Two of the best international finance economists opine on Trump policy

• Maury Obstfeld
• Jeff Frankel

Might President Trump stumble onto a good policy?

I don't have much faith in the Trump administration's economic policy, but I see one small glimmer of hope. The president plans to announce his new tariff policy on April 2. So far, he has said two things about it. First, the goal is reciprocity. Second, he wants to treat a value-added tax, which most other nations have, as a tariff.

I don't buy either of these arguments. On reciprocity: Why should I shoot myself in the foot just because you shoot yourself in the foot? On the value-added tax, he is just wrong. A value-added tax is a consumption tax, not a trade restriction. (See here.)

But what if these two misguided arguments together lead Trump to propose a value-added tax? 

That would be great. The new tax could finance cuts in other, more distortionary taxes, reduce the budget deficit, or some combination of the two. I have written about the virtues of a value-added tax here and here. 

I know, I am probably engaged in wishful thinking.

America First?

 
From my Harvard colleague Oleg Itskhoki. (Click on image to enlarge.)

A new review of my favorite textbook

 Here or here.

Four good readings about Trump policy

• Andrés Rodríguez-Clare and Arnaud Costinot
• Clifford Winston
• Cliff Asness
• Larry Summers

Kevin Hassett forgets Econ 101

On ABC's This Week, I watched the following exchange in a discussion of President Trump's trade policies: 

HASSETT: Let's think about it just the way we would do it in Econ 101. If I buy a Mercedes, then it goes into consumption. 

KARL: Yes. 

HASSETT: So, you know, I – the, say, $100,000 for a Mercedes goes into consumption, but then it comes out of imports and so it has no effect on GDP. And a lot of times when we think about the welfare of Americans, we're thinking about GDP per the number of Americans, per capita. 

If you buy a Buick, then it goes into consumption, but it doesn't come out of imports. And so it goes into GDP. That's why – that’s what the “d” is, it’s domestic production. And so, if you want to increase the welfare of Americans, then it’s better to have the stuff produced here. And that’s a very, very simple fact that the president is pushing very hard.

No, Kevin, that's not the way we do it in Econ 101. What happens when Americans switch from buying German cars to buying American cars is that these consumers supply fewer dollars in the market for foreign-currency exchange. As a result, the dollar appreciates. That appreciation makes U.S. goods more expensive compared with foreign goods, reducing U.S. exports and raising other U.S. imports.

Trade restrictions do not increase GDP. Indeed, by interfering with the international marketplace and the forces of comparative advantage, they reduce productivity and thereby GDP.

Please, Kevin, stop invoking Econ 101 to support President Trump's trade policies. It misleads the public, and it insults those of us who have spent our lives teaching (and writing textbooks for) Econ 101.

I talk with Filippo Gaddo

From the Society of Professional Economists.

Do tariffs cause inflation?

There has been some debate between Trump critics and Trump defenders about whether tariffs cause inflation. Some defenders, including the Commerce Secretary Howard Lutnick, say that tariffs don't necessarily cause inflation. My view is that these defenders have a point, but not a good one.

Tariffs reduce productivity because they prevent the international marketplace from allocating resources to their best use. Lower productivity means lower real incomes. Lower real incomes could take the form of either (1) a higher price level for given nominal incomes or (2) lower nominal incomes for a given price level. Whether (1) or (2) occurs depends largely on monetary policy.

When Trump critics say that tariffs cause inflation, they are implicitly assuming case (1). That case may be the more likely one, but it is not necessarily the way things will play out. 

Bottom line: Trump critics should say that the tariffs will reduce American living standards (as well as living standards abroad) without invoking the word "inflation."

What I am reading

An intriguing new paper by John Cochrane picks up on a question that Ricardo Reis and I worked on long ago: Which models of the Phillips curve generate realistic dynamics? I have not yet processed all of what John has to say on the topic, but it seems like it might be a big step in the right direction.

Two Amazingly Stupid Ideas

It is hard to tell which is worse:

The Trump administration may exclude government spending from GDP

Trump calls for creation of a ‘crypto strategic reserve’

Bad as these ideas are, neither is as dangerous and morally bankrupt as cozying up to the autocratic war criminal who is trying to violently annex his neighbor.