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The Economics of COVID-19: How to Build the New Normal (UPDATED)

by D.J. McGuire

Today, Americans are undergoing dramatic social and economic changes as a result of the coronavirus, with some of the more dramatic affects still to come.

The crisis will either “go big” (a massive spike in cases that overwhelms our medical industry and forces life-and-death choices on a massive scale) or “go long” (an extended period of social distancing to prevent the former). I shouldn’t comment very much on the medical impacts, as I am not an expert in the field, and I have grown in humility to the point where I will avoid commenting where I think I shouldn’t.

The economic impacts, however, are also dramatic, and here I’d like to think I can offer more useful advice and ideas. There are calls for a very dramatic increase in government spending, which is understandable. However, we can also make sure that the economic assistance that is planned can be done in ways that preserve the concept of limited and efficient government.

Moving from the Welfare State to a Negative Income Tax

One thing this crisis should do is force a complete review of the 20th-century welfare system currently in place. A system incentivizing people to work for someone else may have made sense in the large-industry era of the 1950s, but with small business formation on a downward slope even before COVID-19, it is no longer fit for purpose. We need to ask ourselves if we really want a large and intrusive government taxing the rich for the purpose of regulating the poor.

In the short term, this can be addressed via either direct payments to Americans or (as I would prefer) an expanded unemployment insurance system that allows for 100 percent of lost wages paid and removes employment-search requirements. Whichever option is taken (and it is likely Congress will use both), they can and should be used to transform our current patchwork of programs into a simple Negative Income Tax as proposed by Milton Friedman. This would ensure government aid to those hard on their luck is more efficiently sent, less expensive to taxpayers, and no longer discouraging entrepreneurship.

If the Fed insists on lending, let more businesses borrow from them

Of course, the above reform won’t mean much to businesses that are in trouble as a result of social distancing. Many industries have been asking for bailouts. Ironically (but understandably), the American people are much more likely to support aid to businesses that are too small to make their voices heard. Meanwhile, there are already arguments about whether the funds should be given as loans, equity purchases, or no-strings payments.

While I reserve the right to change my view on this particular matter, it appears to me that one option is being overlooked: the Federal Reserve. To be clear, I have problems with the Fed’s recent actions. I don’t think moving away from interest rate normalization was particularly helpful (and if the Dow Jones was any indication, I’m not alone).

Nor do I think the de facto return to quantitative easing makes sense from a monetary policy perspective. However, if the Fed is determined to monetize debt wherever it can be found, we should make it easier for smaller businesses to sell bonds. Larger corporations should find it quite easy to loan to a lend-mad Fed (indeed, this is reason enough for any discussion of corporate “bailouts” to be given serious skepticism). Smaller firms shouldn’t be left out of the buying spree. This doesn’t necessarily rule out the need for temporary government support for small businesses, but it should at the very least make it less urgent.

Regarding Health Care Economics: End COPN and Re-engineer Medicaid

One of biggest factors in the push for social distancing has been the danger of overwhelming our health care capacity. If health care supply is a concern (and it is), governments need to get out of the business of restricting it. Certificate of Public Need regimes have been shown to make health outcomes worse even before COVID-19 showed up. The idea that any future hospital or health care facility needs to prove a “need” in the aftermath of COVID-19 is patently absurd.

UPDATE: Governor Northam suspended COPN requirements for hospitals to add beds over the weekend (Patch).

That said, the health care market has one unique characteristic that leads to trouble – a complete lack of credit checks for services rendered. Hospitals in Virginia have complained about this for years – mainly, as the excuse for maintaining COPN to compensate them with oligopolistic power. It has also been one of the reasons hospitals tend to be more sanguine about government-provided universal health insurance (albeit not in a manner as unrealistic as “Medicare for all”).

Unfortunately, much of the discussion about health insurance has been focused on the unique problems of poor Americans, rather than the unique problems of sick Americans. In property and casualty insurance, there is no such confusion: the threat of flooding is such a danger that private insurers won’t touch it unless it’s via the National Flood Insurance Program.

A similar mindset in health insurance would dramatically improve the industry. It would allow healthy Americans (including poor Americans) the chance to buy insurance they could use, while the government would provide a backstop for Americans with problematic health conditions. If initial reports on COVID-19 are accurate, many more Americans will fall into the latter category as a result of the virus. Shifting government-supported health insurance from income to illness would be more practical and more sensible.

Limited government can survive the pandemic, but like everything else, it must adapt

The above measures would, I hope, enable government to be dynamic enough to address the economic effects of the crisis without sacrificing either the dynamism of freer markets or the concept of limited government. Yes, government spending and power will grow in some ways, but they can (and should) be reduced in others. If we do this right, we can transform and revitalize our governments, rather than merely expand them.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

On the Latest Federal Budget Data

by D.J. McGuire

The Treasury Department released the latest data on the budget for Fiscal Year 2019. Most of the focus was on the deficit figure, which rose to $984 billion (WaPo).

The U.S. government’s budget deficit ballooned to nearly $1 trillion in 2019, the Treasury Department announced Friday, as America’s fiscal imbalance widened for a fourth consecutive year despite a sustained run of economic growth. The deficit grew $205 billion, or 26 percent, in the past year.

The country’s worsening fiscal picture runs in sharp contrast to President Trump’s campaign promise to eliminate the federal debt within eight years. The deficit is up nearly 50 percent in the Trump era. Since taking office, Trump has endorsed big spending increases and steered most Republicans to abandon the deficit obsession they held during the Obama administration.

Give the WaPo authors (Heather Long and Jeff Stein) some credit. They don’t reach for the usual crutch (the 2017 tax cut) until the sixth paragraph. As can be seen in the revenue and spending breakout (many thanks to Evan Ryser for compiling the data), income tax receipts rose about 5 percent in FY2019 after being flat in FY2018 (the tax reductions having eliminated the revenue growth expected from economic growth that year).

Overall revenues went up 4 percent, but that couldn’t keep up with the 8 percent increase in spending …

… which was a problem for both parties.

My old party (the Republicans) will be pleased to see revenues gaining again – it makes it easier for them to rail against higher spending. Unfortunately for them, the major drivers of the spending hikes were areas where Trump insists spending reductions are anathema – Medicare, Social Security, and Defense (in that order). Just behind Medicare was Interest on the existing (and rising) debt. Those four categories alone accounted for over 2/3 of the FY2019 spending increase – and so long as Trump leads the Republican Party, none of its elected officials will address them.

As for my new(-ish) party (the Democrats), the top two categories are also sacrosanct to their voters. Democratic candidates looking to address deficits will need to address either entitlement reform or tax increases. The latter will put off voters (and rightly so). As for the former, well, entitlement reform never really had a political moment (despite the efforts of a few to bring it up) but it certainly isn’t having one now.

In other words, while some in both parties will still try to talk a good game about our fiscal imbalance, far fewer will be prepared to walk the walk.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

Insulin: A Story of Market and Government Failures

by D.J. McGuire

One of the more confusing – and for diabetes sufferers, outright frightening – market realities is the recent increase in insulin prices. Given that insulin is not exactly a new product (first discovered in the 1920s), a sudden increase in price seems a bit odd at first. When combined with numerous anecdotes about patients reducing their intake of insulin for financial reasons, the failure of the insulin market becomes a matter of life and death.

When something like this happens, economists call it market failure – and in this case, it usually has three complementary causes: a spike in demand, market concentration, and barriers to entry. All three exist where insulin is concerned, providing an example not only of market failure, but government failure as well.

Whether it’s due to greater awareness inspiring more diagnoses or poorer diets, diabetes is more prevalent today than even 20 years ago. According to the Centers for Disease Control and Prevention, diabetes sufferers numbered over 23 million in 2015, more than two-and-a-half times the number in 1995. Even in a competitive market, demand growth like that will lead to price fluctuations (thankfully, overall inflation has been rather tame during this period).

Still, if the insulin market were competitive, one would expect existing firms to largely hold any price increases to inflation over time – absent a dramatic increase in resource cost which does not seem to be present here. That simply isn’t the case. As Nicholas Florko notes in StatNews

Just three pharmaceutical companies, all of them massive, global enterprises, control the vast majority of the $27 billion global insulin market: Sanofi, Eli Lilly, and Novo Nordisk. And they always have, virtually since the drug was discovered back in 1921.

One way economists measure market concentration is the four-firm index. The larger share of the market controlled by the four biggest firms, the closer to an oligopoly it is. In the case of insulin, there isn’t even a fourth firm, so we’re talking about a ratio of 100. The opportunity for anti-competitive profits is pretty large – and indeed, according to healthline, that opportunity was already taken back in the last century.

The insulin market is ripe for market failure in a similar manner to those for all life-preserving drugs: the consumers are unable to leave the market. While this barrier to exit certainly makes it harder to bring competitive pressures on firms, free entry into the market can usually do the job.

Indeed, certain markets that look monopolistic or oligopolistic can still have competitive pricing and quality if the existing firms fear new entrants. Such markets may not be competitive, but they are contestable, which for consumers would be a distinction without a difference.

In the case of insulin, however, there is a barrier to entry – the Food and Drug Administration.

To be clear, I am not referring to the usual role the FDA plays in regulating new entrants into drug markets. That can impede competition, but the justifications for the FDA’s regulatory role should be obvious. In this case, however, a combination of changing law and apparent FDA inertia may have created the perfect storm for insulin consumers.

In 2010, as part of “Obamacare,” Congress created a fast-track for FDA approval of biologics (simple definition: drugs that are created within living things rather than via chemical reactions). Insulin falls into this category.

However, the insulin fast-track doesn’t come into force until next March. Making matters worse, various FDA interpretations of the law virtually ensured any attempt to create a generic alternative to insulin (a “biosimilar”) would go nowhere until next spring. Andrew Dunn describes the problem in Biopharmadive:

…when Congress established a path to regulatory approval for biosimilars in 2010, lawmakers created a gray area for manufacturers seeking OKs for insulin copies prior to March 2020. With that transition date approaching, drugmakers run the risk of being caught between two legal frameworks governing approval of copycat insulin products.

The FDA hasn’t solved the problem, saying it’s restricted by law from converting pending applications under the older legal pathway to the new framework governing biosimilars.

What does this mean for would-be competitors to the Big 3 of insulin? Dunn explains:

Suppose you’re a pharma exec with an (sic) copycat insulin in your drug pipeline. Today, your R&D head comes into your office and gives good news — clinical testing is done and the therapy is set to be submitted for regulatory approval.

Your drug could feasibly reach the market under two legal frameworks.
Framework A: The Hatch-Waxman pathway, which would treat your product as a “follow-on biologic,” not legally a biosimilar but functionally analogous.

But there’s a risk: The FDA has stated it won’t approve such applications for insulin products after March 23, 2020. If your product submitted via Hatch-Waxman legal pathways doesn’t get a regulatory OK by then, you’ll have to withdraw and start over with Framework B, which means paying more user fees and waiting even longer for approval.

Framework B: The biosimilar pathway, created in 2010 through the Biologics Price Competition and Innovation Act.

Your drug would be treated as a biosimilar, if approved. However, biosimilars, like generics, need reference products. And all the branded insulin products were approved under Framework A, Hatch-Waxman, meaning you can’t use those as a reference product for a biosimilar until the FDA converts those licenses on March 23, 2020. Effectively, you can’t submit your copycat insulin as a biosimilar until then.

Neither framework is of much use to you today.

Dunn refers to the result as a “regulatory dead zone” which effectively blocks anyone looking to enter the insulin market. He’s not wrong.

The FDA says it is merely interpreting the law – which also provides an avenue to change the law: Congress. If Congress were to move the date up from next March to ASAP, it would at least remove this barrier to entry and no longer have government failure being added to market failure. Then we can figure out if the insulin market will be competitive or remain concentrated.

As it is, Dick Armey’s “invisible foot” is causing serious problems in the insulin market.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

The Purge of Freer Market Defenders from the Trumpist GOP, Part II

by D.J. McGuire

Last week I reviewed how the conservative movement has begun to redefine itself in a way that no longer includes supporters of freer markets. That continued yesterday morning when Henry Olsen – best known recently for his hilarious mislabeling of Justin Amash, see Charles Sykes in The Bulwark for more on that – took aim at those of us who oppose Trump’s tariffs and prefer freer trade.

Olsen, returning to the Washington Post for his latest debacle, insists that anyone who opposed protectionism has embraced the concept of “no moral standard.” He really said that.

Cato’s Scott Lincicome inadvertently let the cat out of the bag in his contribution to the National Review compilation. In attacking President Trump’s attempts to recast U.S. trade policy, he asks the key question: “Why should certain American industries and workers have a moral claim to government protection? Why should government prioritize those workers’ living standards above their fellow citizens?” If there is no moral standard against which we can measure market outcomes, then Lincicome is right to protest. But if there is such a standard, then market interventions are not only morally justified, they become morally mandatory. And that is simply unacceptable for the fundamentalists.

My guess is Olsen, upon reading Lincicome (which you, dear reader, should also do, by the way), fell upon the words “American industries and workers have a moral claim to government protection” and immediately decided to himself, “of course they do,” and…well, here we are.

My focus – and based upon Lincicome’s praise of Don Boudreaux’s Cafe Hayek post on the subject, his too – was on the word certain. In effect, Lincicome is asking: Are steel and aluminum workers more “moral” than automobile workers whose industry will be damaged by higher steel and aluminum costs? Conversely, are auto workers more “moral” than those working in fields impacted by the cost of cars and of trucks? Construction workers? Taxi drivers? Police officers?

Opposition to tariffs is based upon the concept that no American – whatever the field – is more “moral” and thus more worthy of market intervention on their behalf. This includes workers in firms that have yet to exist, but will when entrepreneurs can make use of funds saved by Americans who aren’t paying higher import prices.

As Boudreaux himself puts it…

Lincicome’s point begins with the reality that protectionism artificially helps some American industries and workers only by artificially damaging others. And so protectionism is unethical because it elevates the welfare of those who reap the benefits of protectionism over that of those who necessarily suffer – and protectionism performs this inequitable elevation for no reason other than the fact that its beneficiaries possess more political power or saliency than do its victims.

Lincicome’s, and all free-traders’, moral standard is one of equity: no one gets special favors. The fact that Olsen misses this core element of the case for free trade reveals the intellectual weakness of those who struggle to do the impossible, namely, to supply credible ethical and economic justification for Trump’s economic nationalism.

I agree that providing credible justifications for Trump’s protectionism is impossible, but Olsen’s effort is telling for another reason: it is more evidence that the Trump-led Republican Party is no longer interested in defending freer trade, or even in defending freer markets in general.

Those who, as I do, still defend them should take heed – and as I did, take their leave.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

Free-Market Supporters Won’t Go Away Just Because Conservatives Don’t Want Us

by D.J. McGuire

One of the great arguments within the conservative movement revolves around how much it has changed since Donald Trump became a presidential candidate four years ago. This is the year we are finally beginning to see a sorting out – and for those of us who define ourselves as economic conservatives, the music has stopped without a chair.

It began with the heated reaction to Congressman Justin Amash, a founder of the House Freedom Caucus and one of the most articulate proponents of limited and frugal government (indeed, I’ve had my own disagreements with him on foreign policy). Amash lost nearly all of his friends in the conservative movement, to say nothing of the Republican Party, by his decision to support impeachment of President Trump based upon the information in the Mueller report. Aaron Pomerantz provides the details and the inconsistencies in the Bulwark.

The House Freedom Caucus seemed more than able to rally and condemn Amash, but were strangely absent from the conversation about the budget, allowing a series of financial decisions that contradict the very principles of their founding. And not for the first time.  House Freedom Caucus member Mick Mulvaney, for example, wrote in the Wall Street Journal in 2015 that the government couldn’t afford new deficits, and yet completely switched positions two years later when he’d become Trump’s budget director. It seems that “the party line” has become more important than the fundamental principles that are meant to underlie the party itself.

At first, this may have seemed to be a simple case of party tribalism over principle, which is hardly new or unique to Trump. That changed dramatically when Sohrab Amhari decided to redefine conservativism in First Things. Ostensibly an attempt to criticize the political modus operandi of National Review‘s David French, Amhari took the opportunity to redefine conservatism itself. Robert Tracinski has the details in the Bulwark.

In the first sentence of his missive against supposed “David French-ism”—is there anything more Trumpian that reducing big ideological questions to a personal grudge?—Ahmari links to a manifesto published in First Things last March which denounced the “Dead Consensus” of the right.

The First Things manifesto begins with sneering references to “individual autonomy” but then moves on to denouncing “the cult of competitiveness,” “free trade,” “economic libertarianism,” “the demands of capital,” “investors and ‘job creators’ “—note the gratuitous scare quotes—and “warmed-over Reaganism.”

I predicted a few days ago that we were only weeks away from conservatives trashing Ronald Reagan in order to bolster Trump. It turns out I was behind the curve. It was already happening.

The signatories of that manifesto don’t just want to eject the free-marketers. They want to welcome in the nationalists: “We embrace the new nationalism insofar as it stands against the utopian ideal of a borderless world.” They talk about “communal solidarity” and “the human need for a common life.” And who are the bad guys? Here we get a lot of familiar alt-light rhetoric about supposed “jet-setters,” “citizens of the world” who can “go anywhere” and “work anywhere” in a “borderless world.” I’m surprised they didn’t just go straight to “rootless cosmopolitans.”

In short, Amhari is doing more than just providing intellectual cover for obsequious to Trump (for that, seek out Henry Olsen’s recent Op-ed in the Washington Post, if you must). He’s using Trump to redefine conservatism as a new collectivist enterprise replacing freedom with blind faith and replacing persuasion with coercion.

For those of us who appreciate economic freedom – or even political freedom – there is no place, period.

Quite a few on the right have provided the equivalent of the Luke Skywalker response to Amhari (“This is not going to go the way you think”), but they’ve left out one crucial component: what economic conservatives will do once we’re read out of the conservative movement and out of the Republican Party.

People don’t just go away; they react. Thus it will be with economic conservatives, too. To be sure, some will stay where they are and fight an increasingly desperate rear-guard action within the movement and within the GOP. Many more will simply leave both and come to terms with the dizzying reality that they – we – are the new political center.

More than a few, however, will follow me into the Democratic Party on the assumption that partial collectivism – for all its many faults – remains superior to the full-throttle theocracy that Amhari and those like him will redefine as “conservatism.” That’s going to come as a slow-motion shock – and not just to Republicans or to conservatives (however they are defined). Democrats will start to find more robust internal arguments about economic issues.

One can already see it happening today. Contrary to the confused nostalgia of several presidential candidates, the overwhelming majority of Democrats now support free-trade agreements, while barely a third consider reducing trade deficits to be a priority (Pew Research). Democrats in 2019 are already more desirous of their party moving rightward than in 2016 (Pew Research). Here in Virginia, the last Governor to propose a tax increase was…Republican Bob McDonnell in 2013. Neither of his two Democratic successors followed suit (one of them – Terry McAuliffe – even proposed a corporate income tax reduction during his term in office). The leading Democrat for the presidential nomination – by far, albeit for now – was Vice President during the formation of the Trans-Pacific Partnership. Even those who support Universal Basic Income are now doing so not merely as a redistribution policy, but also as a way to dismantle the welfare state apparatus and end government regulation of the poor.

To be fair, the Democratic nominee (whoever he or she is) will almost certainly attempt to run to the president’s left on many economic issues, but not on all of them. In time, especially if the Republicans are as dismissive of us as First Things has become, economic conservatives will continue to move the Democrats toward freer markets and exchanges. That will change both parties, to say nothing of the body politics as a whole, in ways that are not anticipated…

…and shouldn’t be feared.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

Trump’s Bad Trade ‘Deal’ With China Takes Shape

by D.J. McGuire

One of the more maddening defenses of Trump’s protectionism is the insistence that his tariffs and trade wars are “temporary.” Give him the chance, his defenders say, and he’ll get “better deals” that remove tariffs all around.

This week’s Bloombergrevelation about trade talks with the Chinese Communist Party completely destroyed that argument.

China is considering a U.S. request to shift some tariffs on key agricultural goods to other products so the Trump administration can sell any eventual trade deal as a win for farmers ahead of the 2020 election, people familiar with the situation said.

The step would involve China moving retaliatory duties it imposed startinglast July on $50 billion worth of U.S. goods to non-agricultural imports, said the people, who asked not to be identified because the discussions were private. The shift is because the U.S. doesn’t intend to lift its own duties on $50 billion of Chinese imports even if an agreement to resolve the trade war between the two nations is reached, one the people said.

Let’s examine the full implications of this nonsense. First, it’s abundantly clear that Trump has no interest in ever removing the tariffs he has imposed. This should surprise no one. Donald Trump was President of the United States for less than an hourwhen, in his own inaugural, he insisted, “Protection will lead to great prosperity and strength.” Within fifteen months, he had cleared out the bureaucratic resistance to his dangerous impulse and the tariff spree began. The idea that he would ever get rid of them was foolhardy.

The repercussions of this are now beginning to be seen, in geopolitics as much as economics. The Administration that touted itself as being able and willing to “stand up” to Beijing has been reduced to begging the CCP to switch its tariffs to less visible products.

Meanwhile, the regime gets a free pass on threatening Taiwan, strong-arming its neighbors in the South China Sea, using Kim Jong-un as a foil, and persecuting hundreds of thousands of Uighur Muslims in occupied East Turkestan.

The president who as a candidate railed against the rest of the world “laughing at us” is only spared hearing side-splitting gales from Zhongnanhai due to the distance of the Pacific Ocean.

The rest of the world is taking notice and will act accordingly. Those hoping for removal of tariffs now must accept the fact that they’re not going anywhere. The world will be a poorer place, with higher prices and lower production across countries and sectors worldwide.

Economically, America has been shielded by timing: we’re in the late stages of a long economic recovery temporarily buttressed by a Keynesian sugar high disguised as a “supply-side” tax cut. That can’t last forever. The economic reckoning will be painful. The geopolitical effects will as well.

The one silver lining is this: no one can credibly claim Trump’s endgame is about reducing or eliminating tariffs. Anyone who still tries peddling that nonsense is gaslighting everyone in the conversation, themselves included.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

In Defense of Freer Trade

by D.J. McGuire

As we careen towards another presidential election, one of the issues that has been once again shunted to the side is international trade. This is a mistake, especially for Democrats looking to expand their coalition (or hold the expansions achieved in last year’s Congressional election). Before we get to that, however, we must revisit why protectionism is wrong, and freer trade is better for Americans and for everyone else.

America has had a conflicted history when it comes to trade. One would presume that protectionism had an advantage when tariffs were our primary source of revenue. In fact, protectionists in the nineteenth century preferred tariff rates so high that revenue would fallbecause imports would so low. Indeed, it was just such an economic platform that enabled the Republicans to win the election of 1888 (despite losing the popular vote) and enact the McKinley Tariff. It is the most common historical marker Donald Trump uses in his own speeches when he defends his protectionist outlook.

Here’s what he doesn’t mention: the tariff was so unpopular that the Republicans lost half their House seats in the election of 1890 (including McKinley’s) and the Democrats took back the White House in 1892. By the time McKinley returned to national politics (as the Republican nominee for President in 1896), he had remade himself as a defender of the gold standard.

A generation later, the Republicans once again forgot the economics of freer trade – and the rest of us suffered the consequences. The Smoot-Hawley tariff of 1929 is still mentioned in Economics classes today as an example of short-sighted policy. It either caused or exacerbated the Great Depression (depending upon which economist is talking). The political effects were also acute: the Republicans were denied a Congressional majority for the over a decade and a half, and after Hoover’s defeat in 1932 they would be out of the White House for twenty years. Congress became so mired in self-doubt that it handed the presidency de facto legislative authority to reduce tariffs (before taking it back under Trade Promotion Authority in the 1970s).

Thus was the “free trade” consensus established, a consensus that started fraying when the Democrats began flirting with protectionism in the late 20th century (before the Clinton era), and is now in serious trouble due to the populist takeover of the GOP. While I prefer to use the term “freer trade” (fully “free trade” is an impossible absolute), I am deeply concerned about the protectionist retaking control of the Republican Party, for reasons both economic and political.

Economically, freer trade means more options for Americans and more efficient markets for them. Please note, I did not limit those benefits to America “consumers” – and for good reason. The first tariffs Trump imposed in 2018 were on steel and aluminum, which hits firms across the country with higher production costs. Those costs led to jobs unfilled, products unmade, services not offered, and prices increased.

Those are the direct impacts of tariffs on inputs, but tariffs on goods and services also damage economies indirectly. Higher prices on these goods and services lowers both Americans’ standards of living and their savings balances. Less money saved means fewer funds available for business to invest in themselves. Once again, that leads to jobs unfilled, products unmade, and services not offered.

So why does protectionism still seem so popular among the populist right and the American left? Status quo bias is certainly a part of it. The opportunity cost of protectionism is the loss of jobs and growth not yet seen, compared to disruptions that are easily seen. Trump’s behavior on the “Carrier deal” before he took office is a class example. As I noted at the time, “saving” jobs in one area costs jobs in another (and worse), but those costs are less visible.

Or at least they wereless visible. In the social media era, with access to information much easier, we are seeing more discussion of the overall effects of tariffs. What once required the ability to follow several academic journals now requires little more than following Scott Lincicome. Meanwhile, Boeing’s recent problems have been another revelation on the advantages of freer trade: greater choice of products, services, and inputs – or, as Jane McManusput it: “Was never so relieved to see ‘Airbus’ on my upcoming booking.”

As for the politics of trade, that, too is changing. As Trump increasing rebrands the GOP as the protectionist party it once was in the 1880s and in the 1920s, supporters of freer trade are finding Democratic voters far more receptive to their ideas than certain Democratic elected officials (Pew Research). Even in 2016, a majority of Democratic voters approved of free trade agreements, despite neither of the two major contenders for their nomination openly supporting them. Indeed, the 45% of Americans who supported freer trade agreements only found one November candidate who agreed with them on that issue – and that was Gary Johnson. Democrats looking to be the nominee in 2020 should take note of what the party’s voters actually believe on trade – rather than what protectionists in the party are telling them.

First and foremost, though, those of us who know the damage protectionism can do must speak out against it and ensure the arguments for freer trade are heard – and that is why this post is here.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

Do Lower Interest Rates Actually Make Income Inequality Worse?

by D.J. McGuire

Ever since John Maynard Keynes revolutionized the field of macroeconomics, left-wing and center-left politicians have included “expansionary monetary policy” – quoted because it’s the actual term – as part of their platform. Higher money supply and lower interest rates have been loudly endorsed by Democrats (and quietly cheered by many Republicans) since the Second World War at least.

President Trump himself has railed against the Federal Reserve’s recent (and paused) attempt to normalize interest rates from the period of extremely low levels following the Great Recession. Meanwhile, the left is also complaining loudly about income inequality, while recommending a radically expansionary monetary policy – known as Modern Monetary Theory – to “pay for it.”

The usual critique to “loose money” has been the threat of inflation. However, the lack of inflationary pressures during the past decade has eroded the power of that argument. Indeed, the lack of strength in the post-Great-Recession recovery has led many to wonder if quantitative easing was not expansionary enough.

A new paper from Ernest Liu (Princeton), Atif Mian (also Princeton), and Amir Sufi (University of Chicago) casts doubt on that theory. In fact, they propose that extremely low interest rates might have causedthe problems of slow growth and income inequality.

Liu, Mian, and Sufitheorize that excessively low interest rates – designed to encourage business investment – actually skew said investment towards larger and more dominant firms. This makes them moredominant in the process, turning more markets from competitive to monopolistic.

Now, microeconomic market structure normally isn’t considered a major factor in macroeconomic policies. In this case, however, Liu et al show that monopolistic markets lead to lower productivity and to slower growth. Moreover, while Liu et al don’t address income inequality per se, increased market power has been known to lead to suppressed wage growth and thus greater income inequality.

In short, Liu et al present an entirely different set of expected consequences for extremely low interest rates. Instead of faster growth, they lead to slower growth. Instead of higher productivity growth, the lead to lower productivity growth. While in theory enabling government to address income inequality, they actually exacerbate it by encouraging market concentration and monopolization.

More time and research is needed, of course, to see how much impact the market concentration effect truly has. More than a few economists will have questions about the paper, as it should be.

However, at the very least, advocates for looser money in general – and MMT in particular – might want to take into account the strong possibility that their methods are running contrary to their avowed policy goals.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

The Trans-Pacific Partnership Begins … Without the United States

by D.J. McGuire

Remember the Trans-Pacific Partnership? That was the major trade agreement between 12 nations, including the United States, that most Americans thought had died when Donald Trump pulled America out of it in early 2017.

Well, Trump may have pulled us out of TPP, but he didn’t kill it (Telegraph, emphasis added).

The world’s most radical trade pact has come into force across the Pacific as the US sulks on the sidelines, marking a stunning erosion in American strategic leadership.

The White House assumed that the TPP would wither on the vine without US impetus.Instead, long-standing US allies across the Pacific have brushed off pressure from Washington and forged ahead regardless with what is now known as the “anti-Trump pact”.

“America is the biggest loser,” says the Peterson Institute in Washington. The fall in food tariffs under the CPTPP means that US farmers will be undercut by exporters from Australia, Canada, and New Zealand in the lucrative Japanese market. Wheat from Canada will be $70 cheaper per metric tonne by 2020.

Australia, Canada, Japan, Mexico, New Zealand, and Singapore have ratified the agreement (Quartz). They will all soon benefit from the tariff reductions that will take place (Reuters). Those of us old enough to remember when Japan was considered the corporatist and protectionist bete noire of the free world can only marvel as Japan moves into agreement while the United States does not (Japan News and Nikkei Asian Review).

Much of the coverage regarding America’s exclusion is focused on the man who pulled us out – Donald Trump. My opposition to the president – politicallyand personally– are well known to readers here. In this case, however, Trump is far from the only culprit. His opponent – yes, the one for whom I eventually voted – walked away from her support for TPP during the campaign. Indeed, she walked away from freer trade in general – a policy and political mistake that I firmly believe led directly to her defeat in several states where Gary Johnson (the one pro-TPP candidate) won more votes than Trump’s margin of victory (Michigan, Pennsylvania, Wisconsin, Florida, and Arizona).

The two nominees, sadly, reflected political parties that were, at the time, far more interested in emotional tribalism than well-thought-out economics. The Republicans’ weakness was exposed in 2015 when some of them started calling Trade Promotion Authority and TPP “Obamatrade” – paving the policy road for Trump. Democratic politicians long held protectionist views as a sort of tribal signaling to organized labor (although, as the Pew Research Centerrevealed, Democratic votersdidn’t share that view).

That it led to the wife of the man who managed to get NAFTA through Congress in 1993 became a political casualty of all this was painfully ironic (to some – or maybe just to me).

There is, however, cause for optimism. The Democrats are, if anything, even moresupportive of freer trade agreements (see Pew’s link above), while Trump’s tariffs are losing popularity (Pew again).

Republicans, sadly, are following their leader into protectionism – yet another reason to presume Trump will easily be renominated in 2020. However, if Democrats can choose a nominee that can appeal to supporters of freer trade and opponents of tariffs (or, as I’ve started to call us, “trade doves”), not only can the party hold the swing voters who crossed over in 2018 (and win more of them), but they can also ensure that the country moves away from its current protectionist cul-de-sac.

We might even be able to re-enter the TPP.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

Why Jay Powell Should Stay Right Where He Is

by D.J. McGuire

Having shaken the foreign policy establishment to its core (which, by itself, is not automatically a mistake) by choosing to cut and run from Syria (which, given the situation on the ground, definitely isa mistake), President Trump is now taking aim at the Federal Reserve’s independence in setting monetary policy.

President Donald Trump has begun polling advisers about whether he has the legal authority to fire Federal Reserve Chairman Jerome Powell, according to two people familiar with the matter, who described the President as newly furious at the Fed chief as markets tumble.

Earlier this year, Trump’s advisers told the President that it was doubtful he would have the law behind him if he fired Powell. But Trump has renewed the issue after the Fed again raised its benchmark interest rate this week.

So far, the White House hasn’t come to a final legal determination on Trump’s authority to fire his Fed chairman, whom he nominated a year ago. The law states the President can fire a Fed governor for cause, but it hasn’t been tested on the firing of a chairman.


This is what Trump said to his Treasury Secretary.

I totally disagree with Fed policy. I think the increasing of interest rates and the shrinking of the Fed portfolio is an absolute terrible thing to do at this time

Mnuchin via Twitter

For those of us in the economic field, this is the equivalent of using a nuclear weapon. As noted above, a Fed Chair has never been fired.

This will be a serious test for both political parties. For my old party (the Republicans), it will be about how much they are willing to let Trump abuse his power and shatter stability. Just about every opponent of Keynesian economics prefers sound money and stable economic policy. A president who fired a Fed Chair because he (Trump) prefers looser money would be the exact opposite of both.

That said, it is just as challenging for my new party (the Democrats). They’ll be willing to call out Trump on abuse of power and stability, but I wonder if they’ll be willing to defend Jay Powell for what he is doing.

This matters because Powell needs defending – not just on a constitutional level, but on a policy one as well. An expansion in its tenth year, a Keynesian sugar high tax cut that is over $150 billion annually, and price hiking tariffs on finished goods and inputs alike are a bonfire worth of inflationary kindling. Any Fed Chair worth his or her salt would respond exactly as Powell did – raising interest rates and reducing the balance sheet from quantitative easing. All that goes double or morefor a Fed Chair in Powell’s situation – with interest rates still well below normal and a balance sheet vastly swelled by quantitative easing.

Federal Reserve Chairman Jay Powell is doing exactly what he should be. As such, he should remain exactly where he is. I fear no Republican will be willing to say either. Many Democrats will say the latter, but I fear I may be the one of the very few willing to say both.

That doesn’t make me wrong, though.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015. He is also a contributor to Bearing Drift.

Is Raising the Minimum Wage Really Progressive? Why I Say No.

by D.J. McGuire

Amazon’s announcement that it will pay all its employee no less than $15 per hour (with a call for the rest of American businesses to do the same) has added fuel to the flames of the minimum wage debate. As usual, I find myself at odds with nearly every other Democrat on the matter. The main thrust behind this is the assertion that the low-paid are being cheated by their employers, and thus the employers must bear the brunt of fixing the problem by paying higher wages. There is also a Keynesian macroeconomic argument that endorses transferring income to the lower paid as a way to stimulate aggregate demand. The former argument is simply wrong, while the latter is merely misguided. In fact, I would argue that income supports (like the Earned Income Tax Credit) are more efficient and equitable than a minimum wage hike.

For starters we have to remember how wages are set in a competitive marketplace. Labor demand is what economists call “derived demand” – in that it is derived from the expected revenue the firm can expect from its workers. Higher prices and higher production mean higher wages. In other words, what truly drives wage rates in competitive markets are the customers (i.e., us). So, first and foremost, this is our fault. Secondly, while the emphasis of the minimum wage debate has been on large firms like Amazon and Walmart, a very large portion of firms affected are small businesses (including franchisees, which are small businesses in corporate garb).

Meanwhile, the economic impacts of a minimum wage hike are both damaging and avoidable. Firms will respond by either cutting production (and laying off staff), increasing automation (also laying off staff), or raising prices; the most likely outcome across the economy is a combination of the three. So employment will fall and prices will rise. In effect, for consumers, a minimum wage is a hidden sales tax – and a sales tax is one of the more regressive types of tax out there (i.e., it hits the poor the most). Remember this the next time some wealthy pundit (yes, Bill Maher, I am looking at you) complains about “paying for welfare” of low-paid workers; their solution is that poorer Americans pay for it instead. This goes double for folks in the IT industry, which sees demand for their products rise as more firms switch to automation. In that context, the actions of Amazon – whose largest profit center, by far, is Amazon Web Services (cloud services) – take a much more self-interested hue. Moreover, a higher minimum wage benefits not just the working poor but also the working young (many of whom are not poor at all) and is thus inefficient.

By contrast, a negative income tax (of which the Earned Income Tax Credit is a kind) avoids all of the negative effects of a minimum wage increase, while being more equitably funded (via governments, whose reliance on income taxes ensures a less regressive impact).  Moreover, to call it “welfare” is to deny the fact that income taxes (as labelled) are not the only taxes out there. The low-paid also pay taxes on gasoline, food, shelter (via property taxes either paid directly if they own property or via higher rents from taxed landlords), and nearly everything else with a sales tax. They also still pay taxes on income (don’t forget the payroll tax). Additionally, a larger EITC would have the same macroeconomic effect on aggregate demand without the inflationary effect of higher prices.

To be fair, there are some who argue that a minimum wage hike won’t reduce employment. They focus upon markets that are less competitive – and thus, where firms have enough market power to separate wage rates from derived demand. However, I think those markets, while more likely to get our attention, are fewer than most realize. More to the point, they can be more efficiently addressed by reforming antitrust law to take into account the effects of monopolies and oligopolies on resource markets (such as labor) rather than just product markets.

Most progressive (perhaps all of them) consider minimum wage hikes to be in line with their values. Policies, however, are about methods, too. I would humbly submit that expanding the EITC and addressing gaps in antitrust law would be a more efficient and more equitable set policies to help the American working poor.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015

No, my fellow conservatives, the regulation rollbacks aren’t worth supporting Trump either

by D.J. McGuire

The standard defense a Trump supporter uses – well, the ones not wholly subsumed by racism or by authoritarian cultism – involves three political issues: the federal judiciary, the 2017 tax “reform”, and regulation rollbacks. I’ve already discussed why the 2017 tax law should bring no smile to a conservative’s face; I’ve also explained how fleeting “control” of the judicial branch really is. That leaves the regulation issue.

Theory versus Practice

In theory, fewer regulations is a standard supply-side economic policy: regulations increase costs on businesses and make it harder to smaller firms to compete with larger ones. In practice, it’s a bit less clear. None other than Charles Koch himself funded a study by Mercatus economist Alex Tabarrok that revealed the effect of regulation on American entrepreneurship to practically nil (Washington Post). Mercatus itself is of two views on the subject (others at the institute came to a different conclusion), but my point is that we’re not talking about something as cut and dried as most Republicans believe.

A Lack of Political (or any) Precision

Of course, most Republicans themselves are not fond of throwing every federal regulation ever written on a massive bonfire. The reason for the regulation also has an impact. Just as those of us who prefer limiting government’s size, scope, and cost take issue with “across the board spending cuts” – which make no accounting to necessary versus unwise expenditures – any trimming of regulations should have some form of precision or priorities. This is not the case with President Trump’s attacks on red tape. There appears to be no rhyme or reason to it whatsoever – save that Trump will go after any regulation brought to his attention. Not only is that poorly thought out, it also exacerbates the influence problem that many Republicans have with excess regulation in the first place: the politically connected game the system. Thus does an exercise in apparent government scope reduction turn into the figurative “swamp.”

The Lack of Staying Power

This fuels the same problem that the “courts” argument has – a lack of longevity. In this case, regulation rollbacks will be even more fleeting than judicial appointments. The next Democratic Administration could reinstitute much of the rollback (as there is little to no change in actual law involved). Even during this Administration, a Democratic House could insist on regulation resurrections in their budgets.

In short, Trump’s moves against regulation are too unpopular and unplanned to survive a change in the political winds (including perhaps one of gale force coming within the next two months). It is yet another false benefit to be weighed against the ever increasing cost to American political and economic health inflicted by this president.

D.J. McGuire – a self-described progressive conservative – has been part of the More Perfect Union Podcast since 2015