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The reason behind the tariffs that President Trump has announced for steel and aluminum is an unusual one. The legal justification for the tariffs is based Section 232 of the Trade Expansion Act of 1962, which gives the President the power to impose tariffs if \”national security\” is at stake.

As Chad Bown of the Peterson Institute for International Economics has pointed out, this specific justification for import tariffs has led to a total of 28 investigations in the 56 years since the law was enacted. The most recent investigation as to whether national security should lead to import tariffs was in 17 years ago in 2001; the most recent time in which national security actually led to imports being limited was 32 years ago, when President Reagan used this argument to limit imports of certain machine tools.

However, the argument that it might sometimes be necessary to limit imports because of national security has a venerable history. Adam Smith, the intellectual godfather of free trade arguments, listed national defense as an exception in  Book IV of the The Wealth of Nations.. Smith wrote:

\”There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry. The first is, when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country in some cases by absolute prohibitions and in others by heavy burdens upon the shipping of foreign countries.\”

By all means, the national security argument deserves serious consideration. And seriously, are the steel and aluminum tariffs actually about national security in the sense of military strength? Or is it \”national security\” in a more generic and rhetorical sense, really meaning that if it\’s good for steel industry profits, then it\’s good for \”national security.\”

(Side note: Of course, this second argument is essentially similar to the line attributed long-ago to to Charles Wilson, a former head of General Motors who was nominated to be Secretary of Defense in 1953. Wilson was widely mocked for saying, \”What\’s good for General Motors is good for the country.\” That\’s not actually what he said, as I explain in \”What\’s Good for General Motors …\” (October 23, 2012). But the sentiment that if corporate profits for favored industries are vital to national security was certainly common enough, then and now.)

The US Department of Commerce has put forward the \”national security\” justification for the steel and aluminum tariffs in two January 2018 reports: \”The Effect of Imports of Steel on the National Security\” (January 11, 2018) and \”The Effect of Imports of Aluminum on the National Security\” (January 17, 2018).

As the reports point out, Section 232 allows for a broad definition of \”national security.\” It quotes from a report back in 2001, the last time the national security justification for tariffs was considered (although not ultimately used), to note that“in addition to the satisfaction of national defense requirements, the term “national security” can be interpreted more broadly to include the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements that are critical to the minimum operations of the economy and government.” These reports have a lot of detail on levels of steel and aluminum imports and the difficulties of US steel and aluminum companies. But the details about just how national security is being affected are harder to find and to pin down. Here, I\’ll first give some details on the steel industry from the US Department of Commerce report, and then turn to the aluminum industry report.

Background on the US Steel Industry

The report sums up its case in this sentence: \”It is these three factors – displacement of domestic steel by excessive imports and the consequent adverse impact on the economic welfare of the domestic steel industry, along with global excess capacity in steel – that the Secretary has concluded create a persistent threat of further plant closures that could leave the United States unable in a national emergency to produce sufficient steel to meet national defense and critical industry needs.\”

How much steel is actually used by the US Department of Defense? The answer is 3% of domestic US production. The report says: \”The U.S. Department of Defense (DoD) has a large and ongoing need for a range of steel products that are used in fabricating weapons and related systems for the nation’s defense. DoD requirements – which currently require about three percent of U.S. steel production – are met by steel companies that also support the requirements for critical infrastructure and commercial industries.\”

What about the \”critical industries\” more broadly? The answer is about half of domestic production. The report says: \’\”[T]here are 16 designated critical infrastructure sectors in the United States, many of which use high volumes of steel (see Appendix I). The 16 sectors include chemical production, communications, dams, energy, food production, nuclear reactors, transportation systems, water, and waste water systems. … The updated analysis in Appendix I shows that 49.1 percent of domestic steel consumption in 2007 was used in critical industries.\”

The report has a LOT to say about steel production in China. But when you look at US imports of steel, this table taken from the report shows that Canada is at the top and China is 11th. US steel imports from 2011 to 2017 are up considerably overall, especially from Brazil, South Korea, Mexico, Russia, Turkey, Germany, and Taiwan. But over that time, US steel imports from China are down by about one-third.

How much is US production capacity dropping off? Here\’s the figure from the report. There\’s a rise before the Great Recession and a fall after, but current steel capacity is about the same as it was in the early 2000s.  

Logically speaking, the number of jobs in the US steel industry shouldn\’t be part of the national security argument. After all, steel like pretty much every other industry is continually making more use of automation and robots. But here\’s what the report shows about steel industry jobs: a big drop from about 2000-2003, but not much change since then. 

For me, it\’s hard to look at these kinds of figures and see a national security crisis in the making in the military strength category. The report even notes that while steel prices are low all around the world, \”Notwithstanding these effects, prices for steel in the U.S. remained substantially higher than in any other area. However, relative to prices between 2010 and 2013, prices are still relatively depressed.\”

The report does give a few examples of specific types of steel products that are important for defense production and where there are few domestic suppliers. The report notes:

\”This is not a hypothetical situation. The Department of Defense already finds itself without domestic suppliers for some particular types of steel used in defense products, including tire rod steel used in military vehicles and trucks. … In the case of critical infrastructure, the United States is down to only one remaining producer of electrical steel in the United States (AK Steel – which is highly leveraged). Electrical steel is necessary for power distribution transformers for all types of energy – including solar, nuclear, wind, coal, and natural gas – across the country. If domestic electrical steel production, as well as transformer and generator production, is not maintained in the U.S., the U.S. will become entirely dependent on foreign producers to supply these critical materials and products.\”

The report also notes that steel producers have reduced their capability to ramp up production in a national emergency:

\”[D]omestic steel producers have a shrinking ability to meet national security production requirements in a national emergency. The U.S. Department of Commerce, Census Bureau regularly surveys plant capacity, and has found that steel producers are quickly shedding production capacity that could be used in a national emergency. The Census Bureau defines national emergency production as the “greatest level of production an establishment can expect to sustain for one year or more under national emergency conditions.” From 2011 to 2017, steel producers increased the utilization of the surge capacity they would have during a national emergency from 54.2 percent to 68.2 percent …  As steel producers use more of this emergency capacity, there is an increasingly limited ability to ramp up steel production to meet national security needs during a national emergency.\”

As the report notes, ramping up steel production in the patterns that occurred during the Vietnam War or World War II would take time and effort. Of course, the notion that the US steel industry should be continually prepared to ramp up at high speed for the equivalent of World War II is a questionable one. Let\’s pause there for a moment, and turn to the aluminum report.

Background on the US Aluminum Industry

As the aluminium report explains: \”Aluminum originates from bauxite, an ore typically found in the topsoil of various tropical and subtropical regions; the United States is not a significant source of bauxite as it cannot be economically extracted here. Once mined, aluminum within the bauxite ore is chemically extracted in a refinery into alumina, an aluminum oxide compound. In a second step, the alumina is smelted to produce pure aluminum metal.\”

One of the ironies here is that the US is worried about the national security importance of an industry that depends entirely on imported raw materials. However, as the report notes: \”The U.S. Government does not maintain any strategic stockpile of bauxite, alumina, aluminum ingots, billets or any semi-finished aluminum products such aluminum plate.\”

How much aluminum is used by the US Department of Defense? The report blacks out this information. It reads: \”The U.S. Department of Defense (DoD) and its contractors use a small percentage of U.S. aluminum production. The DoD “Top Down” estimate of average annual demand for aluminum during peacetime is XXXXX, or XXXXX percent of total U.S. demand.\” However, later in the discussion in the specific category of high-purity aluminum, the report reads: \”The U.S. manufacturers of products based on aluminum require 250,000 metric tons of high-purity aluminum a year. Approximately 90 percent of this is for commercial aerospace and other applications. Ten percent is used to support the manufacture of defense-related products.\”

As with steel, the main source of US aluminum imports is Canada. In fact, this outcome is the result of long-standing polices. The report notes: 

\”The U.S. in 2016 relied on imports for 89 percent of its primary aluminum requirements, up from 64 percent in 2012. Canada, which is highly integrated with the U.S. defense industrial base and considered a reliable supplier, is the leading source of imports. With Canadian smelters operating at near full capacity and with the vast majority of their production already going to customers in the United States, there is limited ability for Canada to replace other suppliers. … 

\”The U.S. and Canadian defense industrial bases are integrated. This cooperative relationship has existed since 1956 and is codified in a number of bilateral defense agreements. For example in 1987, DoD (all Services), the Defense Logistics Agency (DLA), the Office of the Secretary of Defense (OSD), and the Canadian Department of National Defence (DND) joined together to form a North American Technology and Industrial Base Organization (NATIBO). NATIBO is chartered to promote a cost effective, healthy technology and industrial base that is responsive to the national and economic security needs of the United States and Canada.\” 

How low is the price of aluminum? Here\’s a graph from the report showing aluminum prices since 1998. Prices peaked during the commodity boom in the lead-up to the Great Recession, then crashed, but presently are above where they were in the late 1990s and early 2000s. In other words, it\’s hard to make the case that prices have fallen below their usual historical range, rather than being pretty much in the middle of that range. 

Where is the world\’s aluminum produced? The report says: \”Because aluminum production is highly energy intensive, the world’s leading producers are generally the countries with the lowest energy costs (including Canada, Russia, the United Arab Emirates (UAE), and Bahrain). The exception is China, where electricity costs are actually higher than those of the United States ($614 per metric ton of aluminum produced in China versus $532 per metric ton in the United States); China’ overall production costs were equal to that of U.S. producers.\” 

What jumps out at me from the previous table is the US capacity utilization rate in aluminum production is so very low. 

The report does note two particular issues that seem to me potentially relevant to national security in the military sense. One is the particular area of \”high-purity aluminum:

\”The U.S. currently has five [aluminum] smelters remaining, only two smelters that are operating at full capacity. Only one of these five smelters produces high-purity aluminum required for critical infrastructure and defense aerospace applications, including types of high performance armor plate and aircraft-grade aluminum products used in upgrading F-18, F-35, and C-17 aircraft. Should this one U.S. smelter close, the U.S. would be left without an adequate domestic supplier for key national security needs. The only other high-volume producers of high-purity aluminum are located in the UAE and China (internal use only).\”

A somewhat related issue is that many of the high-tech uses of aluminum involve research into new alloys and their properties. But aluminum industry R&D seems to have died off:

\”At this time most aluminum companies cannot afford to fund research. The importance of research in this industry is clear, however. More than 90 percent of all alloys currently used in the aerospace industry were developed through Alcoa’s research. … Of the three remaining companies with U.S. smelting operations in 2016, Alcoa is the only company to report spending on Research and Development over the past five years in its financial statements; Century Aluminum and Noranda reported zero spending on R&D since 2012.\”

Some Thoughts about the National Security Argument for Protection

Imagine for a moment that you were firmly convinced that the US faced a national security problem with steel and aluminum–and I mean in the specific sense of being related to military and critical industry needs, not in the generic sense of just thinking some industries should have bigger profits. What would you propose? Here are some ideas: 

• Focus on the specific areas where the dependence on imports of steel and aluminum is most concerning, like the areas of steel tire rods, electrical steel, and high-purity aluminum mentioned in the reports. 
• Undertake a crash R&D program to find ways of substituting for steel and aluminum in various applications, and also to reuse and recycle existing steel and aluminum where possi le 
• Stockpile bauxite and other raw materials, so as not to be vulnerable to import disruptions. 
• Take all the subsidies that are proposed or enacted for favored noncarbon energy sources like solar and wind, and adapt them to apply to steel and aluminum: maybe tax cuts for these industries; or government guarantees that these companies could borrow large sums at subsidized or zero interest rates; or the  Department of Defense and other government purchasers would buy purchase steel and aluminum from US producers at above-market prices; or government could pay steel companies to keep unused excess capacity that could be ramped  up quickly. 
• Make  contingency plans that would redirect steel and aluminum from noncritical uses to national security uses, if needed. 
• Avoid undercutting Canada, which is both a key US ally and the largest outside supplier of steel and aluminum.

Just to be clear, I\’m not advocating everything on this list of ideas. I\’m saying that someone who is seriously concerned that the domestic production of steel and aluminum raises national security concerns should be considering all of these ideas, and advocating for at least some of them.

If the response to national security concerns over steel and aluminum is just \”slap on tariffs, help domestic industry earn higher profits, and just kinda sorta hope that domestic industry uses those profits to build up capacity and specialized products and R&D\”–well, that response doesn\’t actually seem like a serious concern over national security to me.  If the national security concerns are legitimate, seems like a remarkably sloppy and unserious way to address them.  

Speaking of being serious, one frustration for any economist reading these reports is that at no point do they acknowledge that imports tariffs or quotas have any costs to consumers and other industrial users of these products. After all, the key mechanism by which import restrictions benefit domestic firms is by allowing them to charge higher prices to buyers.  

I care a considerable amount about national security. But waving the words \”national security\” should not exempt anyone from an actual consideration of actual costs, benefits, and alternative strategies. 

There is zero question in the mind of any economist that import tariffs will offer short-run benefits to  the domestic steel and aluminum industries. Whether it benefits the country overall–either in the military or the economic sense of \”national security\”– is considerably more dubious. The inevitable trade retaliation from other countries will only worsen these tradeoffs.

Finally, one sometimes hears the argument that these steel and aluminum tariffs are just an opening bid in the renegotiation of trade agreements. In this telling, the steel and aluminum tariffs could be bartered away for concessions in other parts of trade agreements. Maybe this is true. But if the tariffs are now bargained away or discarded so, I would conclude that the national security justification for their existence was not made sincerely in the first place.

Are there some ways to tip the balance a bit more toward workers? Jay Shambaugh and Ryan Nunn have edited an ebook, Revitalizing Wage Growth: Policies to Get American Workers a Raise, with nine chapters on causes of wage stagnation and policy proposals to address it (published by the Hamilton Project at the Brookings Institution, February 2018, full Table of Contents is appended below). Given that the US unemployment rate has now been 5% or less for more than two years, since September 2016, the question of wage growth is rightfully assuming high importance.

In an overview essay, \”How Declining Dynamism Affects Wages,\” Jay Shambaugh, Ryan Nunn, and Patrick Liu point out that labor markets have come less dynamic. A dynamic market is always experiencing gross creation of jobs and gross losses of jobs, which together make up net job creation. But gross job creation is down. So is employer-to-employer movement. So are the levels of start-up firms, which are often a source of productivity growth and new job hires.

I found several of the chapters about improving worker bargaining power to be especially interesting.

For example, Matt Marx argues for \”Reforming Non-Competes to Support Workers.\”

\”Today, non-competes are widely used in a variety of occupations, especially among knowledge workers and executives. Prescott, Bishara, and Starr (2016) estimate that 18 percent of respondents to an online survey across a broad set of occupations had signed a non-compete for their current job. Looking specifically at engineers, Marx (2011) finds that 43 percent of workers had signed a non-compete in the past 10 years. Executives were even more likely to have signed: Garmaise (2011) finds that at least 70 percent of senior executives in public companies were bound by a non-compete. …

\”Perhaps the most well-established effect in the non-compete literature is that such employment agreements discourage workers from changing jobs. … If non-compete agreements discourage workers from changing jobs, this restriction circumscribes the effective market for their skills. With fewer firms to bid for their labor, they might receive fewer and less-attractive job offers. …  To date, the only published paper to investigate the impact of non-compete agreements on wages is Garmaise (2011). He finds that executives are paid less in states that have adopted stricter noncompete
policies. ..[T]alent flows less within states with tighter non-compete laws. Researchers have also examined labor flows across states. Marx, Singh, and Fleming (2015) find that Michigan’s rule change providing for enforcement of non-compete agreements  resulted in a brain drain of talent out of the state. Specifically, technical workers left for other states with less-strict enforcement of non-competes. Worse, this brain drain due to non-compete agreements is greater for the most highly skilled workers.. … Non-competes act as a brake on entrepreneurial activity, both by blocking the emergence  of new companies and by making it harder for them to grow. … Non-competes not only make it more difficult to start a company, but also make it harder to grow a start-up.\”

In \”A Proposal for Protecting Low‑Income Workers from Monopsony and Collusion,\” Alan B. Krueger and Eric A. Posner argue:

\”New evidence that labor markets are being rendered uncompetitive by large employers suggests that the time has come to strengthen legal protections for workers. Labor market collusion or monopsonization—the exercise of employer market power in labor markets—may contribute to wage stagnation, rising inequality, and declining productivity in the American economy, trends which have hit low-income workers especially hard. To address these problems, we propose three reforms. First, the federal government should enhance scrutiny of mergers for adverse labor market effects. Second, state governments should ban  non-compete covenants that bind low-wage workers. Third, no-poaching arrangements among establishments that belong to a single franchise company should be prohibited.\” 

Benjamin Harris writes on the theme: \”Information Is Power Fostering Labor Market Competition through Transparent Wages:\”

\”In the U.S. labor market, information on wages and compensation is decidedly asymmetric. Employees frequently do not know how their pay compares to comparable workers, either within or outside their firm, and are reluctant to seek this knowledge out of fear of retaliation, social norms, or general inertia. In stark contrast, many employers use compensation surveys to know precisely where their workers fall in the distribution of wages. In other markets characterized by asymmetric information, the entity with more complete information maintains a distinct advantage (Hart and Holmström 1987); the U.S. labor market is likely no different. …

\”This paper puts forth an aggressive agenda to promote better wage transparency through a five-part proposal. … The first pillar of the proposal advocates for states to adopt comprehensive laws, such as those found in Michigan, both to protect workers from employer retaliation for discussing wages, and to discourage employers from asking workers to waive their right to disclose pay. … The second pillar of the proposal addresses the interrupted progress of a 2016 action by the EEOC that would require large companies to more comprehensively report their compensation data. The action … would have required companies with more than 100 workers to report aggregated wage data by demographic characteristics. … The third pillar …  would reform the safe harbor guidelines, which protect firms from claims of wage collusion, to require that companies share any commissioned compensation survey data with workers. … The fourth pillar explicitly prohibits employers from asking about prior pay levels during the hiring process unless they provide data on the pay of comparable workers. … The fifth pillar ,,, calls for Congress to appropriate a small amount of funds for the U.S. Department
of Labor (DOL) to study the impact of wage transparency on compensation levels.\”

___________________________
Here\’s the full Table of Contents:

Introduction
by Jay Shambaugh, Ryan Nunn, and Becca Portman

Earlier this week, the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution hosted \”A Fed duet: Janet Yellen in conversation with Ben Bernanke\” (February 27, 2018). Video, audio and a transcript are all available here.  I\’ll focus here on a few of  Yellen\’s comments that caught my eye.

In the aftermath of the Great Recession, government is higher in most of the world\’s  high-income economies, including the United State. This year, the world economy is producing at close to its potential GDP. If there is ever going to be a time for thinking about long-term fiscal issues, this is it. The March 2018 issue of Finance & Development, published by the IMF, includes a symposium called \”Balancing Act: Managing the Public Purse.\” Here, I\’ll quote from the discussion of debt in advanced economies by Alberto Alesina, Carlo A. Favero, and Francesco Giavazzi, \”Climbing Out of Debt (pp. 6-11). They write:

\”Almost a decade after the onset of the global financial crisis, national debt in advanced economies remains near its highest level since World War II, averaging 104 percent of GDP. In Japan, the ratio is 240 percent and in Greece almost 185 percent. In Italy and Portugal, debt exceeds 120 percent of GDP. Without measures either to cut spending or increase revenue, the situation will only get worse. As central banks abandon the extraordinary monetary measures they adopted to battle the crisis, interest rates will inevitably rise from historic lows. That means interest payments will eat up a growing share of government spending, leaving less money to deliver public services or take steps to ensure long-term economic growth, such as investing in infrastructure and education. …

\”Which policies are more likely to result in a lower ratio of debt to GDP? A number of papers have addressed this question since at least the early 1990s (Alesina and Ardagna 2013 summarizes the early literature). We decided to take another look at the issue using new methodology and a much richer set of data covering 16 of the 35 countries belonging to the Organisation for Economic Co-operation and Development between 1981 and 2014, including Canada, Japan, the United States, and most of Europe, excluding postcommunist nations. Our analysis focused on some 3,500 policy changes geared toward reducing deficits either by raising taxes or by cutting spending. …

\”More specifically, we found that on average, expenditure-based plans were associated with very small downturns in growth: a plan worth 1 percent of GDP implied a loss of about half a percentage point relative to the average GDP growth of the country. The loss in output typically lasted less than two years. Moreover, if an expenditure-based plan was launched during a period of economic growth, the output costs were zero, on average. This means that some expenditure-based fiscal plans were associated with small downturns, while others were associated with almost immediate surges in growth, a phenomenon sometimes known as “expansionary austerity” that was first identified by Giavazzi and Pagano (1990). By contrast, tax-based fiscal corrections were associated with large and long-lasting recessions. A tax-based plan amounting to 1 percent of GDP was followed, on average, by a 2 percent decline in GDP relative to its pre-austerity path. This large recessionary effect tends to last several years.

\”Our second finding is that reductions in entitlement programs and other government transfers were less harmful to growth than tax increases. Such cuts were accompanied by mild and short-lived economic downturns, probably because taxpayers perceived them as permanent and so expected that the taxes needed to fund the programs would be lower in the future. Thus, the data suggest that reforms of social security rules aimed at reducing government spending are more like normal spending cuts than tax increases. Because social security reforms tend to be persistent, especially in countries with aging populations, they entail some of the smallest costs in terms of lost output.

In more detailed analysis, the authors consider various explanations and compare them to the data. For example, the advantages of cutting debt/GDP ratios with spending, rather than taxes, don\’t seem to be associated with corresponding changes in monetary policy, exchange rates, or simultaneous packages of other economic reforms. The big difference seems to be that tackling the debt/GDP ratio with spending based tools is associated with a rise in private investment, while tacking it with tax increases is not.

Here\’s the set-up line for the story: Two central bankers walk into a London restaurant …

Mervyn King tells the tale at the start of his lecture \”Lessons from the Global Financial Crisis,\” in a speech given upon receipt of the Paul A. Volcker Lifetime Achievement Award from the National Association for Business Economics (February 27, 2018). I\’m quoting from the prepared text for the talk. Of course, King was Governor of the Bank of England from 2003-2013, while Paul Volcker was Chair of the Federal Reserve from 1979-1987. This is how King tells the story of their first meeting back in 1991:

\”I first met Paul in 1991 just after I joined the Bank of England. He came to London and asked Marjorie Deane of the Economist magazine to arrange a dinner with the new central banker. The story of that dinner has never been told in public before. We dined in what was then Princess Diana’s favourite restaurant, and at the end of the evening Paul attempted to pay the bill. Paul carried neither cash nor credit cards, but only a cheque book, and a dollar cheque at that. Unfortunately, the restaurant would not accept it. So I paid with a sterling credit card and Paul gave me a US dollar cheque. This suited us both because I had just opened an account at the Bank of England and been asked, rather sniffily, how I intended to open my account. What better response than to say that I would open the account by depositing a cheque from the recently retired Chairman of the Federal Reserve. I basked in this reflected glory for two weeks. Then I received a letter from the Chief Cashier’s office saying that most unfortunately the cheque had bounced. Consternation! It turned out that Paul had forgotten to date the cheque. What to do? Do you really write to a former Chairman pointing out that his cheque had bounced? Do you simply accept the financial loss? After some thought, I hit upon the perfect solution. I dated the cheque myself and returned it to the Bank of England. They accepted it without question. I am hopeful that the statute of limitations is well past. But the episode taught me a lifelong lesson: to be effective, regulation should focus on substance not form.\”

Maybe you need to be an economist to see the humor in the story. But consider:  One central bank chair trying to pay with US dollars in a London restaurant, and the other adding dates to someone else\’s check. It\’s a story that should vanquish any doubts about whether central bankers are fallible human beings.

The rest of the lecture has some good nuggets, tot. King points out that 10 years ago at this time in 2008, we were about two weeks before the failure of Bear Stearns. He says:

\”During the crisis we were vividly reminded of three old lessons. First, our system of banking is fragile, and reflects what I call financial alchemy. Banks that appear to be well-capitalised one day are not the next. Solvency is in the eye of the lender. Second, banks that borrow short and lend long are, as we saw in 2008, subject to runs that threaten the payments system and hence the wider economy. Third, regulatory reform is well-intentioned but has fallen into the trap of excessive detail. The complexity of the current regulation of financial services is damaging and unsustainable.\”

One of King\’s proposals is for that central banks should become what he calls the Pawnbroker for All Seasons. The idea is that rather than putting central banks in a position where, in an emergency, they face a choice between uncontrolled lending and letting the financial system melt down, we need a plan in advance. King suggests that banks work with a central bank to think about the value of the bank\’s collateral–say, the mortgages and other loans held by the bank. The bank and the central bank together would agree that if a bank finds itself caught in a financial crisis, it would give this collateral to the bank in exchange for a loan of a predetermined amount. King says:

\”My proposal replaces the traditional lender of last resort function, and the provision of deposit insurance, by making the central bank a Pawnbroker for all Seasons. … In normal times, each bank would decide how much of its assets it would preposition at the central bank allowing plenty of time for the collateral to be assessed. … Adding up over all assets that had been pre-positioned, it would then be clear how much central bank money the bank would be entitled to borrow – with no questions asked – at any instant. The pawnbroker rule would be that the credit line of the bank would have to be sufficient to cover all liabilities that could run within a pre-determined period of, say, one month or possibly longer. …The scheme is not a pipedream. US banks have pre-positioned collateral with the Federal Reserve sufficient to produce a total lendable value of just under one trillion dollars. Together with deposits at the Federal Reserve, the cash credit line of banks is around one-quarter of total bank deposits.\”

King\’s point is that a bunch of complex financial regulations–where their very complexity means they can be gamed–isn\’t a real answer. Solemnly swearing that the central bank won\’t lend in a crisis, and will just let the financial system melt down, isn\’t an answer, either. But thinking in advance about how much a central bank would lend to a bank, based on the collateral that bank has available, could actually help cushion the next (and there will be a next) financial crisis.

The National Advisory Commission on Civil Disorders was appointed by President Lyndon Johnson in the summer of 1967 and issued its report in February 1968. US cities had been experiencing sporadic but severe riots for three years. The report became known as the Kerner Commission after its chair, Governor Otto Kerner, Jr. of Illinois. I\’m not seeing a place online where the full report is freely available online, which is a bit of a surprise to me, although the intro and first 70 pages or so are available here. For the tone, here is some of the introduction: 

The authors of this Economic Policy Institute aren\’t arguing over causes and reasons–at least not here–just putting some facts out there. But I\’ll add a few words.

The patterns mentioned here are of course intertwined. The fact that whites have far higher college graduation rates affects wages, income, poverty rates, and wealth. Lower education and income are also correlated with infant mortality rates and crime.  Differences in education level between groups can take a long time to play out. Someone who didn\’t finish high school back around 1970 has probably just retired in the last few years. Someone who didn\’t go to college in the 1970s or the 1980s or the 1990s has been probably been working for decades in lower-paying jobs. When parents have less education, their children tend to have less education, too. And while racial discrimination in America doesn\’t operate with the same brute force as 50 years ago, it surely continues to play a role in patterns of housing, employment, and what society is willing to tolerate in terms of educational results.

The racial disparities in 2018 aren\’t happening in the same society as in 1968, or from the same causes, or against the same backdrop of urban rioting. But black/white racial disparities remain very large. Very large indeed. 

Analysis in economics and other social sciences often uses a combination of words and mathematics. There is an ongoing critique by those who argue that while the math may sometimes be useful, it is too often deployed with insufficient regard for whether it captures the underlying economic reality. In such cases, the argument goes, math is used as a way of pretending that an argument about the real-world economy has been definitely made, or settled, when in reality only an equation of limited application has been solved.

Paul Romer recently offered a pithy commentary on this longstanding dispute on his blog. Romer quotes from an earlier post by Dani Rodrik, who in some lists of advice for economists and non-economists, includes the following:

\”Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes. … Unrealistic assumptions are OK; unrealistic critical assumptions are not OK. …  Do not criticize an economist’s model because of its assumptions; ask how the results would change if certain problematic assumptions were more realistic. … Analysis requires simplicity; beware of incoherence that passes itself off as complexity. … Do not let math scare you; economists use math not because they are smart, but because they are not smart enough.\”

Romer has in recent years expressed concerns over \”mathiness,\” in which predetermined conclusions masquerade behind what looks like an \”objective\” mathematical model.  As he wrote in a 2015 paper:

The Council of Economic Advisers was established by the Employment Act of 1946 as a separate office in the White House. Along with an ongoing stream of stream of reports and advice, the CEA also produces an annual report, and the 2018 Economic Report of the President  is now available. The CEA is headed by three political appointees, which is fine by me. I expect every president to choose appointees who are broadly in agreement with administration policies. My (often unrequited) hope is that the president will then actually listen to such experts on the dangers of likely tradeoffs and the details of policy design.

If you want to read the reasonable person\’s defense of Trump\’s economic policies–either because you want to support these policies or you want to rebut them–the Economic Report thus offers a useful starting point. For example, the first chapter is a defense of the Tax Cuts and Jobs Act (TCJA) passed in December 2017, and the second chapter is a defense of the Trump\’s regulatory policy efforts.  I tend to skim over such partisan arguments, but I still appreciate the figures and tables surrounding these arguments. They often describe facts and patterns worthy of note, whatever one\’s policy beliefs about the appropriate reaction to them.

In that spirit, I\’ll offer a grasshopper view of the report, leaping with no particular rhyme or reason between figures that caught my eye, with a few sentences quoted from the report about about each. Topics include: geographic mobility, road infrastructure, the US balance of trade since 1790, the fall in US manufacturing employment after 2000, the opioid epidemic, firms are investing less while paying out more to shareholders, and there is an international decline in labor productivity in the last decade or so.

The Fall of Geographic Mobility 

\”High levels of unemployment concentrated in particular locations may amplify exit from the labor force, especially when workers are unwilling or unable to move to a location with a stronger job market. People move to improve their life circumstances, but the share of Americans moving has been declining, and is currently at its lowest value on record (figure 3-21).

\”In addition to family and social connections, deterrents to moving include (1) search time, (2) State-specific occupational licensing requirements, (3) local land use regulations that raise housing costs in places with the greatest potential growth, and (4) homeowners’ limited ability to sell their homes. Such obstacles to finding better employment opportunities, coupled with high local unemployment rates, may lead employees to ultimately exit the workforce. More research is needed to determine the direct relationship between geographic immobility and labor force participation, specifically exploring whether obstacles to moving have increased over time, and how prime-age workers in particular have been affected.\”

More Driving on the Same Roads

\”For example, between 1980 and 2016, vehicle miles traveled in the United States more than doubled, while public road mileage and lane miles rose by only 7 and 10 percent, respectively (figure 4-1). Unsurprisingly, queuing caused by traffic congestion has risen, imposing both direct and indirect costs on business and leisure travelers alike …\”

Swings in the US balance of trade since 1790

\”Figure 5-7 illustrates the U.S. trade balance from 1790 to the present, expressed as a share of GDP. From 1790 through 1873, the U.S. trade balance was volatile, in part due to the low trade volumes (Lipsey 1994). The trade balance swung back and forth between surplus and deficit, but was mostly in deficit. From 1873 through the 1960s, the trade balance was mostly in surplus. The largest historic surpluses were during the years 1916–17 and 1943–44, as wartime production and trade with allies predominated. Since 1976, the trade balance has been continually in deficit. The largest deficit as a share of GDP was nearly 6 percent in 2006, a share exceeded in only six other years in U.S. history and not seen since 1816.\”

The sharp fall in manufacturing employment after 2000

\”Although employment in the sector has long exhibited procyclicality, it has seen changes since 2000. In the expansionary period from the end of 2000 through 2007, the economy failed to recover the manufacturing job losses it experienced during the previous recession years.\”

The Opioid Epidemic

\”And since 1999, over 350,000 people have died of opioid-involved drug overdoses, which is 87 percent of the 405,399 Americans killed in World War II (DeBruyne 2017). The staggering opioid death toll has pushed drug overdoses to the top of the list of leading causes of death for Americans under the age of 50 and has cut 2.5 months from the average American’s life expectancy (Dowell et al. 2017). … 

\”The opioid epidemic evolved with three successive waves of rising deaths due to different types of opioids, with each wave building on the earlier one (Ciccarone 2017). In the late 1990s, in response to claims that pain was undertreated and assurances from manufacturers that new opioid formulations were safe, the number of opioid prescriptions skyrocketed (CDC 2017b). What followed was an increase in the misuse of and deaths related to these prescriptions (figure 6-2). As providers became aware of the abuse potential and addictive nature of these drugs, prescription rates fell, after peaking in 2011. Deaths involving prescription opioids leveled off, but were followed by a rise in deaths from illicit opioids: heroin and fentanyl. Heroin deaths rose first, followed by a rise in deaths involving fentanyl—a synthetic opioid that is 30 to 50 times more potent than heroin and has legitimate medical uses but is increasingly being illicitly produced abroad (primarily in Mexico and China) and distributed in the U.S., alone or mixed with heroin. In 2015, males age 25 to 44 (a core group of the prime-age workers whose ages range from 25 to 54) had the highest heroin death rate, 13 per 100,000. Fentanyl-related deaths surpassed other opioid-related deaths in 2016.\”

Investment is down, while firms pay out more to shareholders

\”It is a matter of concern that net investment has been generally falling as a share of the capital stock during the past 10 years, which limits the economy’s productive capacity. In 2016, net investment as a share of the capital stock fell to a level previously seen only during recessions (figure 8-10). The Tax Cuts and Jobs Act is designed to increase the pace of net investment. As discussed further below, the slowdown in investment has also exacerbated the slowdown in labor productivity growth. …

\”The rate of payouts to shareholders by nonfinancial firms, in the form of dividends together with net share buybacks, has been gradually trending higher for several decades, although it fell in 2017 (figure 8-11). Nonfinancial corporations returned nearly half the funds that could be used for investment to stockholders in 2017. In a well-functioning capital market, when mature firms do not have good investment opportunities, they should return funds to their stockholders, so the stockholders can invest these funds in young and growing firms. Although it may be admirable for individual firms to thus return funds to their shareholders, the rising share of paybacks to shareholders suggests that investable funds are not being adequately recycled to young and dynamic firms. Gutiérrez and Philippon (2016) find that firms in industries with more concentration and more common ownership invest less.\”

The International Decline in Labor Productivity

\”Labor productivity growth has been slowing in the major advanced economies (figure 8-41), driven by an estimated decline of 0.3 percent in annual multifactor productivity growth relative to average precrisis growth of 1 percent a year. This slowdown is broad-based, also affecting developing and emerging market economies. Although the causes of this productivity slowdown are unclear, a number of hypotheses have been offered—including financial crisis legacies, such as weak demand and lower capital investment; the trade slowdown; the aging of the post–World War II Baby Boom generation in its various forms around the world; the rising share of low-productivity firms; and a widening gap between high- and low-productivity firms. The Organization for Economic Cooperation and Development (OECD) finds that the survival of abnormally low-productivity firms may have contributed to the slowdown in productivity growth.\” 

There are legitimate concerns about how the poverty line is set. It was set back in the early 1960s and adjusted for inflation since then, but without regard for other changes in the economy. It doestn\’t vary according to regional differences in the cost of living and it doesn\’t include in-kind benefits like Medicaid and food stamps. It is based on income levels, rather than consumption levels (or see also  here). At least for a bloodless social scientist, it\’s possible to become focused on these conceptual issues to such an extent that basic empathy for those living with very low income levels gets crowded out. But just as one should remember that the poverty line is an arbitrary but useful convention, one should also remember that households living with very low income levels have a hard time.

Thus, it seems to me a  profoundly useful exercise, every now and then, to set aside the questions of how to measure poverty and instead to focus on what might be done about it. In that spirit, the Russell Sage Foundation Journal for the Social Sciences has put together a special double issue on the theme of  \”Anti-poverty Policy Initiatives for the United States\” (February 2018, vol 4, issues 2-3). After an overview essay by Lawrence M. Berger, Maria Cancian, and Katherine Magnuson, the two issues include 15 papers with a wide range of concrete proposals: focused on children in low-income families, the elderly, renters, food stamps, the earned income tax credit, the minimum wage, subsidizing or guaranteeing jobs, postsecondary training and higher education, contraception, and more.

There\’s a lot to contemplate in these issues, and I\’ll list the table of contents, with links to specific papers, below. A number of the papers are focused on how to adjust existing programs at a moderate cost. Here, I\’ll just sketch a couple of proposals that think much bigger. 

For example, a \”universal child allowance\” means that any household with children, regardless of income level, would receive a per child payment from the government. . Luke Shaefer, Sophie Collyer, Greg Duncan, Kathryn Edin, Irwin Garfinkel, David Harris, Timothy M. Smeeding, Jane Waldfogel, Christopher Wimer, Hirokazu Yoshikawa  lay out what such a proposal might look like in \”A Universal Child Allowance: A Plan to Reduce Poverty and Income Instability Among Children in the United States.\”

The point out that the US has oriented much of it social safety net toward work, with the result that children in families where the adults don\’t work much can be very badly off. Their baseline proposal is to that every US family with a child  would be about $250 per month ($3,000 per year).  Because the allowance doesn\’t depend on income or hours worked, it is not reduced if an adult works more hours or gets higher pay. There is no need for a large bureaucracy to monitor eligibility and sliding-scale reductions in benefits.

Lots of other countries have enacted policies along these lines. They write (citations omitted):

Part of the reason that other nations have fewer poor children than the United States is that they provide what the OECD terms a universal child benefit—a cash grant that goes to all families with children. Austria, Canada, Denmark, Finland, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden, and the UK have all implemented a version of a child benefit. Some call their measures child allowances (CA). Others implement their CA through the tax code as universal child tax credits. A notable feature of these universal child benefit plans is that they are accessible to all: families with children receive them regardless of whether parents work and whatever their income. The level of these child benefits varies by country. The benefit in U.S. dollars for two children in Belgium and Germany is about $5,600 per year; in Ireland $4,000, and in the Netherlands $2,400 (. Canada has a base child allowance, in U.S. dollars, of roughly $5,000 per child under six and $4,300 per child age six to seventeen …  

To pay for the allowances, they would start by scrapping the existing \”$1,000 per child per year Child Tax Credit and a $4,000 per child per year tax exemption (often referred to as the child deduction),\” which as they point out mostly go to families with incomes well above the poverty line.\” This saves $97 billion.  The total estimated cost of the baseline proposal about $190 billion, so the additional spending needed would be $93 billion. For those who are skeptical about whether the money would actually benefit children, the author point to a body of evidence that for low-income families in particular, available cash seems to make a real difference in many measures of well-being. 

Another aggressive proposal is that the federal government should guarantee a job to everyone who wants one. Mark Paul, William Darity Jr., Darrick Hamilton, and Khaing Zaw sketch a proposal long these lines, and respond to some of the common concerns, in \”A Path to Ending Poverty by Way of Ending Unemployment: A Federal Job Guarantee.\” Their proposal is: \”Any American wanting a job, at any time, would be able to obtain one through the public employment program.\”

Their proposal is that local, state and federal governments would \”conduct an inventory of their needs and develop a jobs bank. … At the federal level, we anticipate a wide array of major public investment activities, which may include fostering a transition to a green energy economy, extending access to high-speed rail, improvements in our public park service, revival and product diversification for the postal service, and an increase in general services across the economy. At the state level, we anticipate the states to undertake major infrastructure investment projects, as well as projects to improve the services they offer to their citizens. At the local level, we expect communities to undertake community development projects, provide universal daycare, maintain and upgrade their public school facilities, and improve and expand the services provided by their libraries.\”

Most countries of the world tax oil products, especially the gasoline used in the road sector, but impose only very low taxes on other fossil fuels.  The OECD compiles a Taxing Energy Use Database that includes energy use and energy taxes for 42 countries that make up 80% of global energy use, and not coincidentally, 80% of global carbon emissions. For the latest iteration of this database, the OECD has also published Taxing Energy Use 2018: Companion to the Taxing Energy Use Database (February 2018), which pulls together some of the overall patterns. Here are a couple of the figures that caught my eye.

This figures shows energy taxes on a country-by-country basis. The energy taxes are measured in terms of euros per ton of carbon dioxide emitted. The little horizontal notches show the total tax on carbon emissions from energy use. Switzerland, Luxembourg, Germany, and Norway have the highest taxes, while the US and China are down at the low end,along with Brazil, Indonesia, and Russia. The variation across countries is considerable.

The dark blue balls show the tax on oil products, including gasoline. As is quickly apparent, the effective tax rate on carbon emissions from oil is higher than the tax rate on carbon emissions from other sources of energy. In particular, coal goes essentially untaxed in most countries. As a result, the OECD finds that 81% of carbon emissions are not taxed at all.

Here\’s a similar story, but told in terms of sectors of the economy. The first section of the table on the left shows taxing of energy in the road sector, and the blue lines show carbon taxes on diesel and gasoline. But the next sections show energy taxes in industrial uses, in residential/commercial, and in electricity generation. From a global perspective, energy pollution arising from these other sources is largely untaxed.

If burning fossil fuels is enough of an environment problem that it justifies taxes on oil products in the road sector, then it seems quite peculiar to have burning of fossil fuel from other sectors going essentially untaxed. Indeed, there is a literature on the \”co-benefits\” of reducing air pollution, which points out that there are immediate short-term health gains to doing so, as well as a longer-term reduction  in the risks posed by carbon emissions.

• \”Short-Term Benefits of a Climate Change Policy\” (September 22, 2014)
• \”The Immediate Global Costs of Pollution\” (October 25, 2017)
• \”Costs of Air Pollution in the U.S.\” (November 7, 2011)