Economics

The Shortcomings in Trump’s Foreign Policy

Donald Trump has been a very unique presidential candidate, to say the least, and his uniqueness stretches all the way to his positions on foreign policy issues. His position on foreign policy involves: building a wall on US Mexico border and making Mexico pay for it, defeating ISIS, and establishing new immigration controls to boost American wages. At face value all of these ideas, except maybe building a giant wall on the southern border, may seem like good ideas. After all, boosting American wages would mean that Americans can buy more stuff, right? Well, this is actually not true.

Boosting American Incomes

Trump’s plan to boost American wages would actually hurt the US’ economy and cause American incomes to decline. The reason for this unexpected outcome is that limiting the possibilities of immigrants to gain employment means that lower wage positions will go to Americans. These Americans will demand higher pay than the formerly employed immigrants. Since business owners will be forced to pay employees higher wages, the cost of goods will increase. This means that all Americans will be paying higher prices for goods. As a result, Americans would have less discretionary income. This would lead to demand for higher cost services declining and could further lead to a decrease in employment among higher salaried careers.

Building a Wall

Trump’s proposal to build a wall along the Mexico border would be incredibly costly, costing around $15 billion to $25 billion. Mexico’s president, Enrique Peña Nieto, has also said that Mexico is not paying for a wall at the US border. Despite President Nieto’s statements, Trump continues to say that Mexico will pay for the wall. However, Trump actually has no way to effectively force Mexico to pay for the wall. Additionally, Trump’s plan does not take into account the many underground trafficking tunnels, which could be used to smuggle drugs and people. These underground tunnels are at times very sophisticated and large. For example, US law enforcement officers found a tunnel that ran all the way from Tijuana, Mexico to San Diego, California.

Defeating ISIS

Trump’s plan to defeat ISIS is even worse than his plans to “boost American wages” and stop illegal immigration. This is because his plan to defeat ISIS is largely non-existent. The only thing it says on Trump’s website about defeating ISIS is that Trump will:

Work with allies in the Middle East and “pursue aggressive joint and coalition military operations to crush and destroy ISIS, international cooperation to cutoff their funding, expand intelligence sharing, and cyberwarfare to disrupt and disable their propaganda and recruiting.”

The big problem here is that Trump’s statement is not very specific; he does not explain how he will do any of the things he outlines. Trump claims that he isn’t being specific because he doesn’t want the enemy to know his plan, but I’m not buying this. I think Trump isn’t being specific because he does not actually have a plan to defeat ISIS, which is understandable since Trump does not have much experience, if any, in developing international policy. His experience is in business, not international politics. Additionally, if Donald Trump actually had a plan, then one would think that he would at least give a little outline or sneak peak of his plan, but he has yet to do this.

Overall, when looking at foreign policy, Trump does not seem to be well suited for the position of President of the United States of America. His foreign policies would not only hurt the US economy, but they also seem to be vague and not well thought out.

Image Source: IB Times

Why Federal Deficits Are Not Always Bad

The federal government’s balance sheet is not like that of a private citizen’s, it shouldn’t always be balanced. There are certain times when running a deficit may be the best course of action. As a matter of fact, running a deficit is often a part of fiscal policy.

Federal deficits can help the government deal with the business cycle. The business cycle consists of four phases — growth, peak, recession, and trough/depression. In order to ease the economic tensions that occur during the business cycle, governments use deficits as a part of fiscal policy. The government runs the deficit by increasing expenditures either through buying goods, providing the public with subsidies, decreasing taxes, or some sort of combination of the three. The government’s increase in expenditures causes an increase in demand. This increase in demand leads to businesses experiencing increased profits. As a result, businesses do not lay off as many people during the recessionary phase.

On the other hand, if the federal government tried to always have a balanced budget, the business cycle would create larger fluctuations in the economy. For example, during the recessionary phase a larger numbers of workers would be laid off. However, federal deficits do have consequences. If the debt to GDP ratio is large enough then this could lead to problems like the ones seen in Greece. Additionally, there is actually not much reason to run a deficit when the economy is not in or near the recessionary phase.

So what about the US’ current debt situation. Although the US government does have debt, even when the US is not in the recessionary phase, the US has been able to handle its debt due to the strength of the US economy. The high revenue to debt ratio also allows more developed states, such as the US, to maintain higher levels of debt. Additionally, the US has been borrowing money at record lows, as a result the debt to GDP ratio should decrease over time. This means that the US may be able to wait longer to address its debt problems.

But how do we know when a state has too much debt? Investor confidence is one measure. Investor confidence often has a strong impact on the economy of states and can be a good way to determine how much debt is too much debt. For example, since interest rates, which have a relationship with investor confidence, on US treasury bonds are relatively low it would be reasonable to say that the US’ stability and developed economy outweigh the US’ high debt levels. However, this does not mean that the US can just racket up debt. The US debt will have to be addressed. If it continues to rise without being addressed then eventually the debt will get too large and lead to problems for the US economy, such as decreased employment and decreased levels of investment.

War is Bad for the Economy

It seems to be common knowledge that war is good for the economy. After all, following World War II the US was no longer in a recession. However, this view is false. War is actually bad for the economy. The reasons that destruction is bad for the economy is explained in Economist Claude Frédéric Bastiat’s broken window fallacy. The broken window fallacy explains that destruction does not benefit the economy. Bastiat explains this by providing the example of someone breaking a window.

An excerpt from Bastiat’s work “That Which Is Seen, and That Which Is Not Seen:”

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation: “It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?

The spectators in Bastiat’s example are explaining that the shopkeeper’s broken window provides the glazier with an increase in income. The spectators believe that this increase in income benefits society. Bastiat goes onto explain that the spectators are ignoring the fact that the broken window causes the shopkeeper to lose money. What results from the broken window is an exchange of money between the shopkeeper and the glazier, as a result, society is no better off with the broken window. Society is actually worse off since the window lost value.

The belief that war is good for the economy is another version of the broken window fallacy. How can deaths of thousands of people and the destruction of infrastructure be good for the economy? It isn’t good for the economy. During wartime, the economy loses labor, resources, and infrastructure. These losses can never be recuperated.

When looked at from a global perspective, war in one country means that the global economy will be working less efficiently. While one country may experience a boom after war, another country will be experiencing the impacts of destroyed infrastructure and resources. In fact, all countries that were involved in war will at least have to deal with the impact of the loss of labor. Additionally, during wartime economies shift towards producing more wartime materials that do not promote economic well being, such as weapons. As a result, resources that could have been used to promote well being are wasted on the production of wartime materials. As Bastiat would say “if that which is not seen is taken into consideration,” then war would obviously be considered bad for the economy.

Image Source: Life Magazine

Why Does North Korea Isolate Itself?

Due to North Korea’s isolationism the world doesn’t know much about the country, however we do know a little about North Korea’s economy. The North Korean economy is rife with problems, such as the misallocation of resources and a reliance on”emergency” international relief. Many of the state’s citizens are also malnourished and the nation operates under total government control. Nearly every aspect of the North Korean economy is state owned, including property, domestically produced goods, imports, and exports.

North Korea’s government sets all production levels and nearly all of the state’s GDP comes from state owned businesses. The state’s resources are further drained by the country’s songun policy. Songun policy holds that the military is the first and most important part of the state. This policy leads to the issue of resources being drained by the military. North Koreans do not have any say in changing the government’s policies because there are only two groups in the state that hold any power, the Worker’s Party and the Korean People’s Army, while all being under the ultimate control and power of the totalitarian leader Kim Jong Un.

An examination of North Korea’s command and control economy easily reveals why the nation has difficulty feeding its own citizens. Setting production levels instead of using a free market that sets its own levels of production based on demand has led to the misallocation of resources. This missallocation of resources combined with North Korea’s songun policy has led to a decrease in the production of food and other goods and services that people in other states take for granted.

Many of North Korea’s problems also come from the state’s decision to isolate itself. For example, North Korea’s isolationism means that the nation can’t trade with most other states. As a result, North Korea can’t take advantage of the economic benefits that come with free trade, such as decreased prices of goods and services. This leads to the question of why would a state choose to shut itself off from the rest of the world during today’s time of increasing globalization. Much of this deals with Kim Jong Un and the state’s ruling Worker’s Party.

While members of the ruling Worker’s Party may have a privileged position in North Korean society, they are unlikely to promote change in North Korea due to fear of Kim Jong Un. Much like his father, Kim Jong Un keeps North Korea under tight control. In fact, during 2014 Kim Jong Un ordered the killing of 10 senior Worker’s Party officials. The Kim family’s historically tight control over the North Korean population shows that many of the state’s problems are largely a result of the Kim family’s leadership. That’s not to say that if Kim Jong Un came out of power that anyone better than him would take his place. Someone outside of the Kim family may be just as bad or worse than Kim Jong Un. However, the Kim family’s psychology is a great factor in the state’s poor performance.

When we look at Kim Jong Un and his fathers we can see that they all conducted similar activities and likely shared similar traits. They all conducted purges in order to kill anyone they suspected of being a potential rival or threat. Sometimes they even claimed that the victims of their purges were foreign spies. The Kim family also pushes a propagandistic ideology that peddles the narrative that the Kim family is divine. From looking at the purges and the North Korean ideology, one can see that historically the Kim family has been insecure and has felt a need to be worshiped. While in an average individual insecurity and the longing to be worshiped have a small impact on society, when manifested in individuals that have large amounts of power this can have a huge impact on a nation and can create terrible problems that are incredibly hard to solve.

Image Source: CNN

How Illegal Immigration Is Good for the Economy

Many people may be surprised to learn that unauthorized immigration benefits the US economy. In fact, Economist Gordon H. Hanson, has explained that stopping unauthorized immigration may cause a net drain on the US economy. Unauthorized immigration benefits the US economy by providing employers with low wage labor. Low wage labor keeps the costs of producing goods down which leads to lower costs for the consumer. This means that not only are Americans able to purchase goods for lower costs, but so are foreigners. As a result, US exports are higher due to more globally competitive prices. However, if employers didn’t hire unauthorized immigrants, then the cost of production would rise, prices would increase, and exports would decline.

An example of the problems that can arise when rates of unauthorized immigration decrease can be found in the state of Arizona. Many economists agree that Arizona’s economy took a hit after the state cracked down on unauthorized immigration. However, some argue that the benefits that come with reducing unauthorized immigration, such as lower government spending on health care and education for unauthorized immigrants and the employment of more US born labor, outweighs the economic costs that accrue from cracking down on unauthorized immigration. Contrary to popular belief, research shows that this is not true.

The US Department of Agriculture (USDA) conducted a study where researchers performed simulation analysis to determine what the effects would be on the economy if the unauthorized immigrant population decreased or if the unauthorized immigrant population increased. Results showed that an increase in the unauthorized immigrant population would lead to the increased employment of unauthorized immigrants at lower wages which would lead to increases in agricultural outputs and exports. However, a decrease in the immigrant population would lead to several problems in the US economy.

USDA research results show that along with a decrease in unauthorized immigrant labor there would be a labor shortage of farmworkers by 3.4 to 5.5 percent. Long run effects of decreased immigrant labor include an increase in wages for low paying positions and a decline in aggregate income. The reasons for a decrease in aggregate income include a relative decrease in production in the long run and the redistribution of employment from higher income positions to lower income positions. The long run relative decrease in production means that production would not only decrease in the agricultural industry, it would decrease throughout the entire US economy. This would result in the reduction of incomes for higher wage positions.

Overall, the USDA found that decreasing unauthorized immigration by a significant amount would badly affect the US economy. In fact, the benefits that come from decreasing unauthorized immigration would not outweigh the negative effects that decreasing unauthorized immigration would have on the US economy. So if lawmakers want to decrease unauthorized immigration, then they must first come up with a well thought out plan on how to handle the detriments associated with decreased levels unauthorized immigration.

The Problems in China’s Economy

China’s economy has been slowing down. In fact, the Wall Street Journal reported that the GDP of China’s economy has dropped from 7.2% at the end of 2014 to 6.4% in June 2016. Despite China’s economic slow down, the Chinese economy is still doing fine. However, there are some problems in China’s economy, including the misallocation of capital and rising private debt. These problems are important to analyse because both could create larger economic problems for China that could lead to financial instability.

The Misallocation Capital

In an effort to increase economic activity in China, the Chinese government has increased the number of new project approvals. This has led to capital being over-allocated to the production of coal plants. For example, the New York Times has explained that several coal plants are being built-in China that could potentially operate at 5,500 hours per year. However, the amount of coal plants in China surpass demand by so much that these coal plants operated at an average of only 4,300 hours. Next year, these factories are expected to operate at an average of 3,600 hours. It is important to note that the Chinese government has been trying to fix this misallocation of capital. Beijing has published guidelines to stop the approval of new coal plants, however, the new guidelines do not apply to coal plants currently under construction.

Ghost cities are another result of the misallocation of capital in China. Ghost-cities are cities that have nearly zero inhabitants. In China, rapid development and the misallocation of capital has led to the development of many ghost cities. Other states going through rapid development, including Brazil and India, have also built ghost towns and cities, but not to the same degree as China. This is because in China municipal governments can easily and cheaply buy rural land to build cities. According to the Wall Street Journal, this leads to government officials building cities for prestige or to provide jobs to friends. Also, the ghost cities built-in China do not cater to the needs of the general population. For example, the cities do not have many necessities, such as schools or hospitals.

Conch Bay is a ghost city in China. (Greg Baker/AFP/Getty Images/NPR)[3]

Conch Bay is a ghost city in China. (Greg Baker/AFP/Getty Images/NPR)[3]

Growing Debt

In order to ensure the growth of China’s economy, Beijing has continued to increase demand by increasing credit. In other words, the Chinese government has continued to encourage corporations, many of which are state-owned enterprises, to borrow more money so the corporations can spend more money. This may have increased the size of China’s economy, but it also increased Chinese debt. In fact, The Economist explains that at the end of 2015 private debt was about 240% of GDP. With this increase in debt, private companies are less able to invest in projects, due to the increase in interest payments that come along with an increase in debt. Additionally, many state-owned enterprises are not earning enough to service their debts.

Protection From Financial Instability

Just like any other state’s economy, China’s economy has its faults. China’s misallocation of capital promotes wasteful spending and increases debt. Additionally, growing debt in China could cause a decrease in aggregate demand. Both of these factors could lead to a recession or could cause other economic problems. However, China’s GDP is still high when compared with many other states. The Chinese government also has a surplus, a large amount of foreign exchange reserves, and China’s debt is mostly owned domestically. All of these factors protect China from financial instability. But financial instability in China is not implausible. It is important to look at the problems in China’s economy and research the best policies to address issues in China’s economy. If these problems continue to go unaddressed then there will be a higher likelihood of financial instability affecting China and the World in the future.

Image: The Economist, BIS

Oil Prices and the Global Economy

The European Central Bank provided some interesting information about today’s oil prices and the global economy. The report basically explains that low oil prices may not be positively effecting the global economy because oil prices have been driven lower due to a decrease in demand rather than a decrease in supply.

During the beginning of 2015, oil prices were decreasing due to decreases in supply. It was predicted that a supply driven decrease in oil prices would positively effect the global economy. However, in late 2015 oil prices fell due to decreased demand. Simulations have suggested that demand driven decreases in oil prices negatively effect the global economy. For example, it is estimated that a 10% supply driven fall in oil prices increase world GDP by 0.1% to 0.2%. On the other hand, a 10% demand driven fall in oil prices decrease world GDP by more than 0.2%. Simulations also suggest that the impact of both of these forces in one year would cancel each other out and result in nearly a zero percentage effect on GDP.

While world GDP may not be positively effected by demand driven decreases in oil prices, these lower oil prices do benefit oil importing states, such as the US. However, the benefit has been small and has not outweighed the negatives that are brought onto the world economy. These negatives include oil exporting states experiencing significant declines in GDP growth and currency depreciation. These problems faced by oil exporting states cause spill over effects that impact trading partners and global economic activity [1].

When viewed from a macro perspective, the current decrease in the price of oil is not good. A demand driven decrease in oil prices means that the economies of oil producing states are not growing as quickly. As a result, the world economy suffers. The following charts provide further information about oil exporting states, GDP growth, and oil prices.

ECB_Pic

Read the European Central Bank’s report: ECB_Economic_Bulletin

The Danger in Trump’s Trade Proposals

Are Donald Trump’s international trade proposals really that bad? Yes, yes they are. Let’s take a look at a few of Donald Trump’s international trade proposals.

  1. 20% tax on imports
  2. 15% tax for outsourcing jobs
  3. Donald Trump appointing himself as the United States Trade Representative

20% tax on imports
A 20% tax on imports is a tariff. Tariffs may sound like they would protect American jobs and industries, but tariffs are actually harmful. High tariffs decrease foreign competition and protect inefficient industries which leads to industries becoming even more inefficient. This means that tariffs basically bail out inefficient industries. This bail out is paid by Americans through the increased costs of goods and services. The increased costs of goods and services could lead to a decrease in the demand of goods which could cause people to lose their jobs.

15% tax for outsourcing jobs
A 15% tax on companies that outsource jobs may sound like a good idea. After all, it would help to ensure that people don’t lose their jobs to outsourcing. However, this tax would have effects similar to a tariff. It would promote inefficiency and keep prices high.

Donald Trump appointing himself as the United States Trade Representative
If Donald Trump became president, it would be a terrible idea for him to appoint himself as America’s trade representative. Besides him not having enough time to be the United States Trade Representative due to various presidential duties, Donald Trump does not have the expertise to be the United States Trade Representative. The current United States Trade Representative, Michael Froman, has extensive experience in international economics and public policy. Donald Trump on the other hand is a business man, he does not have much experience in international economics or public policy.

Image: Mr Donald Trump New Hampshire Town Hall on August 19th, 2015 at Pinkerton Academy in Derry, NH by Michael Vadon https://www.flickr.com/photos/80038275@N00/20724485306

The Trans-Pacific Partnership Agreement

The Trans-Pacific Partnership (TPP) Agreement has been at the center of much political disagreements. Some people claim that the TPP is harmful to the US while others disagree. The United States International Trade Commission (USITC) has prepared a report on the TPP. The report provides information about the TPP’s potential impact on the US’ economy and specific industries.

Overall, the USITC found that the TPP would positively effect the US economy and specific industries. However, this impact would be somewhat small. The USITC estimates that real annual American income would be .23% ($57.3 billion) higher due to the TPP. Real GDP would be higher by .15% ($42.7 billion) and employment would be .07% (128,000 full time jobs) higher. Several US industries will also experience positive gains. For example, the US poultry industry would experience an increase in the price competitiveness of exports. Also, the US dairy industry would experience slightly higher output (by 1.3%) if the TPP were to be adopted.

The USITC’s report can be found here.

 

Image: https://usitc.gov/

A Look At The Global Economy (June 2016)

The global economy is expected to grow at a moderate pace for the next few years. The Conference Board predicts that world total GDP growth rates will hover around 2 and 3 percent over the next ten years. Throughout the rest of the year, it is expected that the output of mature economies will slow down while output is expected to marginally improve in emerging markets, such as Russia and Brazil. [1] The data tables provide a look at world total GDP, GDP by state and region, projected GDP, and labor productivity growth.

View Data Tables


Sources
[1] The Conference Board. “Global Economic Outlook 2016” bbc.com/news/business-15198789

[Image Source: What does weak US wage growth mean for the global economy and US rates? CMC Markets 3rd July https://www.youtube.com/watch?v=5-kIzITgerk]