Some Updates

I know things have gotten a little quiet around here, but don't worry: I've managed to survive without you (haha).  In all seriousness, when not changing diapers or making bottles, I've definitely been keeping busy with several side projects, including:

• I've recorded several podcasts for the Cato Institute on various trade issues.  The first two of those are now out, and you can listen here (on subsidies) and here (on energy).  So sit back, relax, and let my sultry voice lull you into a deeper state of libertarian economic consciousness.

• Back in August, I penned an oped for IBD on how various US government trade and fiscal policies artificially inflate food prices and hurt American families.

• I've also started occasionally writing for the hot new web magazine The Federalist.  You can find my first couple articles (and all future ones) here.

• And last but not least, I'm very excited to announce that I've signed on to be a Visiting Lecturer at Duke University, and will be teaching "Institutions in International Trade Law" there in the Spring of 2014.  Once the course description is online, I'll be sure to share it here.  In the meantime, if you know any students at Duke who are looking to learn about trade law, economics and policy (and, of course, robots/monkeys/pirates), be sure to send 'em my way!

Enjoy!

(And if you'd like to get these (and many, many other) updates more quickly, be sure to follow me on Twitter or Facebook.)

How US Government Policies Conspire to Keep Food Prices High and Rising (and Hurt American Families in the Process)

Recent, widespread reports that US inflation remains tame in the face of ever-loose monetary policy have been met with skepticism from certain folks because the most common metric - "core CPI" - omits rising food and fuel prices.  One such critique that recently caught my eye came from Ben Domenech in his must-read newsletter, The Transom, who noted among other things that "according to BLS figures, over the past five years, the average prices for all goods are 7.7% higher; the average price of bread is 10.4% higher; and the average price of meat/poultry/fish/eggs is 16.2% higher."

In a subsequent email, Domenech sent along the following chart, which really hits his point home:

That's a pretty stark picture, and it got me thinking about what's causing the recent and alarming spike in US food prices - a problem that, of course, disproportionately hurts poor American families and stands in stark contrast to fantastic price declines for many US consumer goods (as documented repeatedly by AEI's Mark Perry).

As it turns out, there are several government policies that are conspiring to keep US food prices high and rising and thereby line the pockets of certain special interests at US consumers' expense.  I'd be remiss not to lead off with the fact that many archaic US trade barriers on certain foods thwart foreign competition and the lower prices that it facilitates. According to the US International Trade Commission's latest report on "The Economic Effects of Significant U.S. Import Restraints," these artificial barriers to free trade raise US prices of certain foods to levels that are well above global averages.  I railed against these barriers back in 2009 using the previous version of the ITC's report, and that critique unfortunately remains valid (although certain numbers obviously have changed):

The table below is from the 2009 ITC report (click to enlarge).  It shows the products that face the highest import and export tariffs in the United States, as well as the US-world price difference caused by those import barriers. 

 

As you can see, some of the highest trade barriers in the United States are on things that American families use everyday - food (cheese, butter, milk, sugar, tuna, etc.), clothing (including thread, fabric and textiles) and shoes.  The taxes on these necessities range from a few percent to almost 48 percent, and these trade barriers result in US prices that are up to 57 percent higher than prices for the same goods in other markets.  So, for example, US trade policies force American families to pay $1.57 for a stick of butter, while Canadian families pay only a dollar for the exact same thing.  Nothing like a 57% butter tax to help the Joneses really tough-out the recession, huh?  Awful.

Thus, archaic US trade barriers designed to protect certain food producers - most notably sugar and dairy farmers - from international competition inflate food prices and force American consumers to pay through the nose.  Like I said back in 2009, awful.

As bad as this protectionism is, however, it only helps to explain why US food prices are artificially high versus world market prices; it doesn't explain the dramatic spike in domestic food prices over the last several years (the protectionism isn't new).  Some of this increase is most definitely due to market forces like increasing global demand for food and recent weather problems, but there are also several non-market (read: government) factors at work here.  Perhaps the biggest one is the United States' ridiculous support for ethanol in the form of direct subsidies and the Renewable Fuel Standard which requires refiners to add steadily increasing amounts of ethanol to gasoline.  Reporting on a new study by FarmEcon LLC, the Heartland Institute summarized how these policies affect food prices:

For more than half a century, from 1950 through 2005, U.S. consumers benefited from gradually declining food prices. Since 2006, however, prices have sharply risen, with a typical family of four now paying $2,055 more in food bills than would be the case if costs had kept to the 1950-2005 trend line. 

Rapidly rising corn prices, caused primarily by ethanol subsidies and mandates, are the most important factor in rising food prices. 

“Fuel ethanol production capacity, based almost entirely on corn as a feedstock, exploded from 2006 to 2009,” the study reported. “Demand for corn to supply the new plants also exploded. Corn production did not keep up with the higher demand, and corn prices have more than tripled since the mandates came into effect.” 

“Corn is just one of many basic farm inputs used to produce the U.S. food supply. However, with increases in biofuel demand and declining corn production, corn prices have increased sharply. In turn prices of other major crops have also gone up significantly. This ranges from major field crops like soybeans and wheat, to horticultural crops such as potatoes, strawberries, and processing vegetable crops. Higher prices for other crops were necessary in order for those crops to compete with corn for land.… These higher commodity prices mean higher incomes for crop producing farmers, but also higher food production costs, higher consumer food prices, and increased food costs for family budgets,” the study explained....

Other studies - including one by the non-partisan Congressional Budget Office - come to similar, depressing conclusions: US ethanol policy forces food prices higher, benefiting a small cabal of farmers and domestic ethanol producers at the expense of American families and the economy more broadly.  Reason's Peter Suderman adds (in case you weren't offended enough already):

Last summer, three farm economists at Purdue University estimated that even if we just partially relaxed the renewables standard, corn prices could drop by as much as 20 percent. (That could also help ease the impact of rising gas prices, another factor that Karlgaard names as hurting Walmart in his oped, by increasing fuel economy.) 

It’s not just American consumers who would benefit. It would also help stop the rise of food prices worldwide, which harms poor and developing nations. The global impact is big enough that last summer, the World Bank suggested that an immediate easing of the renewables mandate could prevent a world food crisis.

But if you think that all these reports on ethanol's serious problems would somehow lead to reforms, Tim Carney helpfully instructs us today to think again:

The Iowa Renewable Fuels Association flew into D.C. this month to defend the mandate. The National Biodiesel Board has retained a new lobbyist this month - former Republican Congressman Kenny Hulshof. Poet, the country's largest ethanol producer, hired a new top lobbyist, former House Science Committee staffer Rob Walther. 

Ethanol's best asset may not be on K Street, but in the EPA: new administrator Gina McCarthy. McCarthy, confirmed by the Senate last week, is a consistent ethanol-industry defender. 

Late last year, for instance, governors from both parties and five states petitioned the EPA to waive the ethanol mandate. The governors weren't petitioning on behalf of drivers or Big Oil, but on behalf of ranchers. Feed prices were going sky-high thanks to drought, and the ethanol mandate diverts corn from cattle feed to gas stations.... 

McCarthy, then assistant administrator for EPA's Office of Air and Radiation, denied the request.

Industry, lobbyists and bureaucrats preventing much-needed reform of harmful regulations?  Shocking, I know.

Unfortunately, US ethanol policy isn't the only thing causing the recent run-up in food prices.  It turns out that a combination of easy money and federal subsidies (particularly crop insurance) has facilitated intense speculation by both farmers and investment firms in the US farmland market, with quite predictable results:

Because higher prices for crops means farmers could make more on their land, many are using their growing profits to buy more land. Investment firms have caught on -- they're buying too. 

The Kansas City Federal Reserve said irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. And despite the drought in Iowa last year, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska have also doubled during the same period. 

Analysts and economists have quietly warned of a bubble in farmland since 2011. The latest comes this week -- a group of bankers advising the Federal Reserve warned prices aren't justified and have entered bubble territory, according to records obtained by Bloomberg of meetings of the Federal Advisory Council. As investors shy away from bond markets and search for bigger returns, members say they've opted for farmland. They blame the central bank's super-low interest rate policies. 

"Agricultural land prices are veering further from what makes sense," according to minutes of the Feb. 8 gathering of the Federal Advisory Council. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."

More on the farmland bubble and its causes is here and here.  Further encouraging these investments is the fact that they receive artificial support from federal subsidies, especially the types of crop insurance that both the House and Senate just doubled-down on in the latest Farm Bill.  So investors use dirt-cheap credit to buy land whose ever-increasing value is protected by taxpayer-subsidized insurance.  Perfect.

Also, as we've already discussed, pushing up crop prices and encouraging more farmland speculation is US ethanol policy, creating a rather vicious government-driven cycle: ethanol subsidies and mandates lead to higher crop prices, which combine with super-low interest rates and federal subsidies to encourage farmland speculation by both farmers and Wall Street investment firms, which leads to even higher food prices, thereby encouraging even more speculation.

Rinse, repeat.

Caught in the crossfire, of course, are struggling American families who don't have the luxury of being part of the ethanol con or having the spare (low-interest) cash and connections needed to invest in taxpayer-subsidized farmland.  For them, it's all downside, driven (in part) by really bad government policies.

So maybe overall inflation is in check, but that doesn't mean that federal monetary and other policies aren't causing pretty serious problems for a large portion of the citizenry, particularly those on the lower-end of the economic spectrum.  Such problems are definitely out there; you just have to look beyond the headlines.

The Potential Downside of Chinese "Re-balancing": US Inflation

With China recording an unexpectedly huge trade deficit in February 2012, the punditocracy has rushed to opine on the potential effects of Chinese "re-balancing" - i.e., a shift away from economic growth driven by exports and foreign investment (due mainly to relatively cheap labor and currency) to growth driven more by domestic consumption.  Most of the commentary has looked at a "re-balanced" China's potential problems for Chinese exporters and potential gains for US exporters, but I'd like to look at another possible effect of Chinese re-balancing: the loss of two significant, longstanding brakes on harmful inflation in the United States.

Before I get to that, let's dig into China's surprising trade data, courtesy of the WSJ:

A trade deficit of $31.5 billion in February is the largest on record for the world's second-largest economy....

With the lunar holiday for Chinese New Year playing havoc with the data, it makes sense to look at January and February's trade numbers together. On this basis the trade deficit is a less-alarming $4.1 billion-because of a substantial surplus in January-but remains the largest for the first two months of the year since 2004.

Exports grew just 6.8% compared with the first two months of 2011, down from 14.2% growth in the final quarter of 2011. No prizes for guessing the main reason for the fall: exports to Europe contracted 1.1%....

Qu Hongbin, Asia economist for HSBC, notes that growth in processing trade imports fell to 2.4% compared with a year earlier, down from 8.6% in the fourth quarter of 2011. Those imports are the inputs to make China's own exports. Such a low growth rate suggests factories are anticipating weak demand for their products down the line, and going slow on accumulating stock.

Another WSJ article gives us the money graphic:

The article added that "[l]ooking at January and February together, exports rose 6.9%, while imports gained 7.7%, far slower than the double-digit gains China usually chalks up."

So what's causing the sudden shift in China's trade balance?  Well, some of the change is clearly due to falling demand abroad, particularly in crisis-torn Europe (as the WSJ notes), but a broader look at China's exports (courtesy of Michael McDonough) indicates that there may be something bigger and more systemic going on here:

The chart above makes clear that Chinese exports have steadily declined over the last 2 years across the globe, not just in Europe.  I have no idea if this means that China actually has begun to "re-balance," but if China's growth model really is moving towards domestic consumption and away from export-dependence, domestic factors like rising living standards and a stronger currency are likely at play.  If so, that's good news for Chinese consumers and certain US manufacturers that compete directly with China and other low-cost Asian manufacturers.  Unfortunately, there's a downside to these re-balancing factors: they should make it increasingly difficult for the United States to keep inflation at bay.

First, rising labor and other costs in China have made Chinese exports more expensive. This well-documented trend will affect not only China's trade balance, but also US inflation:

Since the 1990s, Chinese imports have helped cool inflation in the U.S. That allowed the Federal Reserve to keep interest rates a bit lower, allowing the economy to grow at a quicker pace.

But with wages rising, the cost of China-made goods has begun to go up. That is bound to continue, and as it does the U.S. economy will look a little more inflation-prone. The Fed's job is going to get more complicated.

The U.S. imported $399 billion in Chinese goods last year, according to the Commerce Department. That was quadruple the $100 billion imported in 2000, the year prior to China joining the World Trade Organization, and ten times the $39 billion imported in 1994.

The jump in Chinese imports has coincided with a period in which inflation has been remarkably quiescent. Over the past 15 years, the core consumer-price index, which excludes food and energy, has risen at an average annual rate of 2.1%, according to the Labor Department, compared with 4% in the 15 years previous.

Much of that downshift owes to a cooling in prices for goods—that is, prices for stuff like t-shirts, which can easily be imported, rather than services like haircuts, which can't. Core consumer-goods prices have increased at an average annual rate of 0.2% over the past 15 years, compared with 2.9% in the 15 years before that.

The Chinese import prices have lately been increasing, however, rising 3.9% last month from a year earlier, according to the Labor Department. Some of that owes to higher commodity costs, but rising Chinese wages and an appreciating yuan also seem to be playing a role. One indication of that: Prices for footwear imports—labor-intensive goods that use a minimal amount of raw material and are mainly made in China—have risen 5.5% over the past year.

While a cooling Chinese economy could offer some temporary respite, China has reached a point in its development where it will be difficult to keep labor costs in check. Some manufacturers are shifting operations to other low-wage Asian countries, but the scope for doing that is limited—there are only 90 million people living in Vietnam compared with China's 1.3 billion.

This isn't to say that rising prices in China will be pushing prices higher in the U.S. Rather, they won't be pulling them down. So the U.S. economy will look a little more inflationary, and a little less productive—a little more like it looked before China entered the scene.

A brand new report from the WSJ indicates that rising Chinese labor costs are having a "ripple effect" on labor costs in other developing Asian economies like Malaysia, Thailand, Indonesia and Vietnam. Thus, the prices of these countries' exports are also on the rise:

More Asian governments are pressing businesses to hike wages as a way to prevent outbreaks of labor unrest, raising the specter of higher manufacturing costs for global companies—and the products they sell world-wide....

Global companies already have been facing higher labor prices in China over the past year, despite a weak global economy, as workers demand a greater share of the country's economic boom. In recent months, the pressure also has intensified in countries across Southeast Asia that have marketed themselves as alternatives for companies seeking to escape China's rising costs, leaving those companies now with fewer places to move....

Asian governments, in some cases, are embracing the call for higher salaries, in part to head off the spread of the kind of unrest that has toppled Middle Eastern regimes recently—and to calm rising labor actions in their countries.

They also are hoping the higher wages will help consumers boost spending, providing a new engine of growth at a time when slack demand for exports in the West and higher oil prices are worrying policy makers across the region.....

The spread of higher wages is likely to present challenges for the companies that have long relied on Asian manufacturing operations to keep their costs low, potentially including multinationals, such as Nike Inc., Adidas AG, Dell Inc. or their suppliers....

Boosting minimum wages risks setting off more inflation at a time when central bankers are worried about increased oil prices. Such a scenario could put the price of ordinary goods out of reach of the people the higher wages are intended to help.

Garment, footwear and electronics manufacturers operating in Indonesia from South Korea, Taiwan and Japan say they are now thinking of taking their factories elsewhere. Some said they fear more wage increases as local politicians try to win votes in elections scheduled over the next two years....

But with wages now rising in so many places at once, unhappy companies may have few places to escape.

If rising Chinese import prices are removing a brake on US inflation, then rising prices of other Asian imports   should have a similar and supplemental effect.

Second, in real terms, the Yuan has appreciated significantly against the US dollar over the last several years.  This appreciation will undoubtedly decrease some Chinese exports and increase domestic import consumption, but it might also have a significant effect on US inflation because of how China manages the value of the Yuan.  As I've repeatedly noted, much of the Yuan's relative appreciation is due to significant Chinese inflation (caused by, among other things, economic growth, rising labor costs and Chinese monetary policy), but some of it is due to a noticeable shift in China's monetary policy, in particular its "managed peg" of the Yuan against the US dollar.  Until last week's trade surprising trade deficit, this change allowed (or forced) the Yuan to appreciate against the Dollar in nominal terms over the last year or so (chart again courtesy of Mr. McDonough):

So why did the Yuan's nominal value appreciate so much last year?  Well, one possible reason is that China stopped buying US government debt.  China helps control the nominal value of the Yuan by purchasing that debt, but the government's purchases slowed dramatically last year:

China's holdings of U.S. Treasuries accounted for 54% of its foreign-exchange reserves as of June 30, according to a U.S. Treasury survey released this week. That's down from 65% in 2010 and a record 74% in 2006....

Beijing continues to buy loads of U.S. debt. As of June 30 it held $1.73 trillion in U.S. securities, up 7% from June 30, 2010.

Still, other federal data show it was a net seller of U.S. treasuries in the second half of 2011.

Bank of America predicts that China will continue to diversify its debt holdings away from US Treasuries in 2012, even though most people expect the Yuan's nominal appreciation to slow this year.  Because global turmoil has made the United States the "debt of last resort," most experts note that China's diversification shouldn't have a huge affect on interest rates (and thus inflation) in the United States right now.  However, China's reduced foreign purchases of US Treasury Bills could eventually bite, as this new report from the Federal Reserve makes clear:

Foreign offi cial holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the offi cial sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign offi cial purchases of U.S. Treasuries. Would such a slowing of foreign o cial purchases of Treasury notes and bonds a ect long-term Treasury yields? Most likely yes, and the eff ects appear to be large.

The aforementioned Bank of America report echoes these concerns.  So, in short, should the Chinese government stop buying US debt in order to allow (or force) the Yuan to appreciate, an unfortunate - but totally expected - byproduct could be higher interest rates and increased inflation in the United States.

There are growing concerns from several reputable, non-partisan sources that inflation could become a real problem in the United States over the next year or so.  (Sky-high energy costs and ridiculously easy money can do that to a country.)  At the same time, President Obama and his administration are relentlessly pushing China to re-balance its export-dependent economy.  As noted above, part of that re-balancing process will undoubtedly involve more expensive Chinese (and other Asian) imports into the United States and also could involve fewer Chinese government purchases of US debt.  But given the potential adverse effects of such events on the inflation-prone US economy, advocates of Chinese re-balancing in the administration and elsewhere may want to recall an old bit of wisdom:

Be careful what you wish for.

Tuesday Quick Hits

I'm travelling this week, so blogging will remain light, but here are a few things to keep you going:

• Senate Minority Leader Mitch McConnell (R-KY) takes to the op-ed pages today to explain what many of us have been saying for a month now: President Obama's "blame Congress" strategy for the continuing stagnation of US FTAs with Colombia, Panama and Korea is extremely disingenuous.

• Mitt Romney released his economic plan today, including a detailed section on trade policy (starting at p. 41).  I'll have a lot more on this later, but for now let's just say that, on US-China trade, Governor Romney regrettably appears to have taken a page right out of Donald Trump's China playbook.  (Jon Huntsman's recently-released plan was far less antagonistic.)

• The WSJ today explains how Korea is facing a serious inflation problem because its trying to competitively devalue its currency as in the face of continued easy money policy in the United States.  If this all sounds familiar, it should: China's having the same problem for much the same reason.  Crazy how basic economics works, eh?

• Speaking of China, the WSJ reports that its "low wage export engine" is starting to "sputter" due to labor cost inflation and competition from other low-cost countries like Vietnam.  Shocking, I know.

• The WSJ rightly explains that Asia's impressive increase in high net-worth individuals is a good sign for those economies (and the global economy more broadly), but it's troubling that some of that increase is due to cronyism and government patronage rather than merit.

That's it for tonight, folks.

Monday Quick Hits (World Champion Dallas Mavericks Edition)

I'm sure that you, like me, are still tired from celebrating the Mavs' ridiculously unexpected victory last night. So here's a little pick-me-up:

• Sec. Clinton: Free trade is great for everyone (except Americans!).  In all seriousness, if you've ever wondered whether the Obama administration's free trade foot-dragging reflects political opportunism or a sincere-yet-misguided misunderstanding of basic economics, wonder no longer.

• WTO Director General Pascal Lamy explains that, because of global supply chains, value-added is a much better way to measure trade flows, and old school trade stats "give us a distorted picture of trade imbalances between countries." A full WTO report on this issue gives us a detailed understanding of the abject absurdity of politicians' breathless claims about global trade imbalances based on the old metrics.  For example, on our elected officials' currency demagoguery, Lamy stated: "When products include many parts made in many other countries, the effect of an isolated exchange rate appreciation or depreciation to the selling price in export markets will be reduced to the domestic content of these exports, to its 'value added content'. This may explain why empirical studies about the impact of exchange rate changes on imbalances tend to show they only have limited or ambiguous effects."  Translation: the demagoguery is pretty much baseless.  Heritage's Bryan Riley has more on our misleading trade stats here.

• In a must-read editorial, George Will absolutely destroys the White House's refusal to submit pending FTAs to Congress without congressional assurances on expanded Trade Adjustment Assistance.  My favorite lines: "A government borrowing $58,000 a second cannot afford Obama’s policy of Stimulus Forever, and there is this problem with TAA at any level: It is unjust to treat some workers as more entitled than others to protection from the vicissitudes of economic dynamism. Consider a hypothetical Ralph, who operated Ralph’s Diner until Applebee’s and Olive Garden opened competitors in the neighborhood. With economies of scale and national advertising budgets, those two franchises could offer more choices at better prices, so Ralph’s Diner went out of business. Should he and his employees be entitled to extra taxpayer subventions because they are casualties of competition? Why should someone be entitled to such welfare just because he or she is affected negatively by competition that comes from abroad rather than down the street? Because national trade policy permits foreign competition? But national economic policy permits — indeed encourages, even enforces — domestic competition. In 2001, when approximately 80,000 people worked in 7,500 music stores, the iPod was invented. Largely because of that and other technological changes, today only about 20,000 people work in 2,500 music stores. Should those 60,000 people be entitled to extra welfare because they are “victims” of technology? Does it matter if the 60,000 have found work in new jobs — perhaps making or selling electronic devices? In 2008, Americans bought 1.4 billion books made of paper and 200 million e-books. Soon they will buy more e-books than paper books, and half the nation’s bookstores will be gone. Should the stores’ former employees be entitled to special assistance beyond unemployment compensation? Reactionary liberalism holds that existing jobs must be protected with policies that reduce the economic dynamism that would mean a net increase in American jobs. So the dreary probability is that even if the TAA entitlement were re-enriched to stimulus levels, Democrats would again move the goal posts, concocting new objections to the trade agreements."  Yep. 

• Speaking of TAA, I quite enjoyed this NYT op-ed from former Bush official Matthew Slaughter and former Clinton official Robert Lawrence about how to resolve the White House's self-imposed TAA/FTA impasse.  Their solution: (i) pass the FTAs as soon as humanly possible, and then (ii) scrap TAA and the current mishmash of other federal unemployment benefits and replace the ancient, broken programs with a more streamlined and rational system that is market-friendly and doesn't discriminate against Americans who lost their jobs due to technology or something other than (allegedly) trade policy.  I don't agree with everything they propose, but I love this idea (and have advocated something similar for a few years now): "enabling unemployed workers to make penalty-free withdrawals from savings accounts like 401(k)’s and I.R.A.’s to finance costs like occupational retraining and relocation."  Sadly, the chances of this deer-in-the-headlights White House actually doing something as rational and economically-beneficial as the Slaughter/Lawrence plan are, well, not good.

• Is the, ahem, "Chicago way" coming to Geneva?  The Peterson Institute's Gary Clyde Hufbauer reports on what he sees as a very troubling development at the WTO: USTR's attempt to block Appellate Body member Jennifer Hillman from serving a second term on the world's most important arbiter of trade disputes: "The United States has never before blocked its Appellate Body appointee from serving a second term. Since the USTR has offered no explanation for blocking Hillman, suspicions are bound to arise that the United States is displeased with her decisions on the AB and wants to name a judge who is more attentive to US positions in future cases. These suspicions are bound to erode confidence in the WTO judicial system, and create a chilly reception for Hillman’s successor appointee. 'Judicial independence' is a hallowed American concept, now enshrined in the WTO.... But as a member of the bar, as well as President, Obama should seriously reconsider this damaging precedent."

• Does CNBC get just how contradictory this ridiculous news story about the Japan tragedy and the US trade deficit is?  Compare and contrast (emphasis mine): "The after-effects from the March earthquake and tsunami in Japan left behind one on the US economy: An unexpected shrinking in the massive trade deficit. But that improvement may not last long….  Most of the $3.1 billion decline came from Japan and a $2.5 billion drop in auto-related imports. The tsunami devastated the Japanese auto industry, slowing parts distribution and production essential to US car manufacturing and sales."  So to recap: choking off essential inputs for US manufacturers is a "positive impact."  Riiiiight.  (h/t Bryan Riley) 

• The Mises Institute's Jeff Tucker explains how US treatment of Vietnamese catfish basa and swai is an "archetype of disgusting protectionism."  Yep.

• In case you're wondering, inflation and rising labor costs aren't isolated to China.  According to the WSJ, India's facing similar issues: "Maruti Suzuki India, the local unit of Suzuki Motor, is facing what's become a familiar hazard in the country: labor action. On Wednesday, a strike by about 2,000 workers at one plant entered the fourth day. With $9 million of potential revenue lost each day from the closure, the total is about $32 million, or close to 1.5% of last quarter's revenue. Maruti's troubles are the latest reminder of the effect of labor unrest as workers demand better wages and benefits, triggered partly by high inflation. Last month, a similar protest by the employees of national carrier Air India lasted nine days, causing a revenue hit of $30 million. In 2010, Hyundai Motor India had to rehire most of the employees it had sacked after a two-day protest that cost a similar amount."

• Slate's Bryan Palmer explains why Europe "sucks" at innovation.  The intro reads like an article from The Onion: "The French government has banned television reporters from using the words Twitter and Facebook when referring generically to social media, because all that free advertising gives the companies an unfair advantage." Sacre bleu! 

• Bloomberg's editors go back to basics, explaining why protectionism is politically attractive yet economically stupid.  The whole thing is worth reading, but I really enjoyed this quote: "Furthermore, the benefits of free trade do not require reciprocity. Avoiding tariffs and quotas is good for us whether China, Japan or Europe follow suit."  Exactly.

• In case you need further evidence of the White House's secret understanding of free trade's myriad benefits, here's video of CIA Director (and current Secretary of Defense nominee) Leon Panetta explaining the strategic importance of free trade, especially with our allies in Korea, Colombia and Panama (start at 6:04, with Sen. Rob Portman's smart line of questioning):

Panetta: Senator, I think that when it comes to protecting our security there are number of areas that have to be addressed and one of those obviously is not just the military responsibility but there is an economic side of this that plays a very important role in terms of promoting better security. The ability of these other countries to develop trade with us to develop their economies creates greater stability within those countries. I think that’s a fact and to the extent that we can help promote that kind of trade, that we can promote that kind of economic development, I think it assists these nations in their ability to achieve stability. Columbia is a good example. They have done a great job going after narco trafficking. If we can help, you know be able to help them develop their economy, that could become another added factor in providing greater security in that region and the same thing is obviously true for Korea.

That's all for tonight.  Go Mavs!

Monday Quick Hits

It's been a while since I last cleared the decks, so these headlines will go back a couple weeks:

• Former Chair of President Clinton's Council of Economic Advisers Laura D'Andrea Tyson systematically and correctly explains why China's currency policies should not be the focus of this week's US-China Strategic & Economic Dialogue.  (Although it all sounds awfully familiar, if you ask me.)

• AEI's Phil Levy explains the absurdity of the AFL-CIO's opposition to the US-Colombia FTA.

• Unlike most other countries, the United States isn't really interested in Chinese investment.

• Undaunted, Chinese investors are still trying to give us money and jobs, and, fortunately for us, they are occasionally successful.

• The Economist looks at the effect of trade on carbon emissions.

• The US Steel Industry is doing really well these days. (Somebody should tell steel-loving protectionist Reps. Visclosky and Murphy.)

• All of China's currency meddling is pushing the Chinese government to increase the nominal value of its currency.  (Shocking, I know.)

• World Bank study: China will become less trade-dependent over the next decade. (Good writeup of the study here.)

• Chinese study: China's exports will inevitably slow, while its imports will surge. 

• China's one-child policy is creating some serious economic pressures.

• The US-Korea FTA had a pretty ridiculous setback in Korea's National Assembly.  Unfortunately for US exporters, the National Assembly seamlessly approved the EU-Korea FTA a few days later.  (Tick tock tick tock, President Obama.)

• Art Carden explains why the iPad isn't bad for the US economy (and yes, that is apparently a necessary economics lesson for some in Congress).

• US inches closer to allowing Mexican trucks to travel on American roads; retaliatory tariffs on $1.2 worth of US exports remain in place until that actually happens.

• Heritage: The "Age of America" will only end if we let it.

• Steve Horwitz on the pernicious fallacy of the "fixed jobs pie."

That should keep y'all busy for a while. 

Tuesday Quick Hits

A lot of very interesting things have come across my (virtual) desk over the last few days, and many of them support the things I've been discussing here over the last few months.  I highly recommend reading some, if not all, of these in full:

• Harvard's Edward Glaeser discusses why the "morality" of modern economics is rooted in human freedom (h/t Fred Smalkin).  In so doing, he underscores one of the big themes of Dan Ikenson's and my new paper on the broader case for free trade, its inherent morality: "Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices. When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice. Our opponents have every right to contend that economists are unwisely idolizing liberty, but they err by saying we sail without a moral North Star. Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending. Many regulations can even be seen as force for freedom, like financial rules that help give all investors the freedom to invest in stocks by trying to level the playing field.  The belief in freedom does, however, create a predilection for human interaction and trade.  As [Milton] Friedman wrote, 'The most important single central fact about a free market is that no exchange takes place unless both parties benefit.' For many economists, defending free trade isn’t just about gross domestic product; it’s fighting for core values of freedom and human interdependence.  As [Adam] Smith said, 'To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.'  Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom."

• The Economist: based on a rough (but very reasonable and scholarly) esitmate, trade with China has saved American consumers approximately $780 billion(!) between 2001 and 2010.  Chinese President Hu Jintao said it was around $600 billion, and the magazine's back-of-the-envelope confirmation of Hu's claim definitely calls for more research.  Nevertheless, WOW!

• Dallas Fed further confirms what we already knew: China's currency policy is not the primary driver of the US-China current account balance: "Normally, a fast-growing economy such as China would borrow money from the rest of the world instead of lending. An obvious suspect in China’s mounting current account surplus is the fixed exchange rate between its yuan and the dollar. An undervalued yuan makes Chinese products cheaper than those of competitors in international markets. As a result, China exports more than it imports. According to this explanation, yuan appreciation could rebalance the global economy. This argument has at least two flaws. First, the durability of the U.S.–China imbalance is difficult to explain. In order for the exchange rate to affect import prices, those prices can’t adjust.... Although in reality prices cannot change instantly, they do adjust over the long run; therefore, the exchange rate has only short-term effects on import prices and the current account. China has run a significant trade surplus against the U.S. for about 10 years (Chart 2). It is hard to imagine that prices have not fully adjusted to offset the exchange rate after such a long period. Second, an appreciating yuan may only minimally reduce the imbalance. Even in the short run, the exchange rate’s impact on import prices would be quite limited, studies have shown. Exporters usually pass on only a fraction of exchange rate movements when setting prices. About 20 percent of exchange rate changes were reflected in U.S. import prices during the past decade, Federal Reserve economists Mario Marazzi and Nathan Sheets found. Profit margins usually absorb some of exchange rate movement as exporters seek to maintain market share. Additionally, the currency under which import prices are invoiced also affects the exchange rate pass-through. Most U.S. imports from China are priced in dollars, and their prices are fixed in the short run. In this case, depreciation of the dollar against the yuan has no short-run effect on import prices from China."

• The FT's Clive Crook (rightly) dismantles Obama's State of the Union Address (h/t Phil Levy).  He hits on many of the problems with "competitiveness" and "investment" that I've discussed here at length.  My favorite lines: "The metaphor of growth as a race with winners and losers – all that stuff in the speech about Sputnik moments, falling behind, winning the 21st century – is nonsense. Over the long haul, if US productivity rises, so will US living standards. Why should growth in China or India hold back US productivity? No reason at all. Once conditioned to think “productivity” whenever a politician says “competitiveness”, you look at economic policy differently. Winning begins to seem overrated. What exactly do we win, you wonder? Being number one in worldwide production of solar panels would be nice, but how would that raise economy-wide productivity? The key to improving living standards lies not in winning the race to develop showcase technologies, but in accumulating capital, diffusing knowledge and accommodating the disruption that this entails."

• China is starting to experience some pretty significant trade diversion, but (unsurprisingly) very little of the sourcing is heading to the United States: "More than half of international buyers have tended to increase their sourcing from India and Vietnam due to continuous export price hikes from China, according to a recent survey by the Global Sources, a trade information provider.... Workers in Vietnam, however, are said to need twice as much time to finish one task, the Global Sources said. 30% of respondents said they plan to increase sourcing from Thailand. However, export price may not be the polled buyers' sole consideration, for 7% of them are considering increasing imports from countries that have higher production costs than China, including South Korea, Japan, the United States and the European Union."

• Meanwhile, the NYT notices (again) that Chinese inflation may shrink the US-China trade deficit.  Color me shockedtotally and utterly unsurprised.  Although most of this article just updates what we've already known for a while now, I think it's worthwhile to note this passage about the deleterious effects of higher Chinese import prices on US consumers: "The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost."  In short, the pain will mainly be felt by poorer American consumers and US manufacturers.  Wealthier Americans?  Not so much.  And yet it's the politicians who claim to "care" most about America's poor and the US manufacturing sector - and who demonize America's "rich" - that have for years now been demanding more expensive Chinese imports.  Maybe they're not telling us the whole story, huh?

• WTO Director General Pascal Lamy, channeling Cato's Dan Ikenson, explains in the FT why "Made in China’ tells us little about global trade": "As recently as 30 years ago, products were assembled in one country, using inputs from that same country. Measuring trade was thus easy. 2011 is very different. Manufacturing is driven by global supply chains, while most imports should be stamped “made globally”, not “made in China”, or similar. This is not an academic distinction. With trade imbalance causing friction between leading economies, the measures we use can gravely exacerbate geopolitical tensions at a time when co-operation is more vital than ever."  Good stuff from DG Lamy, but, yes, it should all sound very familiar.  However, I did find this stat to be new and interesting: "Measures we use also change the way trade affects jobs too. Research on Apple’s iPod shows that out of the 41,000 jobs its manufacture created in 2006, 14,000 were located in the US. Some 6,000 were professional posts. Yet since US workers are better paid, they earned $750m, while only $320m went to workers abroad. Indeed, the iPod may have never existed if Apple had not known that Asian companies could supply components, while both Asian workers and Asian consumers would manufacture and buy it. Statistics that measure value added can provide a more reliable way of seeing how trade affects employment."  And speaking of the WTO and trade statistics, the trade body is hosting a big seminar on the subject this week.

• The Heritage Foundation's Anthony Kim explains just how far Colombia has come in terms of economic and political freedom.  Maybe it's time we implemented that FTA, huh?

• China expert Lee Miller explains why the conventional wisdom (and hope?) that China's banking sector will be more, ahem, reserved in 2011 may be misguided.  Bizarre stuff.

• America is silly rich and relatively equal.  Also from the NYT's Economix blog comes your chart of the day on global income inequality, which shows that (i) contrary to the breathless claims of certain lefty bloggers out there, the United States is absolutely nothing like Brazil (or other major developing countries) when it comes to income inequality;and (ii) the "bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants" and "about as rich as India's richest."  Check it out:

• The always-great Becker-Posner Blog has more on inequality here (and here).  It's nothing groundbreaking, but definitely worth a read.

• More of the same: US manufacturing sector expands for the 18th straight month. Yawn. BUT, there is this little nugget: "The ISM Employment Index increased in January to 61.7%, which is the 16th consecutive month of growth in manufacturing employment and the highest reading for the ISM manufacturing employment index since April of 1973."  Don Boudreaux has more insights, including a link to a neat new story from MSNBC on the state of US manufacturing, here.

That should keep you busy for a while.  Now get to reading!

Monday Quick Hits

Here are some headlines to tide you over until tomorrow's big State of the Union address and its inevitably depressing depiction of "free trade" and "competitiveness" as "exports" and "subsidies," respectively:

• CHINA INFLATION ALERT!  Asia expert Lee Miller sends me tons of juicy news on China's (possibly) skyrocketing inflation.  Here are some highlights:  First, AmCham China's 2010-2011 China's Business Report finds that "Finding enough qualified staff is the No. 1 business challenge, and competition is picking up not only between U.S. and other foreign companies but between U.S. and Chinese companies -- both private and state-owned enterprises (SOEs)."  Second, Diana Choyleva writes a must-read op-ed in the WSJ Asia, concluding: "It's not just the prices of consumer goods and services. Asset price inflation, most famously in real estate, has been accelerating; as has wage inflation. All of this should make the thousands of investors looking to jump onto the China bandwagon skeptical of what they're being told. Regardless of Beijing's claims of prudent economic management, excess money is sloshing around and overheating China's economy, thanks to the huge monetary overhang from China's post-2008 stimulus. Beijing clearly panicked when the global financial crisis hit and stepped on the monetary accelerator. It halted the ascent of the yuan by re-pegging to the dollar in mid-2008 (so that exports could become cheaper), it stopped sterilizing the still-massive foreign exchange inflows (so these inflows directly entered the money supply) and ordered banks to lend historic amounts of credit. The increase in broad money was a massive 39% of GDP in 2009 and 30% in 2010, compared with a previous peak of 27% in 2003. The Chinese express alarm over Western quantitative easing efforts these days, but China's own monetary loosening beats all that."  Third, AFP reports that "China's main export region in the south will raise minimum wages by an average 18.6 percent, marking the second hike in less than a year as soaring food costs hit the country's millions of poor."  Finally, the Global Times reports that "The People's Bank of China (PBC) will print 1 trillion yuan ($151 billion) worth of new bank notes this year, but officials refuted claims that the announcement had anything to do with inflation, the Xinhua News Agency reported Wednesday." That last story might be nothing, but after reading the first three, are you willing to bet on it?

• David Harsanyi cites "Red Dawn" in his op-ed on the baselessness of the current Sino-phobic hysteria in the US.  Thus, he gets a shout-out from this Red Dawn-loving blogger.

• Joseph Sternberg provides in the WSJ a rather convincing argument as to why we shouldn't expect China to "re-balance" anytime soon.  Sternberg points out several aspects of China's banking sector that lead to a bias against domestic consumption in favor of export industries (especially state-owned ones).  His conclusion: "China's investment-driven growth has paid off so far but may already be witnessing declining marginal returns. McKinsey estimates that China now needs to invest $4.90 to produce each dollar of GDP growth, up from $3.30 in the early 1990s. Shifting to a new model will require changes at every level, right down to the bank branch. That's hard to do when you're preoccupied asserting economic might you may not have."

• Cato's Mark Calabria provides a really simple solution to White House complaints about China's preventing the appreciation of its currency by purchasing US government debt: stop borrowing money!  He states, "When China receives dollars for the many goods it sells us, instead of recycling those dollars into the purchase of US goods, it uses that money mostly to buy US Treasuries and Agencies (Fannie/Freddie securities).  These large Treasury/Agency purchases (foreign holdings of GSE debt are over $1 trillion) have the effect of increasing the demand for dollars and depressing that for yuan, resulting in an appreciation of the dollar relative to the yuan. This connection exposes the hypocrisy of President Obama’s complaints about China currency manipulation – without massive US budget deficits, China would not be able to manipulate its currency to the extent it does. If the US wants to end that manipulation, it can do so by simply reducing the outstanding supply of Treasuries and Agency debt."  Exactly.

• A new study on outsourcing from Duke University's business school shows that "American companies opting to hire offshore labor are doing so because of a domestic shortage of skilled workers, not a desire to save on labor costs."  Do you hear that hissing sound?  Yep, it's the deflation of yet another protectionist narrative.  (Oh snap.)

• AEI's Mark Perry provides our annual reminder that those preaching the "death of American manufacturing" are not just greatly exaggerating but also flat-wrong.  In so doing, Perry provides two charts-of-the-day (below) and smartly concludes: "America still makes a ton of stuff, and we make more of it now than ever before in history, but we’re able to do it with a fraction of the workers that would have been required in the past. We’re still the world’s leading manufacturing economy by far, thanks to the world-class productivity of American manufacturing workers, the most productive in the world. Instead of bashing China, Korea, and Mexico for competing against our manufacturing sector and exaggerating the decline of our manufacturing sector, Americans should take more pride and celebrate our status as the world’s leading manufacturer."  Amen.  I'd only add one thing: is it really good policy to rest the hopes of the US labor force on a sector (manufacturing) that has experienced awesome and steadily improving productivity (i.e., increasing output with a shrinking workforce) over the last few decades?  Hmmm...

That's all for tonight, folks.

Wednesday Quick Hits

Lots of interesting reading over the last few days, so let's spare the pleasantries:

• If you want to know how China's efforts to control the nominal RMB-USD exchange rate lead to serious inflation (and thus an increase in the real exchange rate) read this.  (And then ask yourself this: "Hmm, is this really indicative of a sound economy that will inevitably overtake the United States in the very near future?")  AEI's John Makin has more good data on China's inflation problem here, although I think his solution is a tad simplistic.

• In a great NYT op-ed Harvard's Mark Wu provides three indisputable reasons why China's currency policies aren't the problem for the United States that many, like Sen. Chuck Schumer, breathlessly claim.  My favorite part: "I recently did an analysis of the top American exports to our 20 leading foreign markets, and found little evidence that an undervalued Chinese currency hurts American exports to third countries. This is mostly because there is little head-to-head competition between America and China. In less than 15 percent of top export products — for example, network routers and solar panels — are American and Chinese corporations competing directly against one another. By and large, we are going after entirely different product markets; we market things like airplanes and pharmaceuticals while China sells electronics and textiles."  Cato's Dan Griswold also pens a nice summary on the same issue, and NRO's Rich Lowry broadens the view a little.  [UPDATE: Fresh from Worldtradelaw.net's indispensable trade headlines comes a new CNN report on a debate between Fred Bergsten and Jim Chanos on whether the yuan is undervalued or overvalued.]

• Meanwhile, China's selling US Treasurys again.

• HotAir's Jazz Shaw provides an excellent example in the Ecuador-Chevron kerfuffle of why trade agreements' investor-state protections - such as the mandatory resort to third-party dispute settlement - aren't (as many misguided trade critics claim) pernicious and instead encourage foreign investment (and thus economic growth and, of course, jobs).

• At the request of the Chinese government, "China's five largest banks have pledged to lend more to government-subsidized housing projects in 2011."  What could go wrong?  Oh, right, that.

• Green trade disputes are suddenly a hot topic!  First, Sen. McCain tells Brazilians that US ethanol policies are ripe for a WTO challenge.  Then, Reuters wonders if a "solar trade war" is on the horizon because so many governments are subsidizing the heck out of their solar industries.  Finally, former WTO Appellate Body chair James Bacchus proposes that the US and China negotiate a pre-emptive ceasefire on gree trade disputes in order to avoid a serious conflagration.  If only someone had been warning us about all of these problems for, oh I don't know, the past 20 months or so.  If only....

• The Economist provides our super-cool graphic of the day, which shows that the key to cleaner energy consumption is economic development, not top-down government control.  Shocking, I know:

• The Seattle Times' Bruce Ramsey provides an excellent Korean history lesson which shows that Korean opposition to KORUS and other FTAs is pretty silly.

• Doug Holtz-Eakin, James Capretta and Joseph Antos write a must-read op-ed systematically debunking the liberal/Democrat talking point that repeal of ObamaCare will increase the US budget deficit.

• Finally, this is hilarious, and so is this.

Enjoy!

Wednesday Quick Hits

Lots of headlines since last week, so let's get right to it:

• Cato's Dan Ikenson provides some much-deserved criticism of USTR's jubilation over the WTO's totally-expected ruling that last year's Section 421 decision against Chinese tire imports was consistent with global trade rules.  (Others agree.)

• AEI's Claude Barfield rightly admonishes the Politico's John Maggs for his reallllly bad reporting on US FTAs' likely path through Congress.

• Cato's Dan Mitchell and Chris Edwards explain just how embarrassing it is that, with Japan's decision to lower its corporate tax rate, the United States now has the highest statutory corporate tax rate of all OECD nations.  Edwards provides a great chart: 

Me: The next time that a protectionist complains about imports, outsourcing and a lack of American competitiveness, feel free to share this chart with him/her. 

• Columnist David Harsanyi explains that Americans are just plain wrong about the state of American manufacturing. (Gee, I wonder where they could have gotten the wrong idea?)

• Revealing WSJ interactive charts on US debt levels.  Guess what? Everyday Americans have moderated their debt levels, but Uncle Sam's tab just keeps on growing and growing and growing.

• Paul Krugman, mercantilist.

• AEI's Phil Levy (at a very interesting forum on the National Export Initiative) explains, starting at about 1:37 the pitfalls of trying to sell free trade through mercantilism (i.e., free trade = exports = jobs) approach (h/t Bryan Riley):

• Chinese inflation is becoming a pretty serious issue.  More here.

• Festivus is real.  Bring on the airing of grievances and feats of strength!

• Finally, GMU's Don Boudreaux takes to xtranormal to create a nice little cartoon explaining the idiocy of protectionism (h/t Simon Lester):

 That should keep y'all busy for a while.  Enjoy!

Wednesday Quick Hits

Just a few links tonight for your reading pleasure:

• Forbes rates the 10 worst cars of 2010, and you'll never guess what's all over the list. (Oh wait, yes you will.). "The real secret, McElroy adds, is that almost every hybrid on the market today is a flop: 'I guarantee you every single automaker is losing money on every single hybrid they build, with the exception of the Prius.'  Hybrids are losing money because consumers just aren't buying them. In the 12 years since hybrid vehicles have been on the American market, and with seven mainline brands selling more than 20 hybrid options--everything from the Lexus HS250h sedan to the Cadillac Escalade Hybrid SUV--hybrids still make up just over 2% of the market. And half of that belongs to the Prius."  The SmartCar is also in the top 10.  And once again, we shockingly find that there's money in making cars that people, you know, actually want.  Will Washington ever learn? 

• Defunct, WTO-illegal law is still paying out millions to its chosen benefactors.  (Zombie protectionism continues to roam the earth.)

• AEI's Phil Levy tells us everything we wanted to know about the KORUS but were afraid to ask.  A great rundown of most of the big issues surrounding the FTA (and I'm not just saying that because I was cited).

• In India, higher inflation and input costs spell trouble for domestic manufacturers.  Is this what American firms (many of whom rely on imported inputs) have to look forward to in the wake of QE2?  Awesome!  

• US farm exports set to break records in 2011, and the WSJ wonders if we're witnessing the next asset bubble in the booming US farmland market.  These are two very important things to consider as our politicians debate whether to extend our massive, trade-distorting agriculture subsidies in the next Farm Bill.

That's all for tonight, folks.