Brexiteers – read the ‘Trump Trade Doctrine’ and weep. A trade deal with Trump will harm

Last September an economist called Peter Navarro and a billionaire private equity tycoon called Wilbur Ross published a document which attempted to justify the ways of the Republican presidential candidate Donald Trump to the world.

The pair also unveiled something they called “the Trump Trade Doctrine”.

The document made few waves at the time, mainly because few believed Trump would actually win the election.

But things have moved on somewhat since then.

Trump is in the White House, Navarro has now been appointed to head the President’s official National Trade Council and Wilbur Ross is set to be Commerce Secretary.

Given how things have unfolded, that document from last September deserves a little more scrutiny, not least from Brexiteers whose hearts are fluttering over Trumpian promises of a quick post-Brexit trade deal with the US.

From an economic perspective the Navarro/Ross paper is a joke; a catalogue of confusion and basic conceptual errors bound together by a conspiracy theory. “Magical thinking” is the description from Marcus Noland of the Peterson Institute for International Economics.

The document cites estimates that the “cost” of domestic US regulations is $2trillion, 10 per cent of US GDP. But this is disingenuous, not only because the figure is grossly inflated, but because it completely ignores the economic benefits of regulations.

The requirement to fit seat belts in cars costs money, but it also saves lives. Anti-pollution regulations push up businesses’ costs, but they also result in cleaner air. One can – and must – put a monetary value on these benefits. The US Office of Management and Budget has estimated that each dollar of regulation brings benefits several times the value of the costs.

Navarro and Ross say Trump will cut this regulation bill by $200bn without saying which regulations will be axed – or what benefits will be destroyed in the process.

But it’s on trade where the fallacies really flow.

Navarro and Ross assert that Value Added Tax imposed by America’s overseas trading partners (including Britain) on US imports amounts to a “backdoor tariff”.

This is simply nonsense given that the VAT is chargeable on all domestic sales – whether the product is imported or domestically produced. This is a tax on domestic consumption, not imports. There is no discrimination here.

The document talks as if “bad” trade deals like the North American Free Trade Agreement (Nafta) of 1994 and China’s full accession to World Trade Organisation membership in 2001 are responsible for the collapse in American manufacturing employment.

This is literally incredible. US manufacturing employment has been falling since the 1950s, long before these deals were struck. And over this period US manufacturing output has been rising, revealing that this is mainly a story of automation and rising productivity, rather than good American jobs being off-shored.

Some individual communities in America have undoubtedly suffered as result of shifting global trade patterns and China really did undervalue its currency for many years to boost its domestic manufacturing sector.

But the idea that multinational corporations colluded with foreign governments to poach high-paying US jobs is a paranoid fantasy, as is the idea that Trump ripping up trade deals will bring back low-productivity manufacturing jobs to America.

But perhaps the most disturbing element of the prospectus is that Navarro and Ross come across as unabashed “mercantilists”.

They appear to believe trade surpluses are an indication of national economic health and trade deficits are a symptom of a disease, a fundamental misconception that the father of economics Adam Smith sought to banish 240 years ago.

Which brings us to the “Trump Trade Doctrine”.

Here’s how Navarro and Ross describe it: “Any deal [that Trump makes] must increase the GDP growth rate, decrease the trade deficit, and strengthen the US manufacturing base.”

Increasing the GDP growth rate is innocuous; that’s what increasing trade does for a country, mainly through applying more competitive pressure to its domestic industry.

But decreasing the US trade deficit? That’s where alarm bells should ring. According to our own Office for National Statistics the UK ran a £40bn trade surplus with the US in 2015. Our surplus is, of course, America’s deficit.

That implies that Trump will not sign a trade deal with Britain unless the terms are so stacked in favour of US exporters that its bilateral deficit with us will fall. This means that the Trump White House will expect to export more to us than we export to them. So any UK firms exporting to the US should be scared, not heartened, by talk of a deal (manufacturers in particular given the third leg of the doctrine).

The ONS figures may not be right. For various technical statistical reasons, they may overstate UK exports and US imports. Other figures suggest trade flows between the UK and the US are roughly equal.

Yet, even if they are, why would the White House’s mercantilists not want to turn that balance into a hefty US trade surplus with Britain, to erode their own overall deficit? “America first” is not an ambiguous slogan. This is where zero sum attitudes to trade lead. Their gain is our loss.

One hope expressed when Trump won the US election was that when he entered the White House he would be forced to listen to people who actually know what they’re talking about.

But if this is the calibre of “expert” that Trump is now receiving this might even be even worse than him listening to his gut.

Guided by the likes of Navarro and Ross, Trump can be confidently expected to make decisions that will harm the livelihoods of all Americans, not least those “forgotten men and women” who he claims as his constituency.

And dollars to doughnuts, as they say in America, he will also make decisions that end up harming the economic interests of Brexit Britain.

#Brexit #DonalTrump #PeterNavarro #trade

INTERVIEW: Steve Nickell

Stephen Nickell is “slightly miffed” at Mervyn King.

It’s nothing to do with the former Bank of England Governor’s quixotic views on Brexit. It’s nothing to do with any disagreement the two men might have had when they both served on the Bank’s Monetary Policy Committee in the years before the 2008 financial crisis. It’s nothing to do with King’s supportive noises towards George Osborne’s austerity policies.

This grudge is more ancient than any of that stuff.

As young academics, both Nickell and King signed the letter from 364 economists to The Times in March 1981 warning that the Thatcher government’s austerity budget would make the recession, then raging, still worse. The letter is widely cited by Thatcherites as a historic blunder by the profession due to the fact the British economy exited recession shortly after it was printed.

Nickell has repeatedly publicly defended the letter from the ridicule it has attracted from gloating right-wingers, pointing out that despite the return to growth the UK economy continued to expand well below its previous trend and unemployment continued to rise.

This, he argues, bears out the warning in the letter that Thatcher’s deflationary policies would do unnecessary harm.

“I wanted to point out that a recession getting worse doesn’t mean negative growth, it means growth has to be below trend,” he says.

It’s an entirely sound economic argument: all competent economists consider the counterfactual.

But Nickell feels a bit like the boy who stood on the burning deck whence all but he had fled in making the counter-case to the idea that the 364 economists got it horrifically wrong thirty six years ago.

“I always feel slightly miffed because Mervyn King was also a signatory – but he never likes to bring it up!” he laughs.

Nickell stepped down from the three person committee at the summit of the Office for Budget Responsibility last month, after six years serving on the watchdog-cum-forecaster established by George Osborne.

The role of Nickell, a distinguished academic economist and experienced policymaker, was to add some gold-plated economic credibility to the new institution.

He played the wise consigliere to its younger chair, Robert Chote. And he looks back on his time there with fondness. “We had a lot of fun,” he says in his first interview since leaving the OBR. “It’s nice to be involved in something where you have a clear cut job.”

But the job comes with limitations too.

It obviously meant Nickell couldn’t express his personal views on Government fiscal policy as he had in 1981.

Yet he must have had views.

I suggest to him that his own criticism of that Thatcher budget could equally be applied, just as reasonably, to Osborne’s 2010 austerity budget.

Yes, the economy grew – which Osborne seized on as vindication of his cuts – but wouldn’t it have grown more without them?

Which is, of course, what Labour under Ed Balls – and any number of Keynesian economists – argued.

But Nickell dodges the suggestion that he was secretly gnashing his teeth at the OBR’s (former) Victoria Street headquarters.

“We didn’t go about thinking too much about what the Government should do. Basically because we’re not supposed to think what the Government should do. And secondly…. [there are] many, many people whose job it is to complain about that,” he says.

Some critics argued that the OBR underestimated the size of the UK’s “fiscal multipliers” – the negative impact of each unit of public austerity on the overall growth rate – and that explained why its growth forecasts in 2011 and 2012 were so off the mark.

The International Monetary Fund made waves a few years ago when it conceded that it had badly underestimated its own multipliers in relation to austerity in places such as Greece and Spain.

But Nickell says the IMF never really made its mind up in relation to the UK.

“The IMF had four different measures of multipliers, depending on which branch [you talked to]…. The Great Britain team had multipliers very similar to ours. Olivier [Blanchard – the former chief economist of the IMF] wanted to have much bigger multipliers.”

And Nickell stresses that he is still “perfectly happy” with the OBR’s original judgements on this front.

Nickell’s also bullish about the OBR’s Brexit impact forecasts from November’s Autumn Statement, the last round of major projections in which he had a hand.

Brexiteers decried the implied cumulative £59bn hit to the public finances as a result of Brexit highlighted by the OBR’s calculations as far too pessimistic.

“We did get criticised by some people,” says Nickell.  “On the other hand other people said we were rather too optimistic. What can you do?”

He takes come comfort that the Treasury Select Committee didn’t rubbish the OBR’s conclusions.

“Even Jacob Rees-Mogg was not overly hostile”, he says, referring to the most combative Brexiteer on the TSC.

But Nickell argues that the most serious threat hanging over the British economy is not so much Brexit as productivity growth, which has been “abysmally low” since the financial crisis.

“We continue to forecast an improvement in productivity growth sometime in the next four of five years – but it’s a bit of an act of faith that it will revert to its average level of the past 50 or 100 years,” he says.

“What we do know is that if productivity growth doesn’t improve things don’t look good – either for the public finances or for the British people.”

​Nickell doesn’t have much truck with the fashionable idea that there’s a major “crisis” in economic modelling, something recently suggested by the Bank of England chief economist Andrew Haldane.

“I was very disappointed when I heard Andrew Haldane say he thought people behaved ‘irrationally’, ” he says.

“My thinking about these things is that by and large people don’t behave randomly and there are reasons why they do things. They may be thought of as irrational in some sense – left to their own devices people don’t save enough for their retirement because retirement is a long way away and people would rather have jam today rather than jam tomorrow. It seems to me much better to focus on these biases. People have always been like this. It shouldn’t be hard to model.”

There is likely to be more modelling to come. Nickell, 72, is an honorary fellow of Nuffield College, and even has a permanent office and car parking space there as a former warden.

“Not retired,” he stresses as he leaves.

If anyone is looking for some gold-plated economic expertise, they know who to call.

This article appeared in The Independent on 25/1/17

#interview #rationality #OfficeforBudgetResponsibility #SteveNickell #MervynKing #AndyHaldane #productivity #RobertChote

If they really want British businesses to thrive, our MPs should block Brexit

“I’m from the government and I’m here to help.”

Ronald Reagan said these were the nine most terrifying words in the English language.

It was a joke, but for a quarter of a century British ministers took Reagan’s quip seriously.

Successive Conservative administrations subscribed to the philosophy that the Government’s economic responsibility was limited to controlling public spending and cutting taxes.

For Labour, the only real difference was that it favoured more redistribution.

Blues and reds both agreed that when it came to business the job of government was to get out of the way. This was said to be the painful lesson of the interventionist 1970s and fiascos like the nationalisation of British Leyland.

Yet with yesterday’s Green Paper – “Building our Industrial Strategy” – it feels like those ideological blinkers have finally been lifted.

The British aversion to innovation was always a misreading of history; the errors of 1970s intervention were in lavishing help on particular firms and throwing good money after bad.

Smart state support for important sectors – aerospace, life sciences, automotive, creative industries – in the form of co-funding for research centres rather than individual companies, as outlined in the proposals, really ought to be uncontroversial.

It’s a genuine relief that they recognise the success of such intelligently targeted interventions in South Korea, Germany and, yes, Reagan’s US.

Indeed, for all the fanfare around this document, a sectoral support strategy is actually a continuation of the Coalition approach (which itself picked up on the sensible things Peter Mandelson was doing in the final years of the last Labour government).

The wider orientation is sound too.

The Government is right to focus on beefing up the support for university spin-off technologies, leveraging our large university science base. It’s pretty clear that not enough has been done here – and it’s welcome that the Green Paper faces up to this rather than trying to gloss over it.

The Green Paper is also right to identify relatively weak levels of numeracy and literacy among young people as a critical problem holding back UK productivity.

The emphasis on skills, rather than the numbers going through university, is overdue.

The Government is also correct to recognise our historic public under-investment in transport and energy infrastructure.

The general tone of the document is one of humility and a willingness to learn from the example of other countries rather than the sort of brainless Union Flag-waving we’ve had far too much of in recent months.

The problem is not, despite what the free market fundamentalists say, a lurch back to the 1970s but that ministers aren’t going far enough.

An industrial strategy on the cheap is a false economy.

The Autumn Statement’s public infrastructure boost was pretty meagre.

These proposals pay lip-service to the growing need to give people the opportunity to train and retrain throughout their working lives. Yet a big part of the problem here is funding.

Largely thanks to the Treasury’s prejudices, adult education has never been funded properly and there is no sign of a fundamental change on that.

Bank lending for promising small firms remains a critical problem. A government truly determined to address this would be looking at breaking up RBS into a network of German-style state-owned business banks.

But it’s not just about money.

There would be a stronger approach to corporate governance.

We need a sea change in corporate attitudes to investment and worker training from large firms. Putting workers on the boards of public companies could have been a catalyst for such a shift if Theresa May hadn’t backed down.

Competition policy is not mentioned in the document.

The Government ought to mandate the split of Openreach – the regulated BT division that is under-investing in our broadband infrastructure – from its parent company without delay.

And it is hard to take a government that complains about the UK’s productivity gap seriously if it refuses to intervene to sort out the productivity-destroying disaster that is Southern Rail.

There are other lacunae.

There is little emphasis on the massive productivity gap between firms and within regions, something the Bank of England chief economist Andy Haldane recently highlighted.

Why don’t the laggards learn from the best? And how can the state facilitate that learning?

It would be fatuous to suggest that there is a simple answer to this but the gains from making progress on this front could be vast.

Nor does the document engage with the biggest single threat to businesses and national productivity since perhaps the Second World War: Britain leaving the European Union.

On the menu of reasonable ideas to boost Britain’s productivity and rebalance the economy, Brexit is nowhere to be found.

There is not a single proposal –with the debatable exception of reforming public procurement rules –that could not have been actioned at any time over the past four decades during which Britain has been a member of the European Union.

Indeed, Brexit threatens to pull the Government towards the worst sort of counterproductive industrial strategy.

Desperate corporatist deals, like the one the Prime Minister struck with Nissan to keep the Japanese firm in Sunderland, really do hint at an unwelcome return to the failures of the 1970s – especially if other large companies start demanding their own special agreements.

Then there are incoming curbs on immigration and the general pandering to xenophobic sentiment which threatens serious harm to our cosmopolitan university sector.

We also face the possibility of a panicked Government doubling down on the regressive policies of the past three decades: deregulation of the banks to compensate for their loss of their single market passport; drastic cuts in corporation tax to offset the pain of new customs checks for exporters.

None of this will help industry, or productivity, or regional rebalancing.

The terrible truth is that the first line of any truly rational industrial strategy would echo the 2015 Conservative manifesto: “We say yes to the single market”.

#Brexit #industrialstrategy