12 Jul 2018

NYU Reminiscences on Mario Rizzo’s 70th Birthday

Economics 1 Comment

My contribution here. Be sure to go to ThinkMarkets and scroll down to see all the entries. (Thanks to the alert von Pepe for telling me about these!)

09 Jul 2018

Murphy on RT on Energy Infrastructure

Climate Change, Conspiracy, Energy 5 Comments

Fortunately YouTube (at least at the site itself) tells you under the screen that “RT is funded in whole or in part by the Russian government.”

09 Jul 2018

AEI on Trade Deficits: The Stunning Conclusion

All Posts, Trade 18 Comments

You have all waited with breath which is baited for the resolution. Last week I posted this AEI meme:

 

 

…and said I thought there was a basic flaw in it, but I didn’t have time to type it up then. (To repeat, I’m sure the economists at AEI know this nuance; my point was just that the above is not right and so that’s awkward in a meme that’s lecturing somebody on trade. Also, to avoid confusing anybody who missed my first post: I am NOT defending Trump’s policies or pontifications on trade here.)

In the comments some of you raised interesting points, but nobody hit the particular thing I had in mind.

So here it is:

A capital account surplus (i.e. net inflow of investment from foreigners) is equivalent to a current account deficit, not a trade deficit. The trade balance is only one component of the current account balance. A trade deficit is neither necessary nor sufficient to have a net inflow of foreign investment. Specifically, the U.S. could have a trade deficit as well as a net outflow of capital, and the U.S. could have a net inflow of foreign capital at the same time it runs a trade surplus.

Here’s the Wikipedia entry on the current account, but unfortunately I’ve yet to find an online treatment that is very good. (Also I’ve seen different definitions and ways to handle things like literal transfers of money between the members of countries. It’s also tricky if you look at the movement of gold back on the gold standard.) So I’ll just give enough intuition/rigor in the present post to show why the AEI meme above is not quite right.

We have

capital account + current account = 0

(Again, I’m defining those terms broadly. I’ve seen other treatments that have a separate thing called the “financial account” but in my mind that is confusing. So the principle of what I’m doing in this post is right, but my categories might not line up with other treatments.)

So a capital account surplus (which occurs when foreigners invest more in U.S. assets than Americans invest in foreign assets during the time period in question, let’s say it’s a year) occurs if and only if there’s a current account deficit.

The current account in turn consists of the trade balance (which itself is separated into goods and services, but I’m not worrying about that here), but it also includes the net earnings of Americans on foreign assets. So think of the current account as like “net income,” where Americans can earn income (a) from exporting more than we import, but also (b) from earning more interest, dividends, and profits on our foreign assets than foreigners earn in interest, dividends, and profits on their U.S. assets.

So if foreigners are investing on net in the U.S., we have a capital inflow or a capital account surplus. That means we have a current account deficit, i.e. the current account is less than zero. The AEI meme above would suggest we must have a trade deficit. But no, that’s not correct:

current account < 0

implies…

trade balance + net foreign earnings < 0

(exports – imports) + (American earnings on foreign assets – foreign earnings on U.S. assets) < 0

exports – imports < foreign earnings on U.S. assets – American earnings on foreign assets

OK so far so good. Now is the last line above consistent with a trade surplus? Sure, it can happen that:

0 < exports – imports < foreign earnings on U.S. assets – American earnings on foreign assets

 

Example #1: U.S. enjoys a capital inflow even though it has a trade surplus.

Suppose Americans hold $10 trillion in foreign assets that yield a 10% return, and that foreigners hold $40 trillion in U.S. assets that yield a 5% return. So Americans earn $1 trillion in foreign income from assets, while foreigners earn $2 trillion in income from U.S. assets. On net therefore the foreigners have $1 trillion in asset earnings coming to them from the U.S.

During the same year, Americans export $800 billion in goods and services to foreign buyers, while Americans only import $200 billion in goods and services from foreign sellers. Thus there is a U.S. trade surplus of $600 billion.

But there is still a net capital inflow of $400 billion into the U.S. Americans were supposed to, on net, ship out $1 trillion worth of goods/services as net income on the different asset earnings. But Americans only sent out $600 billion on net. So foreigners’ holdings of U.S. assets actually goes up to $40.4 trillion.

 

Example #2: U.S. has a trade deficit while still experiencing a net outflow of capital (i.e. a capital account deficit).

Suppose Americans hold $10 trillion in foreign assets that yield a 10% return, and that foreigners hold $10 trillion in U.S. assets that yield a 4% return. So Americans earn $1 trillion in foreign income from assets, while foreigners earn $400 billion in income from U.S. assets. On net therefore the Americans have $600 billion in asset earnings coming to them from foreigners.

During the same year, Americans export $800 billion in goods and services to foreign buyers, while Americans import $900 billion in goods and services from foreign sellers. Thus there is a U.S. trade deficit of $100 billion.

But there is still a net capital outflow of $500 billion out of the U.S. Americans were supposed to, on net, enjoy an influx of $600 billion worth of goods/services as net income on the different asset earnings. But Americans only imported $100 billion on net. So Americans’ holdings of foreign assets actually goes up to $10.5 trillion.

 

Conclusion: I’m not saying that in the real world, the AEI statement is wrong. But especially when I’ve seen an editor at the Wall Street Journal saying something that is flat-out false (after clearly being misled by standard free-trade rhetoric), I think professional economists should be a bit more careful when teaching everybody about trade.

08 Jul 2018

How Christians Can Use the Bible to Disagree

Religious 38 Comments

I am traveling and took my son to a (Bible) church that isn’t our normal one. The people there were very pleasant and welcoming, but I personally had a doctrinal disagreement with one of the posters hanging on the wall. I explained the issue to my son afterwards, but it might be of interest to readers of this blog, especially if you think that religious stuff is “just how you feel about God.”

So, the poster had in caps, “FINISH HIS WORK” and the “O” of “work” was a globe. Underneath the big letters it gave the reference “– John 4:34.”

Now through the whole service that poster was really bothering me. It sounded like they were saying, “Hey you Christians, you need to go out into the world and finish the work that Jesus started.” (Also, the sermon and other posters were consistent with my interpretation. It was very much of the mindset that we had to go win souls for Jesus.)

I explained to my son that obviously, Christians should indeed go do good works. But that would not be construed as finishing the work of Jesus (i.e. His work), because Jesus accomplished His work on the cross, period. (He said, “It is finished” just before dying on the cross.)

Another way to see it is like this: If it were up to humans to finish the work of Jesus, then humanity would be doomed; we would fail.

The last loose end was for me to look up hat was presumably a quotation from Scripture, i.e. the reference they gave to John 4:34. Here it is in context (the NIV translation):

31Meanwhile his disciples urged him, “Rabbi, eat something.”

32But he said to them, “I have food to eat that you know nothing about.”

33Then his disciples said to each other, “Could someone have brought him food?”

34“My food,” said Jesus, “is to do the will of him who sent me and to finish his work. 35Don’t you have a saying, ‘It’s still four months until harvest’? I tell you, open your eyes and look at the fields! They are ripe for harvest. 36Even now the one who reaps draws a wage and harvests a crop for eternal life, so that the sower and the reaper may be glad together. 37Thus the saying ‘One sows and another reaps’ is true. 38I sent you to reap what you have not worked for. Others have done the hard work, and you have reaped the benefits of their labor.”

So you can see why both camps would feel vindicated by the above text. I saw that and thought, “Aha! It wasn’t Jesus telling His disciples, ‘Finish the work that I start while I’m with you.’ Instead, it’s Jesus saying He would finish God’s work. Totally different message.”

However, the people who made that poster would presumably say, “See? Jesus wants us to follow-up with all the seeds God has planted and cultivated. We need to go out into the world and reap the harvest.”

In summary, I still don’t like the vibe of the poster because I think a lot of Christians would assume the “His” means Jesus, not God the Father. But, I was more sympathetic after considering the full context of the quotation.

In any event, this is the kind of stuff that even Bible-believing Christians argue about…

07 Jul 2018

AEI on Merchandise Trade Deficits

Trade, Trump 3 Comments

I follow Perry on Twitter and saw this:

 

 

So, standard disclaimers: Trump’s policies on trade are awful, and his framing of the issues when he speaks to the public is also terrible. His policies, other things equal, will make Americans poorer, and he conveys a very confused understanding of the topic.

Having gotten that out of the way, I think there is a basic mistake in the above treatment of (merchandise) trade deficits and capital inflows (on the level of, I might have put it as a bonus question on an Econ 201 exam). Which is awkward if it occurs in the midst of mocking someone for not being intellectual on trade.

(To be clear, I’m sure the economists at AEI are aware of the nuance I’m referring to. My point is just, you probably shouldn’t make a basic mistake in the midst of lecturing Trump on trade.)

I’m bogged down with day job stuff right now so I’ll see if any of you know what I mean…

07 Jul 2018

Revisiting Piketty’s Summary of the U.S. Minimum Wage

Piketty 16 Comments

The good news is that one person responded to my labor of love (i.e. my long comment) on Scott Alexander’s post on Piketty. The bad news is that the guy’s response contained stuff like this:

If that’s the worst, most partisan error in Piketty, then I’m not too concerned. If anything I’m more concerned about you, Bob Murphy. You’ve dismissed a 696 page book on a single, minor historical detail that was corrected in the second edition (contrary to your assertion).

The only out-and-out error in Piketty’s above statement is the attribution of multiple minimum wage increases to Obama when he signed none*, and this was duly corrected in his 2nd edition. 

and

tl;dr Piketty got it essentially right. You characterize the question as “not hard”, but it is only easy if you simplify minimum wage history down to which presidents signed off on increases. When you consider length of delay between increases, party control of congress during increases and between increases, and inflation effects it becomes clear that Democrats are pro-labor legislation. Which shouldn’t be surprising really. Everyone knows Democrats are pro-labor and Republicans are pro-capital.

I wrote a response to him in turn (and thanks to David R. Henderson for reviewing a draft of it for clarity and calmness in tone). So of course feel free to go read the whole exchange at Scott Alexander’s site for the gory details.

However, what I want to do here is revisit Piketty’s narrative. When I first read it, it was so totally bonkers that I couldn’t make heads or tails of it. (But again, as Phil and I stress throughout our paper, the “typos” we kept identifying all seemed coincidentally to favor Piketty’s narrative. It wasn’t like his cat jumped on the keyboard occasionally when Piketty wasn’t looking–unless it was a progressive feline.)

But now that this guy on Scott Alexander’s blog reviewed my particular claims and tells me there was a slight thing that may have been a bit off, which Piketty duly corrected in the 2nd edition, I read the whole thing again with fresh eyes. And now I think I see why Piketty believes he ironed out any difficulties with the 1st edition, even though (to my eyes) he didn’t even address the 4 most glaring problems.

The real kicker here is that if I’m right, I think it makes Piketty’s treatment FAR WORSE and should make us not touch anything in his book with a ten-foot pole.

So I’m curious to hear your thoughts on whether I’m right in my analysis, and in my related judgment.

*    *    *

For convenience let me reproduce Piketty’s 1st edition summary, and then give the actual history of the U.S. minimum wage:

PIKETTY 1st edition: “From 1980 to 1990, under the presidents Ronald Reagan and George H. W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before
being increased several times by Barack Obama after 2008” (2014b, p. 309).

ACTUAL MINIMUM WAGE HISTORY:

Date……………..Minimum Wage………..President in Office
January 1, 1980…..$3.10…………………Jimmy Carter
January 1, 1981…..$3.35…………………Jimmy Carter
April 1, 1990……….$3.80…………………George H. W. Bush
April 1, 1991……….$4.25…………………George H. W. Bush
October 1, 1996……$4.75…………………Bill Clinton
September 1, 1997..$5.15………………..Bill Clinton
July 24, 2007……….$5.85…………………George W. Bush
July 24, 2008……….$6.55…………………George W. Bush
July 24, 2009……….$7.25…………………Barack Obama

Now in his 2nd edition, the only change I saw Piketty make is acknowledged to have fixed all genuine mistakes by my hostile critic. Here’s how that guy put it at Scott Alexander’s blog:

The only out-and-out error in Piketty’s above statement is the attribution of multiple minimum wage increases to Obama when he signed none*, and this was duly corrected in his 2nd edition. Changing “frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008” to “frozen at that level until legislation passed under George W. Bush led to an increase under Obama” is arguably a typo if you squint your eyes, though I would prefer to call it a minor detail.

So in this light, let me make two observations:

  1. There is still the (presumably genuine typo) of saying Clinton raised it to $5.25 when in fact it was $5.15. Again, that mistake helps Clinton, but let’s assume it is a genuine typo. This one just shows Piketty is sloppy. (The mistake survives into the 2nd edition.)
  2. Apparently both Piketty and my hostile critic are fine with looking at the above table of dates and describing it like this: “From 1980 to 1990, under the presidents Ronald Reagan and George H. W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.[1]5 under Bill Clinton in the 1990s…”

Just look at the table and look at that quoted sentence (where I’ve patched the erroneous $5.25 with the correct $5.15) to see now, why Piketty/my critic think it’s fine. If we are really sloppy on the front end and start with the minimum wage in 1981 and say it held in 1980, then it is indeed a true statement that the minimum wage remained stuck at $3.35 from 1980 [sic] to 1990 (specifically up to March 31, 1990) and it is indeed true that during this period (if we start counting inside 1980 after the November election and consider that he was president-elect) Ronald Reagan and George H.W. Bush were in office.

Next, one could see how a person might say it is indeed a true statement to say that the minimum wage then rose to $5.15 under Bill Clinton in the 1990s.

I realize some of you may not care about this stuff, but I want you to really SEE what these guys are doing with the facts vs. the narrative. If Piketty really is doing what he apparently is doing (and which, for sure, my hostile critic agrees with), then the above treatment is, I think, the most misleading, dishonest historical summary I’ve ever seen that one could claim is not technically lying. His technique of ending in 1990 in order to avoid mentioning the two increases under George H. W. Bush exhibits the precision of a surgeon.

(To be clear, I’m not myself admitting it isn’t false. As I said at Scott Alexander’s blog in response: “The only way you can say Piketty’s summary is correct here, is if you also endorse the following statement, “Reagan remained fixed in the White House, until it was then occupied by Bill Clinton.””

So in conclusion, this whole revisitation makes me adjust my previous weight on the possibilities that Piketty was merely sloppy to “he is intentionally deceptive.” But I grant I’m biased, so I’m curious to hear your thoughts.

03 Jul 2018

What I Said to the “Mises Caucus” of the Libertarian Party

Shameless Self-Promotion 4 Comments

This was the speech I gave last Saturday in New Orleans. Here’s Scott Horton’s speech and Tom Woods’ grand finale.

03 Jul 2018

Potpourri

Piketty, Potpourri, Shameless Self-Promotion 9 Comments

==> At IER, I discuss Doug Ford’s election (in Ontario). He ran on a platform promising to roll back cap-and-trade.

==> Sorry if I already pushed this: In the latest Contra Krugman I go solo and talk about the economics of climate change policy.

==> FEE’s Blinking Lights award, given this year to Nelson Nash.

==> I haven’t had time to read this carefully, but Ilya Somin doesn’t think “enforcing the existing law” requires breaking up families, contrary to the Trump Administration’s claims (at least its initial claims before the revamp).

==> Rob Bradley gives a list of some failed climate doomsaying.

==> Jacob Huebert has been traveling in Austro-libertarian circles for years so I was very pleasantly surprised to see he was one of the lawyers behind the recent union ruling.

==> Conservatives ruin everything!

==> The submissions are in for the Contra Contest 2018!

==> I chime in at Scott Alexander’s blog. Topic: Piketty.