Trump’s tariffs: is there a better way?

Donald Trump has said that “trade wars are good, and easy to win”. I posted on the issue of protectionism in the wake of his election victory here, and on ‘beggar-thy-neighbour’ policies here, and stand by my arguments.

Contrary to the claims of mainstream economics, free trade is not always mutually beneficial for the nations involved. In particular, the historical record suggests that particular ‘infant’ industries in developing countries can benefit from temporary and selective protection, until they are competitive enough to succeed on world markets.

There are plenty of examples of infant industry protection which have failed, so it is by no means a universal panacea. Success requires the management of a particular balance of power in a developing country between particular groups such as the state and social classes, which might include emerging industrial leaders or the middle class. It will also be context-specific: it depends on the historical evolution of the groups and society involved.

Trump’s tariffs on steel and aluminium imports are not an example of protecting an infant industry. They may protect some jobs in those sectors, but most economists argue that by increasing the costs of these products as inputs for other industries, many more jobs will be lost in the latter, so that the net employment impact will be negative. Continue reading


Heterodox critiques of quantitative easing

Following last week’s quote from Michael Hudson on quantitative easing (QE), here are some other insightful perspectives which for me offer explanatory power, given the course of economic and financial events over the decade since the crisis began.

The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.

Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading

Michael Hudson on Quantitative Easing

Plenty of economists, investors and others have been wondering what will happen to financial markets and the real economy as monetary stimulus in the form of Quantitative Easing is wound down by central banks from the US to the Eurozone in the face of stronger growth.

I will be writing more about it next week, considering the perspectives of critic Richard Koo among others, but here is Michael Hudson from, as ever, his iconoclastic and insightful ‘dictionary’ J is for Junk Economics (p.189-91): Continue reading


Finance, inequality, ecology – an interview with Steve Keen

A nice interview with post-Keynesian Professor Steve Keen, in which he discusses what are (or should be) some of the most important issues in modern economics.

He covers the role of finance and private debt in generating inequality and what can be done to reduce it; the idea and feasibility of a universal basic income; economics and planetary ecology; and the incorporation of energy into economic models.


Nicholas Kaldor on taxes and the illusion of incentives

Nicholas Kaldor was a post-Keynesian economist at Cambridge University and, during his final years in the 1980s, a devastating critic of the Thatcher government’s adherence to the doctrines of monetarism and ‘supply-side’ reform.

Here he is on tax cuts and incentives, taken from The Economic Consequences of Mrs Thatcher (1983), a collection of speeches made to the House of Lords (p. 9):

“Between 1880 and 1930, excluding the war years, hardly any new money was sunk into the coal industry or the iron and steel industry, and very little money – in comparison with Germany, not to speak of the United States – was put into the new technology industries which arose out of the invention of electricity, the motor car, heavy machinery, synthetic dye stuffs and other chemicals. Instead, vast sums were invested abroad. In some years during the Edwardian period, when home investment in manufacturing industry was almost zero, no less than 10 percent of our national income was invested abroad.

In those days there were incentives galore. However much Ministers may try to revive incentives through tax reductions, they can never hope to achieve the Victorian or Edwardian peaks in fiscal incentives, when income tax was not progressive and it was seven old pence in the pound or 3 percent instead of the present 33 percent. Yet with all those incentives, the economy was stagnating. If people think that we will now see miracles as a result of cutting income tax by, say, 3p or 6p in the pound, I can regretfully prophesy that it is more likely to make no difference whatever.

I have no doubt that without nationalisation we should have had the same situation after World War II as we had for 40 years before World War I and throughout a larger part of the inter-war years, and if one thinks that the period after World War II was bad, I can only say that in the opinion of all economic historians who have studied this matter seriously, the 20 years of the 1950s and 1960s showed more rapid economic progress and more rapid growth of productivity than any comparable 20 years in previous British history. That that was not just a reflection of a world trend is shown by the fact that while it was true of Britain, it was not true of Germany or the United States; in other words, their post-war record of productivity growth was no higher than had been achieved in previous periods. It was true in our case, and it is only in the last 10 years that our economic progress has broken down, for the reasons I mentioned (sic).”

Kaldor was not in favour of very high marginal rates of income tax, and instead favoured a progressive tax on consumption. However he was clear at the time that poor management was holding back British industry, and the problem, compared with our competitors, was ability rather than incentives.

Even today, the ‘burden’ of taxation in a number of European countries is higher than in Britain, and industrial performance has been notably more impressive. So other policies are more important, but successive Conservative and even Labour governments have failed to learn this.

All this remains relevant today, not least in the wake of the Trump tax cuts, and the turn to austerity in many countries in the wake of temporary fiscal stimulus following the 2008 crash. In Britain, cuts to public services were favoured over tax increases in the attempts to reduce the deficit. This surely reached its limit some time ago, with numerous crises across public services, from the health service to prisons.


Robert Reich on 3 economic myths

Robert Reich is an influential commentator, professor and author, who served under US Presidents Ford, Carter and Clinton, in the latter case as Labor Secretary. YouTube features plenty of his short, useful videos on economics and politics. Here is one of them. Thanks to Lars P. Syll for drawing my attention to it on his blog.

As an aside, I like Reich’s use of illustrative cartoons!