timschochet

TRADE WAR: Dow drops all week, rebounds a little on Friday

3,913 posts in this topic

The administration found their chief trade strategist via AmazonThat’s how you hire the best people, Kushner on a browser.

Peter Navarro is so far out of the mainstream it’s difficult to find another published economist who is in sync with his views. His colleagues at UC-Irvine contemplated posting a notice on their department website disavowing his views. Perhaps part of the appeal for DJT is he’s virtually a clone of The Donald: bombastic, prone to hyperbole, frequently cites reports / studies known to be false, et al. “He’s a difficult guy to have a two-way conversation with” is how one of his colleagues described hiim.

Per Wiki:

Mainstream economics may be called orthodox or conventional economics by its critics.[5] Alternatively, mainstream economics deals with the "rationality–individualism–equilibrium nexus" and heterodox economics is more "radical" in dealing with the "institutions–history–social structure nexus".[6] Many mainstream economists dismiss heterodox economics as "fringe" and "irrelevant",[7] with little or no influence on the vast majority of academic mainstream economists in the English-speaking world.

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I am ashamed that Peter Navarro is from my Alma Mater, UC Irvine. And my wife is ashamed that Stephen Miller is from her high school, Santa Monica. 

Its not our fault! 

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4 hours ago, lazyike said:

While they don't make up a significant amount most of my conservative farmers friends obviously don't like these tariffs. It blew me away when they were supporting him despite his tough talk on NAFTA which we farmers support. I told them it's a little late to whine now, he is only doing what he said he was going to do.

I don't see how any farmers can like Trump but the majority of them voted for him for some reason.

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18 hours ago, Epic Problem said:

There's so many tariffs
There's so many tariffs
There's so many
There's so many tariffs
There's so many tariffs
There's so many

Let's have a trade war!
#### up the Dow Jones!
Let's have a trade war!
It can start in Steel Industry!
Let's have a trade war!
Screw the middle-class!
Let's have a trade war!
Trump banged the porn star that's on stage!

Geez. No Fear fans here?

 

Fine! I'm Leeving

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Posted (edited)

Gotta say I have pretty mixed feelings on this and I’m pretty put off by the perspective of many of you that anti-free trade people are necessarily ill-informed.  Look, I’ve taken college economics.  I understand that free trade makes countries richer.  But I don’t think the analysis should end there.

From my perspective of the last 30 years or whatever, the benefits of freer trade have accrued primarily to the investor class in this country.  If the country is getting richer as a result of the richest 5% of the population getting even richer while everyone else is stagnant, then I think it’s perfectly reasonable for the other 95% to say that the rich need to do a better job sharing or we’re not gonna help them get any richer.

I should make clear that my statements are related to free trade generally not the specific tariffs contemplated by Trump here.  I don’t feel knowledgeable enough to weigh in on the merits of those.

Edited by fatguyinalittlecoat
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11 hours ago, fatguyinalittlecoat said:

Gotta say I have pretty mixed feelings on this and I’m pretty put off by the perspective of many of you that anti-free trade people are necessarily ill-informed.  Look, I’ve taken college economics.  I understand that free trade makes countries richer.  But I don’t think the analysis should end there.

From my perspective of the last 30 years or whatever, the benefits of freer trade have accrued primarily to the investor class in this country.  If the country is getting richer as a result of the richest 5% of the population getting even richer while everyone else is stagnant, then I think it’s perfectly reasonable for the other 95% to say that the rich need to do a better job sharing or we’re not gonna help them get any richer.

I should make clear that my statements are related to free trade generally not the specific tariffs contemplated by Trump here.  I don’t feel knowledgeable enough to weigh in on the merits of those.

There are about 140k people employed in the steel industry.  There's 16x that many in steel related businesses that is going to have to absorb these extra costs which will more than likely lead to layoffs. In 2002 when Bush put tarrifs on steel 187k jobs were created in the steel industry and 200k were lost in related businesses. 

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I don't know where people are coming up with the number 140K for those employed in the Steel industry. If you look at only iron and steel mills, the employment number is closer to 80K.

Those 80K workers produce approximately 80 mm metric tons of steel per year, or about ~1,000 tons per employee. At the absolute peak of employment and production in the US steel industry, in the very early 70s, the industry employed about 600K workers, and they produced 110-120 mm mt per year, or 185-200 tons per year. 

So during my lifetime, the steel industry has lost approximately a half a million jobs as it has become about 5-6x more efficient. Even if you look at just the last 20 years, output per employee has essentially doubled. That is the real story here. Not unfair foreign competition, or bad trade deals, or whatnot.

Early last week I got a call from an old friend to talk about steel prices. His business buys a lot of steel to go in their natural gas fractionation plants. His vendors are attempting to tack a 25% premium on to the steel price from last week. It is clear that prices already moved a bit when the inquiry into Chinese dumping began; the market was building some premium into the price for possible tariffs. So his vendors attempting to pass through a 25% surcharge is clearly "double dipping". 

It would amount to close to a 40% premium from the market price from the end of December. That is far above what is economically justified and is essentially profiteering/price gouging. Benchmark prices outside the US are generally below US prices, so the new equilibrium price should become foreign price + price of transport + tariff. That shouldn't amount to a 40% bump, but in the chaos of current uncertainty vendors are trying to extract economic rents.

This is how real markets work when a market distortion (the suddenly announced tariffs) are introduced. I am not sure how anybody would think this could be a positive for the US economy and for US jobs. My friend is based in East Texas and he builds plants in that region and hires people in that region. The tariffs are likely to enrich his vendors (mostly middle-men) on their current inventories in the short term--rewarding classic rent-seeking behavior. 

Longer term, they are likely to do significant damage outside of the steel industry. That's how economics tell us it should work and that is what real experience tells us about how it basically always works. 

My dad was in the lumber business in the PNW for about 50 years and he has some experience with tariffs and quotas on Canadian forest products. He saw them both as a middle man and also as a supplier of raw US timber. He told me the other day that while the experience differed a bit, depending on his role, he never saw the "protection" of US products as being a net positive for the business. Quite the opposite, in fact. 

Protectionism is one area where economic theory squares with real world experience quite neatly. Yet there are still people who laud protectionist policies. Are they dishonest or just ignorant? Or some of both?

 

 

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Great post Redmond. 

To answer your last question, I believe mostly ignorant. As I have pointed out many times, protectionism is very popular among people who prefer simple answers to complicated questions. 

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Just the idea of being an economic isolationist seems insane in the year 2018.

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6 hours ago, RedmondLonghorn said:

 

Protectionism is one area where economic theory squares with real world experience quite neatly. Yet there are still people who laud protectionist policies. Are they dishonest or just ignorant? Or some of both?

I don’t think it’s necessarily either of these things.  Lots of people do not seem to have had their lives improved by freer trade.  

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23 hours ago, fatguyinalittlecoat said:

I don’t feel knowledgeable enough to weigh in

This is my going in position with most threads around here.

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1 hour ago, fatguyinalittlecoat said:

I don’t think it’s necessarily either of these things.  Lots of people do not seem to have had their lives improved by freer trade.  

Are these people the Amish, or do they live in some other kind of self-contained and self-sufficient community?

Because virtually everybody else has had their lives improved, in some way, by free trade. If they are consumers, their purchasing power as consumers has been improved by free trade.

Now there are some people who have also lost jobs because of international competitive forces, so for those specific people, the cost to them of free trade may have outweighed the benefits. That's an an unfortunate fact. But on a net basis, the benefits of free trade have massively outweighed the costs for our society as a whole. 

And that number is probably a lot smaller than many people think it is. There was a fairly recent academic study that determined that something like 75-80% of job losses in manufacturing have come as a result of automation, rather than do to foreign competition. Which is why over the past 25 years, while jobs in manufacturing have dropped sharply in the US, the total value of manufacturing output is basically at its all time high. See Chart. I said "basically", because this chart is based on data that is a year old and the inflation-adjusted output index was a little below its mid-2000s peak at that time. As of the new data from the end of the 4th quarter (and this data was released just five days ago), the total real value of manufacturing output is within a whisker of where it was at the peak. See Chart The US is also exporting more durable goods, in terms of real value, than it ever has before. See Chart.

As you can see, the narrative that the US manufacturing sector is dying and we "don't export anything anymore" because of competition from China and others is patently false.

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6 minutes ago, RedmondLonghorn said:

But on a net basis, the benefits of free trade have massively outweighed the costs for our society as a whole. 

Maybe - if you have a myopic short-term view.

@fatguyinalittlecoat is correct that the real beneficiaries of free trade have been shareholders.  The consumers do see a short-term benefit - consumable products are less expensive.  But, long-term, this is not sustainable.  

Long-term, the US, and US companies, are not doing enough to efficiently allocate US labor to different jobs.  That is the true benefit of free trade - the efficient allocation of resources.  Right now, we are simply efficiently allocating our wealth to other countries so we can buy cheaper consumable products.  What we should be doing, as a country, is sharing the benefits of free-trade more evenly.  Taxing corporate profits and using those funds to pay for job training, education, R&D into developing industries.

We need to reverse the trade deficit - but not through tariffs - we need to start producing more goods and services that the world wants - by efficiently allocating our resources towards those goods and services.

The alternative is that the trade balance will eventually even out when we no longer can afford to ship our wealth overseas, and countries stop shipping goods to the US, and our standard of living will drop accordingly.

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Just now, Sinn Fein said:

Maybe - if you have a myopic short-term view.

@fatguyinalittlecoat is correct that the real beneficiaries of free trade have been shareholders.  The consumers do see a short-term benefit - consumable products are less expensive.  But, long-term, this is not sustainable.  

Long-term, the US, and US companies, are not doing enough to efficiently allocate US labor to different jobs.  That is the true benefit of free trade - the efficient allocation of resources.  Right now, we are simply efficiently allocating our wealth to other countries so we can buy cheaper consumable products.  What we should be doing, as a country, is sharing the benefits of free-trade more evenly.  Taxing corporate profits and using those funds to pay for job training, education, R&D into developing industries.

We need to reverse the trade deficit - but not through tariffs - we need to start producing more goods and services that the world wants - by efficiently allocating our resources towards those goods and services.

The alternative is that the trade balance will eventually even out when we no longer can afford to ship our wealth overseas, and countries stop shipping goods to the US, and our standard of living will drop accordingly.

If your position is that the US hasn't done enough to promote development of new industries or to aid those who have been negatively affected by changes to their industries (which again, tend to come more often from automation than from foreign competition), that is a different discussion. And I might not differ too much with you on those comments.

But that isn't the fault of free trade. 

Describing the benefit to consumers of increased purchasing power as a minor benefit is something I would differ sharply on, however. It is a substantial benefit, especially for those people with limited means. 

I would also add that the idea that a trade surplus is always good and a trade deficit is always bad is an overly simplistic analysis. There are pros and cons to both a deficit and a surplus. I would probably agree that running a large and persistently increasing trade deficit carries certain risks that we don't want to bear, however.

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30 minutes ago, Sinn Fein said:

Long-term, the US, and US companies, are not doing enough to efficiently allocate US labor to different jobs.  That is the true benefit of free trade - the efficient allocation of resources.  Right now, we are simply efficiently allocating our wealth to other countries so we can buy cheaper consumable products.  What we should be doing, as a country, is sharing the benefits of free-trade more evenly.  Taxing corporate profits and using those funds to pay for job training, education, R&D into developing industries.

As @RedmondLonghorn eloquently states above - not the fault of free trade - and also not the fault of free trade agreements.

 

31 minutes ago, Sinn Fein said:

We need to reverse the trade deficit - but not through tariffs - we need to start producing more goods and services that the world wants - by efficiently allocating our resources towards those goods and services

Yup - and to some extent you (the US) already have: See Google, Apple, etc profits. Where the US has failed is in unquestioningly allowing the markets most short term thinkers to determine how to spend the profits. Share buy backs don't promote growth, R&D spend does.

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17 minutes ago, msommer said:

As @RedmondLonghorn eloquently states above - not the fault of free trade - and also not the fault of free trade agreements.

 

43 minutes ago, RedmondLonghorn said:

But that isn't the fault of free trade.

 

I've never been opposed to free trade.

I am opposed to how we allocate the benefits of free trade.  I am not into protecting jobs - I am into promoting new growth.  I am into efficiently allocating our resources into more productive roles.  We don't do that.  We tout cheap consumer products.

 

Long term, you simply cannot run a trade deficit - it really is that simple.  And long-term, the trade deficit will balance out - one way or the other.  Yes, in the short-run, there are times when you can go on a spending spree.  But, long-term you are simply giving away your wealth, and when it is gone, people will stop selling to you at prices you can afford.  So, when you have built up a surplus - the best way to utilize free trade, is to use that surplus to invest in the future - not buy more TVs.

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16 minutes ago, Sinn Fein said:

I am opposed to how we allocate the benefits of free trade.  I am not into protecting jobs - I am into promoting new growth.  I am into efficiently allocating our resources into more productive roles.  

Doing that, and at the same time expecting quarterly results to

a) be then end all on performance and

b) always go up

are incompatible

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Just now, msommer said:

Doing that, and at the same time expecting quarterly results to

a) be then end all on performance and

b) always go up

are incompatible

Ok?  Not sure what I said that contradicts that....

:shrug:

 

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10 hours ago, RedmondLonghorn said:

I don't know where people are coming up with the number 140K for those employed in the Steel industry. If you look at only iron and steel mills, the employment number is closer to 80K.

 

 

 

I may have miscounted.  I was distracted around 17,043 or so.

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Posted (edited)

6 minutes ago, Sinn Fein said:

Ok?  Not sure what I said that contradicts that....

:shrug:

 

It seems relevant to bring up as a reason for the way wealth continues to be allocated to the 1%ers over actual growth thaty could even the trade balance.

If you have an idea on how to change the current allocation mechanism in a way that provides for longer term growth for the country I'd be happy to discuss it.

Triple Bottom line and Shared Value are stabs at that I suppose, but have yet to have measurable impact beyond the CSR pages in the annual reports

Edited by msommer

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42 minutes ago, Sinn Fein said:

 

I've never been opposed to free trade.

 

That's good.

There are, unfortunately, some people who are opposed to free trade. Including, apparently, the POTUS and several people who have his ear. 

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10 minutes ago, Maurile Tremblay said:

The steel and aluminum tariffs are officially stupid.

I think this is the first time I can remember that one of the panelists hadn't read the question wrong and had to change his/her vote later to go with the majority...

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8 hours ago, fatguyinalittlecoat said:

I don’t think it’s necessarily either of these things.  Lots of people do not seem to have had their lives improved by freer trade.  

I agree with RedmondLonghorn here. Free trade has resulted in higher incomes mostly for managers and investors rather than unskilled workers. But not everything is about income. Unskilled workers benefit from being able to purchase reasonably priced cell phones just like everyone else does. If we're just counting heads to see how many lives have been improved by freer trade, it's going to be a really big number.

That may just be a nitpick about phrasing, though. I agree with what I take to be your main point: that the wealth generated by international trade has been more concentrated in recent decades than is ideal. (I'm talking only about the increased wealth in America. I believe the increased wealth worldwide has been much less concentrated.) The solution should not be to hamper international trade. The solution should be greater general income redistribution through things like a more progressive income tax, higher standard deduction, expanded EITC, introduction of a basic income guarantee, etc. As I've argued before, you can't redistribute wealth that was never generated, so wealth-enhancing opportunities like international trade are pretty important precursors to robust redistribution policies.

There's a separate political question of what leverage people who favor greater redistribution might have to get their preferred policies enacted. "We won't support free trade unless you agree to increase the top marginal income-tax rates" might be a decent bargaining position, but I don't see too many people making anything like that argument. Instead, it's mostly "We won't support free trade because we want to benefit Americans instead of foreigners" -- which is exactly the argument that professional economists all think is stupid because hampering free trade will end up hurting Americans, not helping them.

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Very interesting conversations and points here guys. It does seem like we have an intersection of 2 issues. One is free trade and the other is wealth distriubution (greed?). Free trade is good, but I think some are right here that the investors and high level managers getting rich on it are failing to see the big picture as this wealth relates to the unskilled workers. America would be in a much healthier place if corporations were investing more $ back into their workers. 

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If people want to have a serious discussion about the real reasons for widening income disparity and misallocation of resources, those things have everything to do with tax policy and (especially) Fed policy, and almost nothing to do with trade.

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8 minutes ago, Maurile Tremblay said:

 

There's a separate political question of what leverage people who favor greater redistribution might have to get their preferred policies enacted. "We won't support free trade unless you agree to increase the top marginal income-tax rates" might be a decent bargaining position, but I don't see too many people making anything like that argument. 

Yeah I think mostly just me.  With that said, I don’t see free traders trying to engage in that sort of negotiation either.  They all just take the attitude that free trade is self-evidently good and therefore there’s no need to engage in discussions about how the benefits of such trade should be distributed.  Maybe if they were more willing to advocate for that they wouldn’t be having the problems they are now.

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35 minutes ago, Maurile Tremblay said:

The steel and aluminum tariffs are officially stupid.

I enjoyed the answer from one economist that was "Strongly Disagree", but only had a confidence level of 3. Either she was really hedging her bets, or she doesn't really understand what "Strongly" means.

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2 minutes ago, RedmondLonghorn said:

If people want to have a serious discussion about the real reasons for widening income disparity and misallocation of resources, those things have everything to do with tax policy and (especially) Fed policy, and almost nothing to do with trade.

Likely true, but for some reason the working class seems to have enough votes to hijack trade deals but not to stop tax breaks for the rich.

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1 minute ago, fatguyinalittlecoat said:

Yeah I think mostly just me.  With that said, I don’t see free traders trying to engage in that sort of negotiation either.  They all just take the attitude that free trade is self-evidently good and therefore there’s no need to engage in discussions about how the benefits of such trade should be distributed.  Maybe if they were more willing to advocate for that they wouldn’t be having the problems they are now.

I don't engage in discussions that link the two, because the two aren't linked. 

Trade policy, tax policy, and things like the social safety net are separate topics. The idea that they are inextricably linked is inaccurate. 

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1 minute ago, RedmondLonghorn said:

I don't engage in discussions that link the two, because the two aren't linked. 

Trade policy, tax policy, and things like the social safety net are separate topics. The idea that they are inextricably linked is inaccurate. 

Well if folks are voting against trade deals because they see the rich getting richer while their lives are getting worse, then you have a political problem you need to fix.  Even if your personal view is that the issues are not linked.

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1 minute ago, fatguyinalittlecoat said:

Likely true, but for some reason the working class seems to have enough votes to hijack trade deals but not to stop tax breaks for the rich.

Because, recently anyway, they have been manipulated into that by this wave of right wing populism.

There are also fairly complex psychological reasons why people don't vote in favor of higher taxes for the wealthy. There is also an agency problem, because outside of the most ardent progressives, there are relatively few mainstream politicians who really push for changing tax policy in that way. And those people, for better or worse, also advocate for other positions that makes it hard for them to build a "big tent" among the working class. 

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12 minutes ago, RedmondLonghorn said:

I enjoyed the answer from one economist that was "Strongly Disagree", but only had a confidence level of 3. Either she was really hedging her bets, or she doesn't really understand what "Strongly" means.

I can't find it now, but I think I've seen an explanation before that makes sense of this. Something like: confidence level indicates how certain a person is that they have the direction right, and "Strongly Agree" versus "Agree" indicates how big they think the effect is. Or something like that. So if you're 99% percent certain that there will be positive effect, but you think it will be very small, you might have a high confidence but only "Agree" rather than "Strongly Agree." But if you suspect there will be a huge positive effect but you're not at all sure you're right about that, you could have a low confidence but still "Strongly Agree" rather than just "Agree."

I'm sure I'm botching the explanation, but I think I remember reading something like that.

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1 minute ago, fatguyinalittlecoat said:

Well if folks are voting against trade deals because they see the rich getting richer while their lives are getting worse, then you have a political problem you need to fix.  Even if your personal view is that the issues are not linked.

But people aren't "voting against trade deals". There isn't some groundswell for protectionism, from what I can tell. It is something that really resonates with some people who are desperate for change, but it is just one of a number of things that got Trump elected. I would guess it isn't even in the top handful of things, outside of some specific locations in the Rust Belt. How many members of the House of Reps, in either party, campaigned on a platform in support of protectionism? I don't know the answer, but it can't be a very big number.

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Posted (edited)

3 minutes ago, RedmondLonghorn said:

But people aren't "voting against trade deals". There isn't some groundswell for protectionism, from what I can tell. It is something that really resonates with some people who are desperate for change, but it is just one of a number of things that got Trump elected. I would guess it isn't even in the top handful of things, outside of some specific locations in the Rust Belt. How many members of the House of Reps, in either party, campaigned on a platform in support of protectionism? I don't know the answer, but it can't be a very big number.

Bernie and Trump both made it a major part of their platforms and both did way better than expected.  

Also, how many candidates ran on a platform favoring free trade?  I don’t think that’s a large number either.

Edited by fatguyinalittlecoat

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Just now, fatguyinalittlecoat said:

Bernie and Trump both made it a major part of their platforms and both did way better than expected.  

That's certainly true. I don't think it was the central appeal of either of them, but it was certainly a prominent feature.

Unfortunately, it is really a question of people being uninformed or, more likely, misinformed by campaigns for cynical reasons.

The fact the US hasn't engaged heavily in protectionism for decades also makes it harder to have "political memory" for the problems with that set of policy tools. Plus people clearly attribute a lot of disparate and complex changes in the economy, that haven't in fact been caused by free trade, to it. We see the same thing with immigration.

 

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17 minutes ago, fatguyinalittlecoat said:

Also, how many candidates ran on a platform favoring free trade?  I don’t think that’s a large number either.

That's the de facto position of mainstream Republicans and Democrats.

There are a lot of things wrong with the mainstream of both major parties, but that ain't one of them.

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30 minutes ago, Maurile Tremblay said:

I can't find it now, but I think I've seen an explanation before that makes sense of this. Something like: confidence level indicates how certain a person is that they have the direction right, and "Strongly Agree" versus "Agree" indicates how big they think the effect is. Or something like that. So if you're 99% percent certain that there will be positive effect, but you think it will be very small, you might have a high confidence but only "Agree" rather than "Strongly Agree." But if you suspect there will be a huge positive effect but you're not at all sure you're right about that, you could have a low confidence but still "Strongly Agree" rather than just "Agree."

I'm sure I'm botching the explanation, but I think I remember reading something like that.

It’s definitely not as sophisticated and well implemented as the Offdee scale.

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I found an enlightening explanation of the linkage between trade deficits and budget deficits. Guess which direction the causality is in?

Quote

The United States foreign trade deficit continues to rank near the top of disturbing economic issues. A number of explanations for the trade imbalance have been proffered, including unfair trade practices abroad, the dollar's high international value, financial problems of some large developing countries, and sluggish growth elsewhere in the industrial world. Depending on the explanation selected, alternative remedies have been proposed. Much of the discussion to date, though, has failed to consider the mix of macroeconomic policies—that is, fiscal and monetary policies—in contributing to the recent trade imbalance.

With a few exceptions, little is understood of the relationship between federal government budget deficits and trade deficits. Consequently, solutions to our trade deficit tend to emphasize policy measures that are either impotent or very costly. Typical recommendations include protectionist policies to reduce imports without regard to how our trading partners might respond, or accommodative monetary policy to reduce the dollar's international value without considering its domestic value. These recommendations ignore the consequences of reducing the trade deficit without a corresponding reduction in the budget deficit.

The unpleasant arithmetic of budget and trade deficits shows that, with aggregate savings fixed, large budget deficits inevitably will be accompanied by foreign trade deficits or a slowing in domestic investment. Further, improvement in the trade balance, if achieved with out comparable reductions in the budget deficit, may not necessarily be beneficial. If, for example, improvement comes through import restrictions, it will simply result in growing weakness in private investment. And while accommodative monetary policy may drive down the international value of the dollar, it is not clear that this development, in and of itself, will lead to a significant improvement in the trade balance. In fact, if the economy is at full employment so that aggregate savings are fixed, accommodative monetary policy could worsen the trade balance.

Link to the whole essay

My favorite part of this is that it was written on January 1st...1987.

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2 hours ago, RedmondLonghorn said:

I found an enlightening explanation of the linkage between trade deficits and budget deficits. Guess which direction the causality is in?

Link to the whole essay

My favorite part of this is that it was written on January 1st...1987.

What about purchasing power in terms of % of GDP (we’re on top) or PPP (China is #1)?

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