Justification For Tariffs: Part II

This article continues the discussion of “why would anyone want to impose tariffs” that was started in this article. The first article discussed a non-standard justification: tariffs as a source of revenue.

The standard justification for tariffs is to better control the development of your domestic economy (and/or to reduce the influence of perfidious foreigners). Although I have limited sympathies for this concept — Canada pursued a policy of developing behind a tariff wall — it is a somewhat dated tool (as I discuss below).

Tariffs As A Fiscal Tool?

One of the more predictable outcomes of this election is that I am now running into analyses suggesting that tariffs are a growth-enhancing policy tool. One of the ugly realities of financial/economic commentary is that a lot of it is the result of starting from the desired conclusions, and then working backwards to find reasons why the conclusions are correct. An analyst that is pro-Trump needs to discover why tariffs are great policy. (The advantage of not publishing forecasts and not having a policy agenda is that I am not continuously putting out articles explaining why my forecast is correct, and the data/markets are wrong. The disadvantage of this policy is that it is harder to come up with new content.)

One of the Big Ideas floated by Trump is that income taxes can be replaced by tariffs, which is what excites some of the commentators. I do not see the numbers even getting close to that, even if we put aside the side effects of tariffs on the economy.

Is MMT Only Applicable To The U.S.?

One common line of criticism relates to what is termed open economy considerations – can the foreign sector create constraints on fiscal policy that are not apparent in closed economy models? One simplistic variation of this is the argument that “MMT only applies to the United States,” that is, only a global hegemon that issues the reserve currency can afford to ignore the external sector.

(Note: this is an unedited excerpt from my MMT primer manuscript.)

Limited Passthrough From Exchange Rates To Inflation: Canadian Example

The inflation story in Canada and the United States has not been particularly exciting for some time, and I am not in a position to argue that this will change any time soon. I just want to update a chart that I think is extremely useful when discussing the alleged external constraint on floating currency sovereigns. As seen above, even Canada -- a small floating currency sovereign with a economy highly open to external trade -- has extremely limited passthrough from exchange rate movements to (consumer price) inflation.

The External Sector And Financial Crises

If we look at the full history of financial crises around the world, one could argue that crises related to external debt and/or fixed exchange rates are dominant. Such crises could represent an entire chapter of this book. However, I will only offer a brief overview of the subject. From the perspective of recession forecasting, the addition of a fixed exchange rate regime adds a new wrinkle to analysis: at what point will the peg fail, causing a crisis? As I will discuss below, this is quite different than an analysis of the domestic economy, which one might hope is amenable to something resembling econometric analysis.

The Myth Of The Myth Of Monetary Sovereignty

Frances Coppola recently wrote “The myth of monetary sovereignty,” that rehashes some old complaints about Modern Monetary Theory (MMT), which could be summarised as saying that MMT is only applicable for the United States. There are perhaps some claims within the article regarding developing economies that are worth debating, but they are not of interest to myself. My background and writing interests are in the analysis of the developed economies, and I largely stick to my knitting.

(As an update on "Inflation Breakeven Analysis": the book should be ready for ebook publication by next week, unless something else goes wrong with formatting.)

Exports And The Cycle

Not all "automatic stabilisers" in the economy are due to government policy; there are patterns of private sector behaviour that tend to act in a counter-cyclical fashion. The role of the external sector is an important stabiliser (at least most of the time). This article is a basic primer on the subject.

On The "Everyone Cannot Run Trades Deficits" Argument

Steve Keen has posted "Some Preliminary Questions for MMT," in which he questions the Modern Monetary Theory (MMT) mantra that "exports are a cost, imports are a benefit." He points out: what is to stop everybody from running trade deficits? I discuss why his arguments are not particularly concerning from a policy perspective.

Trade War Complacency

The escalating rounds of tariffs between the United States and China is an interesting point of economic debate. However, from the perspective of the interest rate markets, it appears to be one of those subjects that generates a great deal of economist commentary, but with limited market impact. This view is arguably complacent; whether it is too complacent is left for the reader to judge.

Implementing Foreign Exchange In sfc_models

The sfc_models package is a Python framework that automatically generates the equations for stock-flow consistent (SFC) models. This article discusses how foreign exchange transactions are represented within the framework. It is an unedited draft section from my upcoming book on sfc_models; some technical details may be harder to follow for readers unfamiliar with the framework. At the end of the article, I discuss the difference in modelling strategy between sfc_models and that used by Godley and Lavoie in their text Monetary Economics.

A SFC Model Of Gold Standard Austerity Policies

This article describes the model that I discussed in an earlier video (video link: https://youtu.be/Sx6YkT75ehg). Although a Gold Standard is not exactly a pressing topic for most of us, the simplicity of the system makes it easy to demonstrate ways in which we can use stock-flow consistent (SFC) models. In this case, I can explain why austerity was a core component of gold standard thinking.

Modelling A Gold Standard

Although the topic of the Gold Standard often comes up in economic discussions, their actual operation is less well understood. This article explains how a theoretical model of a Gold Standard works, as implemented by stock-flow consistent (SFC) models. This is a unedited draft of a section of an upcoming book that describes how to use the Python sfc_models framework.

Trade And Growth

This article is a brief discussion of the relationship between growth and trade deficits in the United States. The previous two decades saw a marked deterioration in the U.S. trade balance, as depicted in the chart above. As a result, trade acted as a counter-cyclical brake on growth. One interesting property of the current cycle is that the trade deficit has been relatively stable when compared to that experience.