Random Observations for Students of Economics
At 4:45 pm today, I will be giving the 2025 Martin Feldstein Lecture at the NBER Summer Institute on "The Fiscal Future." I believe you can watch the lecture live at NBER YouTube channel. In any event, I will post the video when it is available.
Or you can read the lecture by clicking here.
"Beginning in the last decade of the 18th century, firewood output increased from about 18% of GDP to just under 30% of GDP in the 1830s."
Fantastic article by Steven Pinker on the situation at Harvard. A tidbit:
And if you’re still skeptical that universities are worth supporting, consider these questions: Do you think that the number of children who die every year from cancer is just about right? Are you content with your current chance of developing Alzheimer’s disease? Do you feel our current understanding of which government policies are effective and which ones are wasteful is perfect? Are you happy with the way the climate is going, given our current energy technology?
I will be talking at a virtual economics teaching conference on April 11. If you are interested in participating, click here.
In a previous post, I noted that, other things being equal, trade restrictions strengthen the dollar. A reader asks, why then is the dollar depreciating in the wake of the newly announced Trump tariffs?
The answer, I believe, is that other things are not equal. In particular, the policy has reduced investor confidence in the U.S. economy. That's also why the U.S. stock market is declining relative to stock markets abroad.
The WSJ explains the dollar depreciation as follows:
The dollar’s sharp falls after President Trump’s tariff announcement raises concerns about the risk of a broader confidence crisis, Deutsche Bank’s George Saravelos says in a note. “Developments since the start of the year make us worried about a broader undermining of confidence in the U.S. economic outlook and the medium-term desirability of dollar allocations.” This risks an unwinding of overweight positions in U.S. assets from countries that have exported capital to the U.S. over the past decade.
Almost nine years ago, I wrote that I would not support Mr. Trump's candidacy:
Mr. Trump has not laid out a coherent economic worldview, but one recurrent theme is hostility to a free and open system of international trade. From my perspective as an economics policy wonk, that by itself is disqualifying.
And then there are issues of temperament. I am not a psychologist, so I cannot figure out what Mr. Trump's personal demons are. But he does not show the admirable disposition that I saw in previous presidents and presidential candidates I have had the honor to work for.
Sadly, today's announcement about tariffs makes clear that I was right. Welcome to the kakistocracy.
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.
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.
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.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.
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."
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.
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.
I am the Robert M. Beren Professor of Economics at Harvard University. I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.
