Warren Platts

  • Excellent article Jeff. I would add that their main result—100% passthrough isn’t even statistically significant according to their own calculations. But if you back calculate the passthrough from their more reliable figures that were significant at p<0.01, then using their numbers with the largest sample size there is actually only a 56% passthrough entailing a terms of trade gain of $5.2 billion. Moreover, their estimate of the deadweight loss of $6.9 billion is exaggerated,.because it does not take into account the effects of moving production to even cheaper places like Vietnam. Once you do that, the deadweight loss is reduced to $4 billion. Thus, according to the standard net welfare calculation where national net welfare = the terms of trade gain – the deadweight loss, then there was a modest boost of $1.4 billion to national net welfare, even by Amiti et al.’s own numbers! And of course all these papers completely ignore the gains to national productivity that happens when people quit their jobs in the service sector to take better jobs in manufacturing. It is a sad state of affairs when you cannot take at face value 99% of what mainstream (English speaking) economists have to say on trade…

  • One simple thing we could do is to tax the non-resident alien investors’ capital gains in the US stock market. Currently, their profits flow overseas perfectly tax free. That is just unbelievably stupid. I cannot imagine a possible rationale for that.

    The problem with the trade deficit is this identity: S – I = NX

    What we don’t want to do is increase savings. There is already too much savings. And the main way to increase savings is to transfer more of the national income from labor’s share to wealthy people. This is also called austerity.

    Thus we need to lower investment I. The way we do that is raise capital gains on both American and foreign investors to at least the same rate as earned income. This will encourage the rich to consume more. (And there should be fat tariffs on luxury items only superrich people buy like yachts and small jets to make sure they buy their toys from America.)

    But there should maybe be a tax break on investment income earned overseas, maybe even 0%. That would encourage Americans to invest in real projects overseas than chasing the tail of ever rising asset prices here. Americans are the ones who should be funding railroads in Africa and canals in Nicaragua.

    Such a strategy should ultimately lead to a net outflow of savings out of the United States. That might sound like a bad thing to the uninitiated or a typical free trade propagandist, but it would be for the best. There is plenty of U.S. savings available to fund new, desired, productive projects in the real economy here. Any American startup that can show investors a roadmap to success and profit can find funding. The shortage is in the startups!

    A net outflow of U.S. savings would also necessarily result in a trade surplus. I am no mercantilist, but we need to run a modest surplus for a while to make up for the decades of trade deficits. Our NIIP is already close to 60%. Not good, and it will take a while to dig back out of that hole….

  • As long as mercantilist countries like China and Germany artificially force up their savings rate, tariffs and currency devaluation will never close the trade deficit. We must address capital flows as well. At the very least we should stop encourages capital inflows with tax breaks for foreign investors. As things currently are, non-resident aliens do not have to pay capital gains taxes on their U.S. investments.

  • Excellent article! It just shows that 99% of economists are not true scientists. For them, their theory of comparative advantage is too beautiful to be false. They are not interested in empirical evidence; optimal tariffs are mere “theoretical curiosities”. They already know the Gospel according to Smith—who ironically was the Scottish Commissioner for Managing and Causing to be Levied and Collected His Majesty’s Customs, and Subsidies and other Duties in that part of Great Britain called Scotland, and also the Duties of Excise upon all Salt and Rock Salt Imported or to be Imported into that part of Great Britain called Scotland. But never mind that Commissioner Smith actually provided at least a half dozen justifications for tariffs.

    However, to get a handle on the trade deficit, tariffs are not going to be enough. Mercantilist countries like China and Germany are using government policy to force down wages, and hence force up savings. The excess savings have to go somewhere. We LET it come here. In fact, USA actively ENCOURAGES foreign investment that we do not need: non-resident alien investors in U.S. equities do not have to pay U.S. capital gains taxes. That is one low-hanging fruit of a loophole that could be easily closed.

  • Capital inflows are another type of import—and one we need even less than cheap manufactures from China. If we tariff goods, there should be a tariff on capital inflows as well imo.

  • I’m not sure I understand where the $1.4B loss to GDP is coming from. The steel makers are among the most productive workers in the USA, with output per worker on the order of $400-500K per worker per year. Just looking at the jobs list, there should be a multiple billion dollar increase in output (assuming steel/al workers put out $400K and conservatively that all other workers are putting out $200K on average, then that’s a $3.6B increase. Is it that exports go down?

    Also, it appears you guys are neglecting the terms-of-trade gain. If the steel tariff is 25% and prices go up by only 6.29%, that entails that foreign suppliers will have to lower their prices by like 15%. In other words, about 70% of the tariff tax incidence will fall on foreign producers. Thus if tax revenue is $5.97B, then the terms-of-trade gain should be about $4.18B; this should vastly outweigh any deadweight losses, that would be on the order of 2% or 3%. Thus, even accepting your GDP loss of $1.4B at face value, the terms of trade gain less deadweight losses is going to be on the order of $4.1B, entailing a net welfare gain of 4.1 – 1.4 = $2.7B