitute companies.  The primary rationales for meat substitutes are that they are healthier, they are better for the environment and they prevent animal abuse. The good news from a vegetarian perspective is that it wasn't terrible; it was kind of dry and bland, but it almost tasted like meat.  In the final analysis, it was inoffensive.

However, there were still several drawbacks.  First it was a $1 more than a regular Whopper. Secondly, it wasn't particularly more healthy than a regular Whopper.  The Impossible Whopper is 630 calories compared to 660 for a regular Whopper; 34 grams of fat compared to 40 grams for a regular Whopper; 10 mg. of cholesterol compared to 90 mg. for the regular Whopper.  On the other hand the Impossible Whopper has 1,080 mg. of sodium compared to 980 mg. in a regular Whopper; and 58 grams of carbohydrates compared to 49 for a regular Whopper.

So on net the Impossible Whopper is slightly healthier - or more accurately - slightly less unhealthy than a regular Whopper.  It is not price competitive given the marginal improvement in health. 

The fact that the Impossible Whopper is about 20 to 25 percent more expensive than a regular Whopper should question whether or not a meatless patty is better for the environment than a beef patty.  It may be the case that more resources are needed to produce a plant based burger.  The efficiency of meat production systems tends to be understated.  While it is true that it takes 7 lbs. of feed to produce 1 lb. of beef, it is also true that much of this feed is in the form of grass and that pasture based systems do not stress the environment.  Another way to put it, is that in the U.S. beef replaced bison in much of the country, with little net impact on the environment.  Bison are better suited to life on the plains than cattle, but they aren't as tasty, and they are much harder to domesticate.  Intensive cattle feeding (higher grain and corn rations) do occur in the last 6 months or so of a steers life, as the animal is fattened up.  While it could be argued that there is some environmental degradation due to intensive feeding, it is pretty minimal.  Also, there is a fair amount of research being carried out on 100 percent pasture based systems.  Cattle do drink a lot but they also pee a lot which recharges aquifers, as a result the impact of livestock production on water supplies is also overstated.

In terms of animal welfare it should be noted that abused animals have a lower productivity than animals that are not abused.  Their feed conversion ratios are lower, and their vet bills tend to be higher.  Also, there is also a higher chance that the carcass will receive a lower grade. As is the case with environmental impacts, animal welfare advocates tend to overstate their case. There is very little abuse in the industry. For the most part, while cattle don't live that long, while they are around they have a pretty good life.

So go ahead and eat real meat for the time being.

 

How to Fix Social Security and Medicare

The following post does not contain any magical thinking and as such may leave you depressed.  This is your trigger warning.

The best way to think about social security and medicare is to imagine a family that is spending more than they earn and has done so for several years.  Eventually, they run out of savings and have to cut back on their spending.  Currently, it is estimated that Medicare Part A trust fund will be exhausted by 2026, and  Social Security fund will be exhausted by 2034.  This does not mean that there will be no funds available, because in some respects theses are pay as you go programs.  For example starting in 2026, if nothing else changes, Medicare Part A still pay 91 percent of costs, although this will decline to 78 percent by 2042.  

Benefits to social security recipients will begin to decline starting in 2035 if nothing is changed, but again, the initial decline will be small and accelerate over time. 

To Fix the Problem Embrace the Bleakness

The above facts are well known to policymakers, but their inability to make even marginal changes only mean that when the bills come due the pain will be even greater.  It's a bit like a toothache that you hope will get better by itself, it won't and putting off a visit to the dentist will only make it worse.  The following are prescriptions that will address this problem in ascending order of quality.  These are not earth shattering ideas, but reflect reality.

4) Cut benefits:  This is do nothing option.  The problem with this option is that Americans are poor savers and are overly dependent on social security for their retirement.  This policy will lead to a reduction in living standards for seniors and a lower quality of health care.  Also, hospitals in areas with a disproportionate number of elderly will face lower revenues, and will either cut back on services or close altogether.

3) Increase Taxes:  Currently the medicare payroll tax is 1.45 percent paid by employers and employees.  If this were raised to 1.9 percent, the problem would be solved.  Higher social security payroll taxes would also make social security financially viable.  The problem with this policy is that payroll taxes are a tax on employment.  The more people hired the greater the taxes paid by the employer.  This policy will further accelerate the substitution of labor with machinery and technology.  It could lead to higher unemployment, especially among those with a limited skill set. While other taxes could be raised to pay for these programs, the benefit of using payroll taxes is that is taxes a broad base and is used for a specific purpose.

2) Raise the ages for enrollment in Social Security and Medicare:  Contrary to popular belief, the U.S was comparatively late in offering social security.  The first country to enact a modern social security system was Germany in the late 19th Century.  Initially the age for benefits was set at 70, but was reduced to 65 during WW I.  When the U.S. enacted social security in 1935, it kept the age at 65.  It's important to note that in 1935 the average lifespan in the U.S. was 61.  In other words most Americans would not have expected to see any social security benefits.

One of the greatest success stories of the 20th Century has been the consistent rise in expected lifespans.  Today the expected lifespan is almost 79 which means that the typical person can expect to receive social security benefits for approximately 14 years.  It should also be noted that for most of us the nature of work has gotten easier.  Office jobs have replaced farm and factory work, meaning that most of us can work longer.  This should be considered good news and as a result, the age limit should be adjusted.

Time for an Update

1) Allow more immigration:  The fundamental issue facing Medicare and social security is demographic.  There are not enough workers to support the retired.  Currently there are 62 million people collecting social security, and there are only 128.6 million people working full-time with other 27.2 million working part-time.  In other words there are about 2.3 people supporting one social security beneficiary.  This number is only going to get worse over time, and will begin to get much worse after 2050.  The birthrate in 2015 was 12.4, half of what it was in 1959, and lower than during the Great Depression. Conversely, people from around the world still want to come to the U.S. These people tend to be young, and often have skills employers need.  There is even a strong demand for workers with what some consider limited skills.  Increasing immigration would pay a demographic dividend that would last decades.

There is some concern about an impending economic slowdown.  Part of this concern is due to the lack of workers.  Housing construction would be up if there was more immigration and the demand for goods and services would be higher if immigration was easier.  In fact if enough immigrants came none of the other policies outlined above would be necessary.

A Note About Medicare for All

There is a great deal of support among the democrats running for President for a single payer health care system along the lines of "Medicare for All".  Given the fact that few of these candidates have explicitly stated how they are going to pay for the current Medicare system makes Medicare for all a slogan and not a serious policy.   If you are unable to fully pay for Medicare for 60 million people, how are you going to cover 300 million?

With Apologies to The Disposable Heroes of Hiphoprisy

Is Self Esteem the Drug of the Nation?

We live in a society where self esteem is considered a self evident good, and this belief appears to be a global phenomenon.   However, the evidence of the usefulness of having a high self esteem is mixed.  For example, while has a general rule people with high self esteem tend to preform better in school, there are interesting exceptions. For example girls tend to have slightly lower self esteem than boys despite the fact that girls consistently out preform boys in school, and the difference in performance appears to widen in high school and college.  It will eventually manifest itself in earnings, and marriage.  Why would a successful woman settle for a loser? 

The reply to this tends to be "girls should have more self esteem".  I tend to disagree, perhaps male self esteem is too high, and as a result they tend to be for the lack of a better phrase goof offs.  Ask most university professors who their honor students are and who are their alcoholics.  You know the answer.  How open to instruction and discipline is someone who thinks he is fine the way he is?  Is unrealistic self esteem one of the underlying reason why white male life spans are actually declining?

While there is somewhat less data across societies, an article written by David Schmitt, in the Journal of Personality and Social Psychology in the mid 2000s assessed self esteem in 53 nations representing 28 languages.  The nation whose residents had the highest level of self esteem was Serbia, followed by Chile, and Israel.  The U.S.  ranked sixth but the all of these nations scored very close to one another.  Conversely, Switzerland and Japan were in the bottom ten with Japan scoring lowest of all.  It goes without saying if given the choice most people would choose to live in Switzerland than Serbia. Some of the best run societies in the world are populated with people with comparatively low self esteem.

Perhaps most disturbingly, as Crispin Sartwell noted in his commentary in the July 1 issue of the Wall Street Journal, hatred enhances your self esteem when he asserted that "the compensatory pleasures of hatred - in particular it enhancement of self-esteem - are underrated.  Hatred is self-congratulatory.  It involved expressing superiority to its objects, and patting yourself on the back for not being them."  This is true at both the individual level as well as the international level.  An easy way to enhance a person's self esteem is by deignigrating others, as far as I can tell this is the primary use of Twitter. 

We also live in a society where pride has become a virtue and humility is for suckers.  Perhaps most destructively we preach to young people "you  can be anything you want".  This is patently false, most of us no matter how hard we try will never be pro athletes, rock stars, or cast members of Saturday Night Live.  However, with realistic expectations and an honest assessment of our talents, we can be accountants, dentists, agronomists, plumbers and truck drivers.  These professions while not the first on any one's list (what 8 year old wants to be an agronomist?) have the advantage of being more socially useful than being a pro athlete or a comedian.

To Fight Self Esteem Embrace the Bleakness

The bitter reality for the vast majority of us is to accept the fact that once we die and the people who knew us die we will be forgotten.  The world will go on without us.  As a thought experiment consider Ingrid Bergman, Joe Louis, Millard Fillmore, Joe DiMaggio, and James Polk.  At one time they were all famous and were considered important; but when was the last time you thought of any of them?  Do you even know who they were?


If people saw themselves honestly, the level of neuroticism would likely decline, we would live in a kinder society, and tolerance would mean something besides protecting the self-esteem of special interest groups.

How to Lie with One Number

On the Trump Tax Cut

Yesterday I read a meme on Facebook (so it must be true), that stated "253,020 Michigan Families Paid More in Taxes Last Year Due to Trump's Tax Scam".  The organization that put out that meme made the mistake of stating referencing the source:  the Institute on Taxation and Economic Policy.  Thanks to the help of a friend I was able to track down the figures and to say the least the meme was misleading.

It is true that 253,020 taxpayers paid more in 2018 that in the year before.  It is also true that 4.026 million taxpayers in Michigan paid less; an additional 536,500 paid the same amount.  Also, despite arguments to the contrary it appears that the Trump tax cut did not adversely impact working class families.  People in the 80 to 95 percent income bracket - roughly $111,000 to $218,000 -  were most likely to see a tax increase.  Thirty percent of the top one percent - incomes above about $517,000 -  received a tax cut, but 36 percent saw a tax increase.  In the state of Michigan, the re-distributive aspects of the tax cut appear to be overstated.

How to Interpret Data Correctly

The first question to ask yourself when you are given one number is to ask "compared to what".  In the example above the question is how many is 253,020 compared to the total number of taxpayers in the state.  In this case, its about 5 percent, conversely more than 86 percent received a tax cut.  A single number never gives you the whole story.  Percentages and per capita data usually give a more accurate picture than a single raw number.  While disappointing, it is also helpful to determine whether or not the source of the number has an agenda.  In the above case it was a partisan organization.

To finish I would like to plug a book, written by Hans Rosling, a Swedish biostatistician. The title is Factfulness:  Ten Reasons We're Wrong About the World - and Why Things are Better Than You Think.  It covers how to interpret data and why most of our underlying assumptions, especially about the developing world, are wrong.  It's actually a pretty easy read and will change the way you gather and interpret information.  It also shows that we tend to be dumber than chimpanzees.




 

Fake News is real and what you can do about it

The Issue

A couple of weeks ago my Facebook feed was filled with two stories that were at best dishonest.  The The first dealt with a Dutch teenager with severe depression who wanted to die.  The story was that Dutch authorities approved her euthanasia.  The second dealt with allegations of animal cruelty at a large dairy farm in Indiana.  The initial reaction of those posting these stories was outrage, which as become the default response in this country.

In the case of the Dutch teenager, it is true that she wanted to die and did apply for euthanasia.  However, her application was denied.  The Dutch authorities did not help her die.  A good source of accurate information can be found here.  https://www.usatoday.com/story/news/nation/2019/06/05/noa-pothoven-media-got-dutch-teens-euthanasia-death-wrong-rape-right-to-die/1355269001/

It did not help that many "reliable" sources got this story wrong.

The Indiana dairy story outlines cases of animal abuse.  What is lost in this story is the fact that the employees were fired as soon as the these cases were brought to the attention of management, and that the organization who collected the film had an agenda that would insure that the farm would be shown in the worst possible light.  In fact the organization did not inform management that the abuse was taking place, other employees informed management and those committing the abuse were terminated.  Abusing animals is not the policy of the dairy, and in fact animal abuse reduces farm profitability because it increases costs and reduces productivity of the animals.

What You Can Do

First think before you post or share.  If a story seems to be too extreme to be true it probably is.  Second, look for additional collaboration.  This is getting increasingly difficult as news sources increasingly reference each other without doing their own investigation.  Nonetheless, there are websites that engage in fact checking and are good resources for debunking fake news.  Third, an emotional response to a story is seldom helpful.  Social media does not give a person license to act as judge and jury on each an every story.

Finally, give people the benefit of the doubt.  If a person, institution, or firm is accused of something it deserves the opportunity to explain its side of the story.

One of the finest theological exposition of the Ten Commandments can be found in Luther's small catechism.  His question and response to the commandment on lying is well worth remembering.  

Thou shalt not bear false witness against thy neighbor.

What does this mean?--Answer.
We should fear and love God that we may not deceitfully belie, betray, slander, or defame our neighbor, but defend him, [think and] speak well of him, and put the best construction on everything.

Isn't that what we would want if we were accused of anything?

Why a 5 Percent Tariff on Mexican Products Doesn't Matter

This is the last of a series of posts on Trade.  Warning:  Contains Math.

Recently there has been a great deal of discussion about a 5 percent tariff on Mexican goods.  This blog will explain why this would not have made any difference in the U.S. and would have only made a minor difference in Mexico.  However, a 25 percent tariff, which has been considered could have a major impact on the Mexican economy, and encourage the thing the administration is trying to stop, illegal immigration.

A Numerical Example

Let's say you are in the market for a VW Jetta that is assembled in Mexico.  Furthermore let's say the price of the Jetta is 380,000 pesos and the exchange rate is 19 pesos to the dollar.  The price of the Jetta is 380,000/19 or $20,000.  If the exchange rate does not change, a 5 percent tariff would raise the price to $21,000 (20,000+(20,000*.05)) if VW passed on the entire cost of the tariff to the consumer.  Since this is unlikely, let's say VW eats 25 percent of the tariff so the price to the U.S. consumer is $20,750.  This appears to be the mindset of those who supported and opposed the tariff.  This analysis is simplistic and wrong.

Changes in exchange rates blunt the impact of tariffs.  There are few countries that have the power to completely manage the value of their currencies and conduct independent monetary policy and Mexico is not one of them.  The day the possible tariff was announced the value of the peso fell by about 3.5 percent.  When the President announced the tariffs would not go into effect, the value of the peso rose by 2.0 percent.

It is well within the realm of possibility the value of the peso would have declined by the full 5 percent if the tariff was instituted.  If that had happened, the value of the dollar would have increased to 19.95 pesos to the dollar.  The price of the Jetta in U.S. dollars would then decline to 380,000/19.95 or $19,048 and the price with the tariff would be (19,048+(19,048*.05) or $20,000, which is the same price as the price without the tariff at the original exchange rate.  Since the price to U.S. consumers is unchanged, VW would have a strong incentive to pass the full impact of the tariff on to U.S. consumers.

To summarize, a small tariff would have no impact on U.S. consumers.  Mexican consumers would be slightly less wealthy compared to U.S. consumers and as a result might slightly cut back on their consumption of U.S. goods even without enacting a counter tariff.  In a floating exchange rate system a tariff could have the impact of actually reducing exports without having any impact on imports.

The Impact of a Large Tariff

It has been proposed that unless Mexico controls emigration a 25 percent tariff should be imposed.  This would have a much bigger impact on Mexico.  A major tariff could lead to a run on the peso, which could dramatically reduce wealth and consumption in Mexico perhaps leading to a recession.  A recession would increase the unemployment rate in Mexico which could lead to increased emigration to the U.S.

In short, a small tariff has no impact on the U.S. economy and a large tariff could lead to the one thing the administration is trying to stop, increased illegal immigration.

The Economic Benefits of Trade

My last post dealt with the arguments for trade restrictions.  While there are reasons to restrict trade, for the most part they are not compelling and the benefits of trade outweigh those of protectionism.  This post will briefly outline some of the reasons for freer trade.  This should not be considered a complete list.

One frustration in discussing trade is that proponents of trade assert that there are no losers; and opponents of trade assert there are no winners.  Neither is the case.

It Promotes Efficiency

Competition between firms in different countries will have tendency to keep prices low and encourage methods to either reduce costs, or enhance product attributes preferred by consumers.  Consumers, especially of those of imported goods, are a major beneficiary of freer trade.  

Firms that are exporters are also beneficiaries of freer trade.  These firms and industries tend to be more efficient than other firms.  Whether protectionists realize it or not trade barriers promote the interest of less competitive firms and industries at the expense of more efficient firms and industries.  In so doing it reduces the incentive of less efficient firms to innovate.  Often efforts to restrict trade are little more than efforts of special interests to protect their profits and incomes.  This does help explain why trade barriers are often politically popular.

It Promotes Equity

A common argument against globalization is that it promotes income inequality.  This is exactly wrong.  Global competition promotes equity by reducing firms' ability to charge excessively high prices.  By definition the number of firms in a open global market is greater than those in a closed national market.  The number of global monopolies is extremely small.  Enhanced global competition improves the buying power of consumer incomes, and increases the number of choices consumers have. 

However, it does reduce the incomes and profits of  firms who face foreign competition, as well as workers who work in these industries. However, it also curbs the incentive to move workers and assets into more efficient sectors of the economy.

It Promotes Peace

While efficiency and equity are important the fact that free trade promotes peace is probably more important.  This especially true for the U.S., a nation with a comparatively small trade sector, and a extremely large military and international affairs sector.  

Realizing that trade barriers such as the Smoot-Hawley tariff were contributing factors to World War II, a series of institutions were created in the aftermath of that war.  Of particular importance was the creation of the World Bank, the International Monetary Fund, and especially the General Agreement on Tariffs and Trade (GATT) which has evolved into the World Trade Organization (WTO).  These institutions have allowed countries to negotiate lower trade barriers over time, promoted economic development, and increased foreign investment in different countries including the U.S..  This has aided in global economic integration and the confluence of interests.  It has only been with the recent rise in economic nationalism that the world has become a somewhat less safe place.

Arguments for Protectionism

This is the first of a series of posts on trade.  The first post outlines some of the reasons for protectionism.  The next one will outline why most of the reasons for protectionism are not valid, coupled with economic reasons for free trade.  The third post will provide non-economic reasons to promote free trade.  The last post will provide some individual case studies.

Rationale 1:  Mercantilism

Briefly stated the goal of mercantilism is to maximize trade surpluses.  Mercantilism was the dominant line of trade policy from the development of the nation state to the middle of the 19th Century.  Policies were designed to promote exports and limit imports.  It is closely tied to the gold standard, trade surpluses led to the accumulation of gold which could be used to fund government activities including wars.  Mercantilism is also related to imperialism in that European countries looked to their colonies as a source of raw materials and as a market to their higher valued finished goods.

While mercantilism is not popular with economists, it has a certain intuitive appeal for the general public and policymakers.  It could be argued that the Chinese Belt and Road Initiative is a mercantilist policy designed to strengthen China's trade position relative to countries in Southwest Asia and Africa.

Rationale 2:  Export Unemployment (Beggar thy Neighbor)

Another rationale for protectionism is to reduce domestic unemployment.  The idea is that by raising tariffs you protect your domestic workforce from unemployment.  This is a reason why the Smoot-Hawley Tariff was passed in 1930.  It is also one of the major concepts behind the current U.S. trade policy.  

The primary shortcoming to the policy is that other countries will retaliate.  This is what happened in the 1930s which helped contribute to World War II.  Unlike the 1930s, countries have retaliated to recent U.S. tariffs in a less aggressive manner.

Rationale 3:  Infant Industry

The argument was popular in the northern U.S. during the first few decades of the nation's existence, as well as Germany during the mid to late 19th Century.  Developing countries need protection from more developed countries with established industries who may be able to take advantage of economies of scale.  

The infant industry argument has been used by the U.S. as well as developing countries.  In Latin America, South and East Asia, and Africa well into the 1980s, under the name of import substitution.

Rationale 4:  National Security

A nation has a vested interest to protect technologies that are important to maintain national security.  This has become more important since the advent of the atomic bomb.  It is also a key source of disagreement between the U.S. and China and to a lesser extent between the U.S. and North Korea, and the U.S. and Iran.  

Issues surrounding protecting a firm's intellectual property in certain key industries can also be an aspect of using protectionism to preserve national security.  Unlike other reasons to erect trade barriers, national security is a valid rationale, but care must be used to make sure that national security is not being used as a excuse to promote the desires of special interests.

Rationale 5:  Dumping

Another proper use of trade barriers is to prevent dumping; selling of goods below the cost of production in foreign markets.  In the worst case this can be used to eliminate competition and eventually raise prices after the competition is destroyed.  

The biggest issue facing dumping cases is determining the cost of production.  A difficulty that is compounded when changes in exchange rates are considered.

Your Parents Lived Through More than You Will

Introduction

From time to time concerns are raised about the pace of change and society's ability to adapt.  For example Ray Kurzweil and Chris Meyer argued in 2003, that "the 21st Century will be equivalent to 20,000 years of progress at today's rate of progress".  Many, if not most of "futurists" believe that the rate of change is accelerating.  One major of opponent of this view is Robert Gordon, an economist at Northwestern.  He argues that the there was a era of above normal economic growth from 1920 to 1970, and the decline in productivity since then is one of the reasons incomes have been stagnant.

This blog outlines why Gordon may be right.

My Dad and I

While hardly scientific, I tested the Gordon hypothesis by comparing the first 40 years of my father's life with mine.  These lists are somewhat subjective, and you could come up with a different list.  My dad grew up in the northern plains, so some of these innovations came to his hometown after it was available in most parts of the country.

There is also a 10 year overlap in our lifespans from 1959-1969.

Innovations 1929-1969

• Electricity
• Mainframe computers
• Indoor plumbing
• Washing machines
• Central heating
• Central air conditioning
• Chemical fertilizers and hybrid seeds
• Penicillin/antibiotics
• Telephones
• Radio
• Television
• Vaccines especially polio
• Organ transplants
• Jet travel
• Tractors
• Automatic milkers-first truly available in 1922, but not widely adopted until later

 Innovations 1959-1999

• Microwave oven
• Chemotherapy
• Improved medical diagnostics (MRIs etc.)
• Personal computers
• The internet

Clearly the innovations from 1929 to 1969 were greater than those from 1959 to 1999.  One later innovation, genetic engineering, is not included because it may be rejected by society.  

During this time most of the innovations improved.  For example, the late 1990s saw the development of the cell phone, and the 1980s saw the development of cable TV.  Nonetheless, these are evolutionary as opposed to revolutionary changes.  In the case of jet travel, performance has probably declined despite the improvements in air safety.

The computer and the internet are particularly interesting.  For most people, the computer is a glorified typewriter (word processor) and adding machine (spreadsheets), files saved on a drive replaced filing cabinets.  The internet can be used as a library for those who know how to do so.  So while the personal computer has dramatically improved productivity, it is less of a new thing as opposed to a set of improvements on previous ways of doing things.

The development social networking, and smart phones may or may not enhance productivity and economic growth.  While the potential is there, so is the potential for these innovations to waste time and share ignorance.  The same is true of the internet. 

Predicting the future is difficult and no one has perfect foresight.  It may be the case that AI, big data, and robotics will usher in a new era of rapid change, but it would have to be a massive change to match that of the first 60 years of the 20th Century.  Another reason to value the accomplishments of your parents and grandparents.