Antidumping in Action

Today's Washington Post provides another example of our dysfunctional "Antidumping" rules in action.  This case is about antidumping tariffs imposed on furniture imports from China:

But do tariffs work? In the case of bedroom furniture, they’ve clearly helped slow China’s export machine. In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million.

Over the same period, however, imports of the same goods from Vietnam — where wages and other costs are even lower than in China — have surged, rising from $151 million to $931 million. The loss of jobs in America, meanwhile, only accelerated. 

This may be a case where the differential tariff treatment between Chinese and Vietnamese furniture which resulted from the antidumping case induced "trade diversion" - i.e., an efficiency loss because the trade preferences result in imports coming from someplace other than the low cost producer.  However, in this example, it could also be the case that comparative advantage shifted to Vietnam as China's labor costs have risen. 

Furthermore:

The only Americans getting more work as a result of the tariffs are Washington lawyers, who have been hired by both U.S. and Chinese companies. Their work includes haggling each year over private “settlement” payments that Chinese manufacturers denounce as a “protection racket.”

Fearful of having their tariff rates jacked up, many Chinese furniture makers pay cash to their American competitors, who have the right to ask the Commerce Department to review the duties of individual companies. Those who cough up get dropped from the review list.

It is clear from the article that workers in the US industry have suffered from a disruptive wave of furniture imports.  While it may indeed be the case that the US no longer has a comparative advantage in furniture production, standard comparative static trade theory fails to account for the adjustment costs associated with reallocating resources.  That is, trade theory assumes full employment and that workers will be shifted to another sector, ignoring the fact that this process involves losing their jobs in one industry and, usually, a period of unemployment before finding a job in another.

Although it is also less than perfect, a more appropriate remedy in this case would be the application of "safeguard tariffs" which the President can impose (following the recommendation of the International Trade Commission) in cases where industries are disrupted by import surges.  Relative to antidumping tariffs, safeguards have the advantages of being (i) time limited, (ii) at the discretion of the president (who presumably can consider the interest of the nation as a whole, rather than just an affected industry or region), and (iii) not requiring any allegation of "unfair" trade practices on the part of the exporters (which are usually somewhat bogus).

Resetting European Bonds

When I saw this headline on the Washington Post's website

I thought the president was going over there to work out a debt restructuring, but that's not the kind of bonds they mean.

It would be kind of weird if a US president to be directly involved in a European sovereign debt crisis (though it has global repercussions so the US is not disinterested), but Europe sure seems in need of some kind of intervention.  It is easy to understand why politicians prefer to hope they can get through the next election before things blow up rather than confronting a debt crisis.  Unfortunately the two institutions best placed to push Europe's politicians into a restructuring of Greek (and maybe Irish) debt that everyone knows is necessary - the ECB and IMF - are not being helpful, according to Steven Pearlstein:

At the time of his arrest, Strauss-Kahn was headed to a meeting with German Chancellor Angela Merkel, reportedly to talk her out of a debt restructuring plan for Greece. The official IMF view, like that of the European Central Bank, is that allowing any euro-zone country to restructure its debt will trigger another global financial crisis as investors rush to indiscriminately dump all their European bonds, forcing European banks, which hold large piles of them, into insolvency. In this scary scenario, a debt default or restructuring in any euro-zone country would cause the collapse of the euro. 

Pearlstein goes on to explain why this logic is flawed.  Indeed, Kash Mansouri argues that the ECB is, in effect, pushing Greece out of the Euro (though he seems to interpret this as an unintended consequence...).

Its not really President Obama's job to tell Europe how to sort out their debt problems - indeed, he's got his hands full with a Congress that seems to want to set off a much bigger crisis by not raising the debt ceiling - but hopefully he can give them a friendly nudge in the right direction while he's over there.  And the US should be using its influence over the IMF to get them to play a more constructive role.

April Employment Report

The BLS reports this morning that the economy added 244,000 jobs in April, but the unemployment rate ticked up to 9% (from 8.8%).  In this case, the reason for the apparent contradiction is that the two numbers come from different surveys - the first is from a survey of firms (the "establishment survey"), and the unemployment rate from a survey of households.  The household survey reported a decrease of 190,000 in the number of people employed.  In general, the two track each other well, but may diverge in any given month; when that happens people tend to trust the establishment survey more because it has a larger sample.

Nonfarm Payrolls, Seasonally Adjusted

Overall, this report seems to be consistent with an economy digging out of a very deep hole at a very slow pace.  While the increase in 244,000 jobs more than what is needed just to keep pace with labor force growth (130,000-ish), 13.7 million people remain unemployed.  The economy is about 4.6 million jobs short of a "normal" (but still not great) unemployment rate of 6% - at this pace, we'd get there in about three and a half years.

The report also included slight upward revisions of the February and March employment numbers (41,000 and 5,000 respectively).

Average hourly earnings have increased by 1.9% over the past year.  That's more evidence that inflation is not a problem: wages should rise somewhat due to productivity growth, so that's not an inflationary number at all.

Private payrolls were up 268,000, but government shed 24,000 jobs, of which 8,000 was at the state level and 14,000 at the local level.

On a non-seasonally adjusted basis, the unemployment fell from 9.2% to 8.7% in April (i.e., this is a month with a large seasonal job increase, which the BLS tries to remove from all of the numbers discussed above, which are seasonally adjusted).

The Graduate Curriculum

Macro navel-gazing turns (again) to the graduate curriculum....

Brad DeLong:

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

Yet that is not what economics departments are saying nowadays.

Perhaps I am missing what is really going on. Perhaps economics departments are reorienting themselves after the Great Recession in a way similar to how they reoriented themselves in a monetarist direction after the inflation of the 1970’s. But if I am missing some big change that is taking place, I would like somebody to show it to me.

As if it weren't bad enough that some assistant professors are writing blogs, a Michigan grad student named Noah Smith is blogging, too.  After a description of his first-semester macro class, he says:

This course would probably have given Brad DeLong the following reasons for complaint:

1. It contained very little economic history. Everything was math, mostly DSGE math.
2. It was heavily weighted toward theories driven by supply shocks; demand-based theories were given extremely short shrift.
3. The theories we learned had almost no frictions whatsoever (the two frictions we learned, labor search and menu costs, were not presented as part of a full model of the business cycle). Other than Q-theory, there was nothing whatsoever about finance* (Though we did have one midterm problem, based on the professor's own research, involving an asset price shock! That one really stuck with me.).

At the time I took the course, I didn't yet know enough to have any of these objections... 

Paul Krugman:

[M]odern graduate-level macroeconomics has managed to bury and forget what earlier generations knew, so that what was billed as intellectual progress ended up being, in crucial ways, intellectual regress. 

Hmmm.... yes and no...

Grad school is trying to produce "productive" scholars, good practitioners of what Thomas Kuhn would call "normal science", who generate publications in academic journals.  As such, much of it, especially the first year, is about learning techniques and terminology.  Most of what I remember from my first year is doing alot of algebra - and that's not a bad thing, being at least somewhat good at algebra turns out to be pretty important, as is knowing about things like Kuhn-Tucker conditions, Hamiltonians, and Bellman equations.

In that sense, I don't think economics PhD programs do such a bad job.  My first year graduate course was mostly growth theory and dynamic consumption theory, which were good vehicles for exposing us to the nuts and bolts of macroeconomic models.  What is missing, is a sense of perspective and context.  Contemporary academic models are grounded in "microfoundations" - the optimization problems of forward-looking agents - and, as such are very different from the models taught to undergraduates.  First-year graduate students learn quickly that macroeconomics is very different from what they expected (i.e., its "micro with time subscripts"), but they don't know why.  Time is precious in putting together a course, but I think a prologue which develops the motivation behind contemporary methods - principally the Lucas Critique and rational expectations revolution - would be time well spent (this article by Greg Mankiw is a good place to start).

DeLong and Krugman lament the lingering prominence of the "saltwater" Real Business Cycle (RBC) paradigm, and they have pointed out some startling statements by prominent true believers.  However, there is good reason for nonbelievers to learn these models, as the methods used by them are also at the core of many state-of-the-art New Keynesian models.

If a PhD program can get its students through some growth theory and consumption theory, which come together in the Ramsey-Cass-Koopmans model, and take the small step from there to RBC models in the first year, those students would be well-prepared to study models with frictions and market failures more relevant to current problems in the second year.

Previously, I have also argued for including history of economic thought in the graduate curriculum.  The trick would be to get people to take it seriously.  This would help recover some of the insight that Krugman (rightly) believes have been obscured.  Moreover, this might get students thinking more broadly, which would improve the likelihood that they might actually be in a position to re-think and change existing paradigms, rather than just being "productive" within them.

Null Hypothesis

XKCD:

1Q GDP: Bleh

The US economy grew at a 1.8% annual rate in the first quarter, according to the BEA's advance estimate.  That's not good - it less than the 2.5%-ish pace needed to keep the unemployment rate stable as the labor force grows and productivity increases - and way short of what we need to significantly bring unemployment down.

The slow growth wasn't a surprise, and much the slowdown is being attributed it to temporary factors, including the severe weather in January, and a slowdown in defense purchases.

The main positive contributions came from consumption, which grew at a 2.7% rate, and inventory investment, which was something of a "bounceback" effect - the actual amount added to inventories was modest, but it was an acceleration relative to the fourth quarter, when there had been a big slowdown.

The government purchases component was a drag, falling at a 5.1% annual rate (defense fell at a 11.7% rate while state and local government declined at a 3.3% pace).

The inflation rate, measured by the GDP deflator, was 1.9%.  Personal consumption expenditures (PCE) inflation was 3.8%, but excluding food and energy - i.e., "core PCE" - was 1.5%.  If one believes that the core measure is the right one to guide monetary policy, then inflation is still low.

Disposable income was up sharply due to the payroll tax cut that took effect in January - 6.9% in nominal terms - but only 2.9% in real terms (I think that's where you see the effect from energy prices).

Meanwhile the Department of Labor says that unemployment claims are rising again...

The next revision of the GDP figures comes out on May 26.

See also: Free Exchange, Ezra Klein, Calculated Risk.

FOMC TV

Ben Bernanke held his first post-FOMC meeting press conference today:



Reactions: Mark Thoma, Tim Duy, Paul Krugman, Brad DeLong, David Beckworth, Calculated Risk, Free Exchange, Catherine Rampell. The conference was liveblogged by the Times' Floyd Norris and by WSJ reporters.

The general tenor of the reactions (particularly the first five in the list above) is disappointment that it sounds highly unlikely that the Fed will undertake further expansionary policy beyond the $600 billion quantitative easing program currently in progress.  This is particularly frustrating in light of the Fed's own revised projections, released today:

The "longer run" unemployment number can be taken as the Fed's estimate of the "natural rate," the lowest rate consistent with non-inflationary growth.  The Fed is saying that it expects the unemployment rate to be significantly above the natural rate for at least three more years.

I think this statement was particularly telling:

I think that while it is very, very important for us to try to help the economy create jobs and to support the recovery, I think every central banker understands that keeping inflation low and stable is absolutely essential to a successful economy and we will do what is necessary to ensure that that happens. 

While Bernanke is always careful to explain policy decisions in terms of the Federal Reserve Act's "dual mandate" of low unemployment and price stability, here he is subtly putting more weight on the inflation part ("absolutely essential"), relative to employment ("very, very important").  I think this is because "every central banker" is deeply afraid of repeating the mistakes of the 1970's, when high inflation became embedded in the economy, and could only be brought back under control with a very painful dis-inflation in the early 1980's.  It may be that, in addition to hurting consumer sentiment, by providing a reminder of "stagflation" of the seventies, the recent run-up in oil prices is also casting a large shadow over the psyche of central bankers.

Also, the academic literature places significant emphasis on expectations and credibility, so the "hawkish" talk is likely partly motivated by a desire to keep a lid on inflation expectations. Of course, credibility ultimately depends on actions consistent with the talk.

While some of us academic types were disappointed in what we see as an excessive emphasis on inflation relative over employment (this is not universal: for a contrary view, see Steve Williamson), the markets may have read things differently.  Treasury yields rose today, which suggests that the news from the Fed was slightly less hawkish than expected.

ARRA MMQB

Another round of Monday morning quarterbacking of the Obama administration's initial fiscal policy drive, which led to the $800bn "stimulus" (the American Recovery and Reinvestment Act - ARRA) in February 2009...

One criticism, made Paul Krugman and many others, is that it simply wasn't big enough - in retrospect, it looks like a field goal when we really needed a touchdown.

A natural villain is Larry Summers, in this case because he prevented Christina Romer's case for a bigger program from getting to the president (this doesn't look so funny now).  New York Magazine's Krugman profile has Summers' response:

"[T]here is some element of [Krugman] that is like the guy in the bleachers who always demands the fake kick, the triple-reverse, the long bomb, or the big trade."

Summers concedes that a bigger stimulus would have been the optimal policy in 2009. “The Obama administration asked for less than all that it recognized pure macroeconomic analysis would have called for, and it only got 75 cents on the dollar. But political constraints and practical problems with moving spending quickly constrained us. The president’s political advisers felt, and history bears them out on this since the bill only passed by a whisker, that asking for even more would have put rapid passage at risk.”

Ezra Klein suggests we should be asking a different question:

[T]he interesting counterfactual is not “what would have happened if the stimulus had been a bit bigger” but “what would have happened if Barack Obama had been inaugurated a couple of months later?” By June, unemployment was over 9 percent, and the full scope of the emergency was a lot clearer. If that had been the context behind the initial stimulus, I think it’s plausible to think it could’ve turned out very differently. 

His post illustrates one of the problems with discretionary economic policy - the "recognition lag" - that the state of the economy only becomes clear in retrospect, after the data comes in.  This is particularly difficult because, by the time sufficient information to identify trends and turning points is available, the economy may have changed directions again.  In most cases, that's a good argument against "fine tuning" macro policies.  But I think it was plenty clear in February 2009 that there was serious trouble - payroll employment had declined by over 400,000 in each month from September 2008 through January 2009, and the shock of the fall 2008 financial panic was still fresh in the collective consciousness.

What was unclear was the shape the eventual recovery would take. Some of us hoped that the economy would bounce back quickly, as it had from previous severe recessions (e.g., in 1982, unemployment peaked at 10.8%, but the recovery was brisk; real GDP grew 4.5% in 1983 and 7.2% in 1984).  However, the 1990-91 and 2001 recessions, which were much milder, had been followed by sluggish "jobless recoveries."  Moreover, as Reinhardt and Rogoff showed, the typical historical pattern is that recoveries in the wake of financial crises are very slow.

Therefore, looking back, in my capacity as another "guy in the bleachers," the main flaw I see is that the stimulus should have been state contingent.  That is, the aid to states and many other spending provisions, as well as tax cuts, could have been designed to stay in place as long as they were needed.  The act could have contained a trigger to phase out after some recovery benchmark had been achieved, e.g., after the unemployment rate has been below 7% for six months, the stimulus steps down by 50%, with the rest coming off after 6.5% or less unemployment is maintained for a period.  Some parts of it could have been tied to state, rather than national, conditions.  That might have spared us the ugly spectacle of severe cuts in state services, even as unemployment remains at an appallingly high level.  Moreover, knowing that the fiscal support would be in place as long as needed might have served to create more confidence in the recovery, leading to a stronger improvement in private activity.  (The natural counter-argument is that such an open-ended fiscal commitment would undermine confidence in the government's ability to handle its debt burden, but I don't think it would have been a problem).

I don't recall the idea of a state-contingent stimulus being raised anywhere at the time, and I have no idea whether it would have been politically feasible or not.  Arguably, its just an amplification of the "automatic stabilizers" already built in to the system.  Hopefully, there is no next time, but when it comes, perhaps we should give this aspect of the design of policy some further thought.

The Economist's Ryan Avent has another question:

[W]hat if Congress had failed to pass a stimulus at all? Would the Fed have acted sooner or more aggressively or both, and how might recovery have gone differently?

Which reminds me of the other thing the administration should have done differently (and this one is harder to explain) - they have allowed several seats on the Federal Reserve Board to remain unfilled for long periods.  I agree with Avent that "QE2" appears to have worked.  A different Board might have done more of it, sooner, and for longer, and that would have been better. On this point, Brad DeLong is yelling from the bleachers.

Change We Can Believe In (1980s Edition)

In introducing the concept of fractional-reserve banking to my students today, I said that a bank which held reserves equal to its deposits wouldn't be profitable.  I'd forgotten this classic example of another way banks could make money:



That was even funnier back in the late 1980s when TV viewers were inundated with the annoying Citibank ads being parodied. Also see this follow-up.

Two Notes on the Continuing Resolution

From the appropriations committee summary of the continuing resolution (i.e, the budget deal):

The legislation also eliminates four Administration “Czars,” including the “Health Care Czar,” the “Climate Change Czar,” the “Car Czar,” and the “Urban Affairs Czar.”

Anastasia screamed in vain.

And:

For the Department of Transportation, the bill eliminates new funding for High Speed Rail and rescinds $400 million in previous year funds, for a total reduction of $2.9 billion from fiscal year 2010 levels.   

I didn't realize it was possible to throw trains under the bus.

Petty and shortsighted.