Month: April 2019

\”In October 2008, the Emergency Economic Stabilization Act of 2008 (Division A of Public Law 110-343) established the Troubled Asset Relief Program (TARP) to enable the Department of the Treasury to promote stability in financial markets through the purchase and guarantee of `troubled assets.\’” The Congressional Budget Office offers a retrospective on how the controversial program all turned out in \”Report on the Troubled Asset Relief Program—April 2019.\”

One issue (although certainly not the only one) is whether the bailout was mostly a matter of loans or asset purchases that were later repaid. A bailout that was later repaid might still be offensive on various ground, but at least it would seem preferable to a bailout that was not repaid.

As a reminder, TARP authorized the purchase of $700 billion in \”troubled assets.\” The program ended up spending $441 billion. Of that amount, $377 billion was repaid, $65 billion has been written off so far, and the remaining $2 billion seems likely to be written off in the future. Here\’s the breakdown:

Interestingly, the biggest single area of TARP write-offs was not the corporate bailouts, but the $29 billion for \”Mortgage Programs.\” The CBO writes: \”The Treasury initially committed a total of $50 billion in TARP funds for programs to help homeowners avoid foreclosure. Subsequent legislation reduced that amount, and CBO anticipates that $31 billion will ultimately be disbursed. About $10 billion of that total was designated for grants to certain state housing finance agencies and for programs of the Federal Housing Administration. Through February 28, 2019, total disbursements of
TARP funds for all mortgage programs were roughly $29 billion. Because most of those funds were in the form of direct grants that do not require repayment, the government’s cost is generally equal to the full amount disbursed.\”

The second-largest category of write-offs is the $17 billion for the GM and Chrysler. Here\’s my early take on \”The GM and Chrysler Bailouts\” (May 7, 2012). For a look at the deal from the perspective of two economists working for the Obama administration at the time, see Austan D. Goolsbee and Alan B. Krueger,\” A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler,\” in the Spring 2015 issue of the Journal of Economic Perspectives.

Not far behind is the bailout for the insurance company AIG. It lost $50 billion making large investments and selling insurance on financial assets base on the belief that the price of real estate would not fall. The US Treasury writes: \”At the time, AIG was the largest provider of conventional insurance in the world. Millions depended on it for their life savings and it had a huge presence in many critical financial markets, including municipal bonds.\” A few years back, I wrote about  \”Revisiting the AIG Bailout\” (June 18, 2015), based in substantial part on \”AIG in Hindsight,\” by Robert McDonald and Anna Paulson in the Spring 2015 issue of the Journal of Economic Perspectives.

Finally, the Capital Purchase Program involved buying stock in about 700 different financial institutions. Almost all of that stock has now been resold (about $20 million remains), and the government ended up writing off $5 billion overall.

Of these programs, I\’m probably most skeptical about the auto bailouts, but even there, the risk of disruption from a disorderly bankruptcy, spreading from the companies to their suppliers to the surrounding communities, was disturbingly high. The purchases of stock in financial institutions, which may have been the most controversial step at the time, also came the closest to being repaid in full.

In the end, one\’s beliefs about whether TARP was a good idea depend on one\’s view of the US economy in October 2008. My own sense is that the US economy was in extraordinary danger during that month. B all means, let\’s figure out ways to improve the financial system so that future meltdowns are less likely, and I\’ve argued \”Why US Financial Regulators are Unprepared for the Next Financial Crisis\” (February 11, 2019). But when someone is in the middle of having a heart attack, it\’s time for emergency action rather than a lecture on diet and exercise. And when an economy is in the middle of a severe and widespread financial meltdown, which had a real risk of turning out even worse than what actually happened, the government needs to accept that however its regulators failed in the past and need to reform in the future, emergency actions including bailouts may need to be used. I do sometimes wonder if the TARP controversy would have been lessened if more individuals had been held accountable for their actions (or sometimes lack of action) in the lead-up to the crisis. 

Back in 2015, the trust fund for the Social Security Disability Insurance Trust Fund was in deep trouble, scheduled to run out of money by 2016. A short-term legislative fix bought a few years more solvency for the trust fund, by moving some of the payroll tax for other Social Security benefits over to the disability trust fund, but the situation continued to look dire. For some of my previous takes on the situation, see this from 2016, this from 2013, or this from 2011. Or see this three-paper symposium on disability insurance from the Spring 2015 Journal of Economic Perspectives, with a discussion of what what going wrong in the US system and discussions of reforms from the Netherlands and the UK.

Well, the report of the 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and the Federal Disability Insurance Trust Funds was recently published. And it now projects that the Disability Insurance trust fund won\’t run out for 33 years. In that sense, Disability Insurance looks to be in better shape than Medicare or the retirement portion of Social Security. What just happened?

This figure from the trustees shows the \”prevalence rate\” of disability–the rate of those receiving disability per 1,000 workers. The dashed line shows the actual prevalence of disability. The solid line shows the change after adjusting for age and sex. You can see the sharp rise in disability prevalence over several decades leading up to about 2014, which was leading to the concerns about the solvency of the system mentioned above. And then you see a drop in the prevalence of disability–both in the gross and the age-sex-adjusted lines.

As Henry Aaron writes: \”What happened next has stunned actuaries, economists, and analysts of all stripes. The number of people applying for disability benefits dropped…and kept on dropping. Some decline was expected as the economy recovered from the Great Recession and demand for workers increased. But the actual fall in applications has dwarfed expectations. In addition, the share of applicants approved for benefits has also fallen. … And if the drop in applications persists, current revenues may be adequate to cover currently scheduled benefits indefinitely.\”

Of course, the disability rate can fall for a number of reasons, some more welcome than others. To the extent that employment growth and a low unemployment rate has offered people a chance to find jobs in the paid workforce, rather than applying for disability, this seems clearly a good thing. But if this shift resulted from tightening the legal requirements on disability, then we might want to look more closely at whether this tightening made sense. The trust fund actuaries don\’t make judgments on this issue, but here are some bits of evidence.

The Center for Budget and Policy Priorities publishes a \”Chart Book: Social Security Disability Insurance,\” with the most recent version coming out last August. The first figure shows that applications for disability have been falling in recent years. The second figure shows that the number of applications being accepted have also fallen since about 2010 at all three possible stages of the process: initial

It\’s not easy to make a judgement on these patterns. A common concern among researchers studying this issues is that the standards for granting disability, and the resulting number of disabled workers, seem to vary a lot across different locations and decision-makers. For example, the CPBB report offers this figure showing differences across states:

A report from the Congressional Research Service, \”Trends in Social Security Disability InsuranceEnrollment\” (November 30, 2018), describes some potential causes of the lower disability rates.

Since 2010, new awards to disabled workers have decreased every year, dropping from 1 million to 762,100 in 2017. Although there has been no definitive cause identified, four factors may explain some of the decline in disability awards.

1. Availability of jobs. The unemployment rate was as high as 9.6% in 2010 and then gradually decreased every year to about 4.35% in 2017. …
2. Aging of lower-birth-rate cohorts. The lower-birth-rate cohorts (people born after 1964) started to enter peak disability-claiming years (usually considered ages 50 to FRA [federal retirement age]) in 2015, replacing the larger baby boom population. This transition would likely reduce the size of insured population who are ages 50 and above, as well as the number of disability applications. …
3. Availability of Affordable Care Act (ACA). … Yhe availability of health insurance under the ACA may lower the incentive to use SSDI as a means of access to Medicare, thus reducing the number of disability applications. …
4. Decline in the allowance rate. The total allowance rate at all adjudicative levels declined from 62% in 2001 to 48% in 2016. While this decline may in part reflect the impact of the Great Recession (since SSDI allowance rates typically fall during an economic downturn), the Social Security Advisory Board Technical Panel suspects that the declining initial allowance rate may be a result of the change in the SSDI adjudication process.

There\’s a common presumption in American politics that special interests are more likely to hold sway during secret negotiations in back rooms, while the broader public interest is more likely to win out in a transparent and open process. People making this case often quote Louis Brandeis, from his 1914 book Other People\’s Money: \”Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants …\” This use of the sunlight metaphor wasn\’t original to Brandeis: for example, James Bryce also used it in an 1888 book The American Commonwealth. 

But what if, at least in some important settings, the reverse is true? What if public processes that are more public actually result in greater power for special interests and less ability to find workable compromise solutions? James D\’Angelo and Brent Ranall make this case in their essay \”The Dark Side of Sunlight: How Transparency Helps Lobbyists and Hurts the Public,\” which appears in the May/June 2019 issue of Foreign Affairs. Responding to the Brandeis metaphor, they write: \”Endless sunshine—without some occasional shade—kills what it is meant to nourish.\”

The underlying argument goes something like this. Many of us have a reflexive belief that open political processes are more accountable, but we don\’t often ask \”accountable to who\”? It\’s easy to assume that the accountability is to a broader public interest. But in practice, transparency means that focused special interests can keep tabs on each proposal. If the special interests object, they can whip up a storm of protests. They also can threaten attempts at compromise, and push instead toward holding hard lines and party lines. Greater openness means a greater ability to monitor,  to pressure, and to punish possible and perceived deviations.

In US political history, the emphasis on sunlight is a relatively recent development. D\’Angelo and Ranall point out:

It used to be that secrecy was seen as essential to good government, especially when it came to crafting legislation. Terrified of outside pressures, the framers of the U.S. Constitution worked in strict privacy, boarding up the windows of Independence Hall and stationing armed sentinels at the door. As Alexander Hamilton later explained, “Had the deliberations been open while going on, the clamors of faction would have prevented any satisfactory result.” James Madison concurred, claiming, “No Constitution would ever have been adopted by the convention if the debates had been public.” The Founding Fathers even wrote opacity into the Constitution, permitting legislators to withhold publication of the parts of proceedings that “may in their Judgment require Secrecy.” …

One of the first acts of the U.S. House of Representatives was to establish the Committee of the Whole, a grouping that encompasses all representatives but operates under less formal rules than the House in full session, with no record kept of individual members’ votes. Much of the House’s most important business, such as debating and amending the legislation that comes out of the various standing committees—Ways and Means, Foreign Affairs, and so on—took place in the Committee of the Whole (and still does). The standing committees, meanwhile, in both the House and the Senate, normally marked up bills behind closed doors, and the most powerful ones did all their business that way. As a result, as the scholar George Kennedy has explained, “Virtually all the meetings at which bills were actually written or voted on were closed to the public.”

For 180 years, secrecy suited legislators well. It gave them the cover they needed to say no to petitioners and shut down wasteful programs, the ambiguity they needed to keep multiple constituencies happy, and the privacy they needed to maintain a working decorum.

But starting in the late 1960s and early 1970s, we have now had a half-century of experimenting with more open processes. How is that working out? When greater transparency in Congress arrived in the 1970s, did that mean special interest had more power or less? There\’s a simple (if imperfect) test. If special interests had less power, then it would not have been worthwhile to invest as much in lobbying, so more transparency should have been followed by a reduction in lobbying. Of course, the reverse is what actually happened: Lobbying rose dramatically in the 1970s, and has risen further since then. Apparently, greater political openness makes spending on lobbying more worthwhile, not less.

D\’Angelo and Ranall argue that a number of the less attractive features of American politics are tied to the push for greater transparency and openness. For example, we now have cameras operating in the House and Senate, which on rare occasions capture actual debate, but are more commonly used as a stage backdrop for politicians recording something for use in their next fundraiser or political ad. When public votes are taken much more often, then more votes are also taken just for show in an attempt to rally one\’s supporters or to embarrass the other party, rather than for any substantive legislative purpose. Politicians who are always on-stage are likely to display less civility and collegiality and greater polarization, lest they be perceived as insufficiently devoted to their own causes—or even showing the dreaded signs of a willingness to compromise.

As D\’Angelo and Ranall point out, it\’s interesting to note that when politicians are really serious about something, like gathering in a caucus to choose a party leader, they use a secret ballot. They write: \”Just as the introduction of the secret ballot in popular elections in the late nineteenth century put an end to widespread bribery and voter intimidation—gone were the orgies of free beer and sandwiches—it could achieve the same effect in Congress.\”

It\’s important to remember that here are wide array of forums, step-by-step process, and decisions that feed into any political process. Thus, the choice between secrecy and transparency isn\’t a binary one: that is, one doesn\’t need to be in favor of total openness or total secrecy in all situations. D\’Angelo and Ranall make a strong case toward questioning the reflexive presumption that more transparency in all settings will lead to better political outcomes.

When import tariffs are proposed, there\’s a lot of talk about unfairness and helping workers. But when the tariffs are enacted, the standard pattern is that consumers pay more, profits for the protected firm go up, and jobs are reshuffled from unprotected to protected industries. Back in 1911, satirist Ambrose Bierce defined \”tariff\” this way in The Devil\’s Dictionary: \”TARIFF, n.A scale of taxes on imports, designed to protect the domestic producer against the greed of his consumer.\”

Back in fall 2017, the Trump administration announced worldwide tariffs on imported washing machines. Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot,  look at the results in “The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines.” A readable overview of their work is here; the underlying research paper is here. 

Following the late-2017 announcement of tariffs on all washers imported to the United States, prices increased by about 12 percent in the first half of 2018 compared to a control group of other appliances. In addition, prices for dryers—often purchased in tandem with washing machines—also rose by about 12 percent, even though dryers were not subject to a tariff. … [T]hese price increases were unsurprising given the tariff announcement. … One revealing finding in this work is the tight price relationship between washers and dryers, even when washers, for example, are the product that is subject to tariffs. Among the five leading manufacturers of washers, roughly three- quarters of models have matching dryers. When the authors compare only electric washers and dryers, they show that in about 85 percent of the matching sets, the washers and dryers have the same price.

\”Financial advisers in the United States manage over $30 trillion in investible assets, and plan the financial futures of roughly half of U.S. households. At the same time, trust in the financial sector remains near all-time lows. The 2018 Edelman Trust Barometer ranks financial services as the least trusted sector by consumers, finding that only 54 percent of consumers `trust the financial services sector to do what is right.\’\”

Mark Egan, Gregor Matvos and Amit Seru went looking for actual data on misconduct by financial managers. Matvos and Seru provide an overview of their research in \”The Labor Market for Financial Misconduct\” (NBER Reporter 2019:1). For the details, see M. Egan, G. Matvos, and A. Seru, \”The Market for Financial Adviser Misconduct,\” NBER Working Paper No. 22050, February 2016.

The authors figured out that the Financial Industry Regulatory Authority keeps a record of the complete employment history of the 1.2 million people registered as financial adviser from 2005-2015 at its BrokerCheck website. This history includes employers, jobs tasks, and roles. In addition, \”FINRA requires financial advisers to formally disclose all customer complaints, disciplinary events, and financial matters, which we use to construct a measure of misconduct.\” They write:

Roughly one in 10 financial advisers who work with clients on a regular basis have a past record of misconduct. Common misconduct allegations include misrepresentation, unauthorized trading, and outright fraud— all events that could be interpreted as a conscious decision of the adviser. Adviser misconduct results in substantial costs: In our sample, the median settlement paid to consumers is $40,000, and the mean is $550,000. These settlements cost the financial industry almost half a billion dollars per year.

Looking at this data generates some provocative insights.  

A \”household equivalence\” scale offers an answer to this question: How much more income is needed by a a household with more people so that it has the same standard of living as a household with fewer people? The question may seem a little abstract, but it has immediate applications.

For example, the income level that officially defines the poverty line was $13,064 for a single-person household under age 65 in 2018. For a two-person household, the poverty line is $16,815 if they are both adults, but $17,308 if it\’s one adult and one child. For a single parent with two children the poverty line is $20,331; for a single parent with three children, it\’s $25,554. The extent to which the poverty line rises with the number of people, and with whether the people are adults or children or elderly, is a kind of equivalence scale.

Similarly, when benefits the poor and near-poor are adjusted by family size, such adjustments are based on a kind of equivalence scale.

And bigger picture, if you are comparing average household income between the early 1960s and the present, it presumably matters that the average household had 3.3 people in the early 1960s but closer to 2.5 people today (see Table HH-4).

However, it often turns out that poverty lines and poverty programs are set up with their own logic of what seems right at the time, but without necessarily using a common household equivalence scale. Richard V. Reeves and Christopher Pulliam offer a nice quick overview of the topic in \”Tipping the balance: Why equivalence scales matter more than you think\”  (Brookings Institution,  April 17, 2019). Here\’s a sample of some common household equivalence scales:

Reeves and Pulliam point out that if you look at the 2017 Tax Cuts and Jobs Act, and how it affects \”households\” at different income levels, your answer will look different depending on whether you apply a household equivalence scale. For example, think about ranking households by income using an equivalence scale. If there are two households with the same income, but one household has more children, then the household with more children will be treated as having a lower standard of living (or to put it another way, a household with more children would need more income to have the same standard of living). The 2017 tax law provides substantial benefits to families with children.

But setting aside that particular issue, it\’s  topic that matters to people planning a household budget, if they think about the question of whether living together will save money, or how much more money they will need if they have children. The commonly used \”square root\” approach, for example, suggests that a a household of two people will need 1.414 times the income of a single-person household for an equivalent standard of living, a household of three people will need 1.732 times the income of a single-person household for an equivalent standard of living and so on. Pick another household equivalence scale, if you prefer, but then plan accordingly.

As we move toward the end of the academic year for many colleges and universities, it is perhaps useful for students to be reminded that the final grade for any given course is quite unlikely to have a long-lasting influence on your life. Here are some thoughts from the syndicated newspaper column written by Calvin Trillin, which I would sometimes read to my introductory economics students on the last day of class. (I don\’t have an online link, but my notes tell me that I originally read the column in the San Jose Mercury News, May 26, 1990, p. 9C). Trillin wrote:

I wrote a few weeks back that the American Statistical Association has published a special issue of it journal, the American Statistician, with a lead article proposing the abolition of \”statistical significance\” (\”Time to Abolish `Statistical Significance\’\”?). John Ioannidis has estimated that 90% of medical research is statistically flawed, so one might expect him to be among the harsher critics of statistical significance.  But in the Journal of the American Medical Association, he goes the other way in \”The Importance of Predefined Rules and Prespecified Statistical Analyses: Do Not Abandon Significance\” (April 4, 2019). Here are a few of his themes:

The result of statistical research is often a yes-or-no outcome. Should a medical treatment be approved or not? Should a certain program or policy be expanded or cut? Should one potential effect be studied more, or should it be ruled out as a cause? Thus, while it\’s fine for researchers to emphasize that all results come with degree of uncertainty, at some point it\’s necessary to decide both how research and how applications of that research in the real world should proceed. Ioannidis writes:

Changing the approach to defining statistical and clinical significance has some merits; for example, embracing uncertainty, avoiding hyped claims with weak statistical support, and recognizing that “statistical significance” is often poorly understood. However, technical matters of abandoning statistical methods may require further thought and debate. Behind the so-called war on significance lie fundamental issues about the conduct and interpretation of research that extend beyond (mis)interpretation of statistical significance. These issues include what effect sizes should be of interest, how to replicate or refute research findings, and how to decide and act based on evidence. Inferences are unavoidably dichotomous—yes or no—in many scientific fields ranging from particle physics to agnostic omics analyses (ie, massive testing of millions of biological features without any a priori preference that one feature is likely to be more important than others) and to medicine. Dichotomous decisions are the rule in medicine and public health interventions. An intervention, such as a new drug, will either be licensed or not and will either be used or not.

Yes, statistical significance has a number of problems. It would be foolish to rely on it exclusively. But what will be used instead? And will it be better or worse as a way of making such decisions? No method of making such decisions is proof against bias. Ioannidis writes: 

Many fields of investigation (ranging from bench studies and animal experiments to observational population studies and even clinical trials) have major gaps in the ways they conduct, analyze, and report studies and lack protection from bias. Instead of trying to fix what is lacking and set better and clearer rules, one reaction is to overturn the tables and abolish any gatekeeping rules (such as removing the term statistical significance). However, potential for falsification is a prerequisite for science. Fields that obstinately resist refutation can hide behind the abolition of statistical significance but risk becoming self-ostracized from the remit of science. Significance (not just statistical) is essential both for science and for science-based action, and some filtering process is useful to avoid drowning in noise.

In 1840, Henry Wadsworth Longfellow published a poem called \”The Village Blacksmith.\” In my humble economist-opinion, not his best work. But the opening four lines are very nice:

Under a spreading chestnut tree
The village smithy stands;
The smith, a mighty man is he,
With large and sinewy hands …

When I was a little boy, and my father read the poem to me, I remember the pleasure in his voice at that word \”sinewy.\” Indeed, there was at time when every town of even modest size had at least one blacksmith. When did they go away?
Jeremy Atack and Robert A. Margo answer the question in \”Gallman revisited: blacksmithing and American manufacturing, 1850–1870,\” published earlier this year in Cliometrica (2019, 13: 1-23).  Gallman is an earlier writer who classified blacksmiths as a service industry, while Atack and Margo argue that they instead should be treated as an early form of manufacturing. From a modern view, given the concerns over how technology may affect current and future jobs, blacksmiths offer an example of how a prominent industry of skilled workers went away. Atack and Margo write:

The village blacksmith was a common sight in early nineteenth-century American communities, along with cobblers, shoemakers, grist mill operators, and other artisans. Blacksmiths made goods from wrought iron or steel. This metal was heated in a forge until pliant enough to be worked with hand tools, such as a hammer, chisel, and an anvil. Others also worked with metal but what distinguished blacksmiths was their abilities to fashion a wide range of products from start to finish and even change the properties of the metal by activities such as tempering, as well as repair broken objects. …

Blacksmiths produced a wide range of products and supplied important services to the nineteenth-century economy. In particular, they produced horseshoes and often acted as farriers, shoeing horses, mules, and oxen. This was a crucial service in an economy where these animals provided the most of the draft power on the farm and in transportation and carriage. The village blacksmith also produced a wide range of goods from agricultural implements to pots and pans, grilles, weapons, tools, and carriage wheels among many other items familiar and unfamiliar to a modern audience—a range of activities largely hidden behind their generic occupational title.

Blacksmithing was a sufficiently important activity to qualify as a separate industrial category in the nineteenth-century US manufacturing censuses, alongside more familiar industries as boots and shoes, flour milling, textiles, and clock making. The 1860 manufacturing census, for example, enumerated 7504 blacksmith shops employing 15,720 workers … —in terms of the number of establishments, the fourth most common activity behind lumber milling, flour milling, and shoemaking. …

As ‘‘jacks-of-all-trades,’’ they [blacksmiths] were generally masters of none (except for their service activities). Moreover, the historical record reveals that several of those who managed to achieve mastery moved on to become specialized manufacturers of that specific product. Such specialized producers had higher productivity levels than those calling themselves blacksmiths producing the same goods, explaining changes in industry mix and the decline of the blacksmith in manufacturing. …

Consider the goods produced historically by blacksmiths, such as plows. Over time, blacksmiths produced fewer and fewer of these, concentrating instead on services like shoeing horses or repairs. But even controlling for this, only the most productive of blacksmiths (or else those whose market was protected from competition in some way) survived—a selection effect. On the goods side of the market, production shifted toward establishments that were sufficiently productive that they could specialize in a particular ‘‘industry,’’ such as John Deere in the agricultural implements industry. As this industry grew, it drew in workers—some of whom in an earlier era might have opened their own blacksmith shops, but most of whom now worked on the factory floor, perhaps doing some of the same tasks by hand that blacksmiths had done earlier but otherwise performing entirely novel tasks, because production process was increasingly mechanized. On average, such workers in the specialized industry were more productive than the ‘‘jack-of-all-trades,’’ the blacksmith, had been formerly. The village smithy could and did produce rakes and hoes, but the village smithy eventually and increasingly gave way to businesses like (John) Deere and Company who did it better. …

During the first half of the nineteenth century, blacksmiths were ubiquitous in the USA, but by the end of the century they were no longer sufficiently numerous or important goods producers to qualify as a separate industry in the manufacturing census.

When the US economy was a larger share of the world economy, then access to the US market meant more. For example, World Bank statistics say that the US economy was 40% of the entire world economy in 1960, but is now about 24%. The main source of growth in the world economy for the foreseeable future will be in emerging markets.

For a sense of the shift, consider this figure from chapter 4 of the most recent World Economic Outlook report, published by the IMF (April 2019). The lines in the figure show the trade flows between countries that are at least 1% of total world GDP. The size of the dots for each country is proportionate to the country\’s GDP.

In 1995, you can see international trade revolving around the United States, with another hub of trade happening in Europe and a third hub focused around Japan.  Trade between the US and China shows up on the figure, but China did not have trade flows greater than 1% of world GDP with any country other than the US.

The picture is rather different in 2015. The US remains an international hub for trade. Germany remains a hub as well, although fewer of its trade flows now exceed 1% of world GDP. And China has clearly become a hub of central importance in Asia.

The patterns of trade have also shifted toward greater use of global value chains–that is, intermediate products that are shipped across national borders at least once, and often multiple times, before they become final products. Here\’s the overall pattern since 1995 of falling tariffs and rising participation in global value chains for the world economy as a whole.

Several decades ago, emerging markets around the world worried about having access to selling in US and European markets, and this market access could be used by the US and European nations as a bargaining chip in economic treaties and more broadly in international relations. Looking ahead, US production is now more tied into global value chains, and the long-term growth of US manufacturing is going to rely more heavily on sales to markets outside the United States.

For example, if one is concerned about the future of the US car industry, the US now produces about 7% of the world\’s cars in 2015, and about 22% of the world\’s trucks. The future growth of car consumption is going to be primarily outside the US economy. For the health and long-term growth of the US car business, the possibility of unfair imports into the US economy matters a lot less than the access of US car producers to selling in the rest of the world economy.

The interconnectedness of global value chains means that General Motors already produces more cars in China than it does in the United States. In fact, sales of US multinationals now producing in China are already twice as high as exports from the US to China. Again, the long-term health of many US manufacturers is going to be based on their ability to participate in international value chains and in overseas production.

Although what caught my eye in this chapter of the World Economic Outlook report was the shifting patterns of world trade, the main emphases of the chapter are on other themes that will come as no surprise to faithful readers of this blog.  One main theme is that shifts in bilateral and overall trade deficits are the result of macroeconomic factors, not the outcome of trade negotiations, a theme I\’ve harped on here (for example, here, here, and here).

The IMF report also offers calculations that higher tariffs between the US and China will cause economic losses for both sides. From the IMF report:

US–China trade, which falls by 25–30 percent in the short term (GIMF) and somewhere between 30 percent and 70 percent over the long term, depending on the
model and the direction of trade. The decrease in external demand leads to a decline in total exports and in GDP in both countries. Annual real GDP losses range from –0.3 percent to –0.6 percent for the United States and from –0.5 percent to –1.5 percent for China … Finally, although the US–China bilateral trade deficit is reduced, there is no economically significant change in each country’s multilateral trade balance.

Some advocates of higher tariffs take comfort in noting that the estimated losses to China\’s economy are bigger than the losses to the US economy.  Yes, but it\’s losses all around! As the 21st century economy evolves, the most important issues for US producers are going to involve their ability to
compete in unfettered ways in the increasingly important markets outside the US.