Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. This is an extended version of a column that appeared at Project Syndicate on January 15th.
President Trump and the Republicans succeeded last month in passing their big tax cut. It may not have many of the desirable attributes of true tax reform (equity, efficiency, bi-partisanship, revenue-neutrality, or cyclical timing); but it is major legislation, as promised. What about that other major Trump promise, to cut the US trade deficit? The tax cut is virtually certain to raise the budget deficit and in turn to raise – not lower – the current account deficit. Call it the Return of the Infamous Twin Deficits. As when Ronald Reagan cut taxes in 1981-83 or when George W. Bush cut taxes in 2001 and 2003.
There are different measures of the balance of payments, each appropriate for different purposes. The narrowest measure includes only merchandise trade. President Trump likes to focus on bilateral merchandise balances, which are probably the least informative of all the measures in use. We should be interested in a broader measure, such as the overall balance on goods and services. His old-fashioned focus on net exports of cars between particular pairs of countries has been rendered obsolete by the modern multi-national production process in which inputs move back and forth across borders, among national contributors to the chain of value-added that leads to a final product. Furthermore, exports and imports of, say, the services of auto designers are as important in the process as the physical trade in auto parts.
For now, let’s focus on the current account balance, a definition that is slightly broader still than the balance in goods and services. It is an important measure because it shows whether the US is spending beyond its means and therefore going into debt to the rest of the world. The current account balance adds in such other transactions as net investment earnings from abroad, emigrants’ remittances, and foreign aid. The international balance of payments statisticians a few years ago started calling such flows “primary income” and “secondary income” (apparently out of fear that people might otherwise understand what were the transactions involved).
Regardless which model, tax cut causes current account deficit
Today’s column on the negative effect of a tax cut on the current account balance, is “wonkier” than makes for optimal readership. It will briefly run through what four different textbook models have to say about the question. That is the bad news. The good news is that they all give the same answer. The reader only has to be convinced by any one of them. You can skip the others.
Argument number 1: A tax cut boosts income and spending. It is true that the particular tax cut recently passed by Congress heavily concentrated in the corporate tax system rather than the personal income tax system. But Republicans like to point out that corporations are people too. Or, to be more, corporations are owned by people and run by people. Most of the corporate windfall will be passed through to shareholders in the form of dividends and share buy-backs, and given to managers as higher pay. The recipients of the higher income will spend some of that. (To the extent that the firms distribute the tax savings to their workers, as Republicans say they expect, the propensity to spend will be even higher.) Either way, some of this spending will fall on foreign goods. Imports go up. Trade balance goes down.
That first argument was the simple Keynesian model. That model is less relevant when the economy is in the area of full employment, as the US is now, and constrained by capacity.
Argument number 2: If national output is constrained by capacity, then the increase in spending goes entirely into the current account deficit, rather than only partly. Furthermore when output is constrained the increased demand tends to lead to inflation. The higher prices for US products are another reason why domestic consumers will decide to buy more imports and foreign consumers will buy less US exports.
Argument number 3: What about the burst of investment that is supposed to result from the Republican tax reform and that is supposed to raise productivity eventually? We must distinguish between short-run effects and longer-run considerations. In the short run, higher investment is another form of spending: again imports rise and the trade deficit widens. (Think of imports of capital goods like machine tools.) In the longer run, the White House is counting on the corporate tax cut to attract corporate investment from abroad to the United States. The resulting net capital inflow will be that much bigger if the Fed responds to the increased demand for goods by raising interest rates, as it is expected to continue doing. The effect of a net capital inflow? It is a current account deficit virtually by definition. (Remember: the current account deficit is the rate at which the country is borrowing from the rest of the world.) According to the so-called intertemporal approach to the current account, a policy change that people believe augurs higher productivity in the future causes a deficit today.
Argument number 4: Don’t forget the exchange rate. The dollar floats in the foreign exchange market. An appreciation of the dollar would be the likely result of the higher interest rates and would be a concomitant of the net capital inflow. The effect of the stronger dollar, in turn, would be a loss of international price competitiveness and another reason for the trade balance to worsen.
So whichever approach one uses, it is hard to escape the conclusion that the tax cut will work to widen the trade and current account deficits, the opposite of what Trump has promised.
Does this mean that Trump skeptics can sit back and confidently wait for him to be proven wrong? There is one fly in that particular ointment.
Statistical errors from tax-motivated transfer pricing
As we have seen, the effect of the tax cut is virtually certain to work to widen the true current account deficit as well as the reported current account deficit. But it is just possible that the change in tax law will narrow the reported trade deficit in the first year, due to an annoying measurement problem, even as it in fact widens the true trade deficit. The annoying problem is a measurement error that for years has made the trade deficit appear worse than it really is, and that might now go away, resulting in an illusory improvement. The problem concerns “transfer pricing” on the part of multinational corporations.
Transfer prices are the prices that a corporation uses for accounting purposes, when valuing trade across national borders in inputs among its subsidiaries. Consider an American pharmaceutical company that establishes a plant in Ireland. The Irish affiliate imports some inputs consisting mainly of the intellectual property represented by the drug patent, assembles the product in Ireland, and exports it back to the US. The value of the drug patent is in reality the biggest contribution to the value added chain. But because Ireland’s corporate income tax is lower than America’s, the company has a big incentive to pretend that the value of the patent is low, so that most of the profits will show up in low-tax Ireland rather than showing up at the US corporate headquarters where the R&D was done. This sort of profit-shifting — or “creative accounting” to apply a less kind phrase — has long been widespread. It has made the US trade balance look worse than it really is. At the same time it has made US primary income look better than it really is — that multinational investment income that is boosted by the exaggerated profits which the firm is supposedly earning in Ireland. [That is, assuming that the American owner at least reports the profits as having been earned somewhere, before reinvesting them abroad, which may not always have happened in the past.]
George Saravelos and colleagues at Deutsche Bank argue that if this measurement error is eliminated, it could give a one-time boost to the reported trade balance (particularly in the form of reported service exports) as large as $250 billion, which by itself would cut the trade deficit in half. But again, this would improve the reported trade balance, not the true one. And the current account balance would not improve at all, neither the reported one nor the true one, because the apparent improvement in service exports would be offset by an apparent worsening of profits earned abroad.
The current account balance would instead deteriorate for all the reasons stated above: Tax cut causes budget deficit causes current account deficit. The twin deficits are back yet again.
This post written by Jeffrey Frankel.
Good general discussion of the macroeconomic effects from the fiscal stimulus from this tax cut but I’m interested in Jeff’s thoughts on the transfer pricing issue. He notes some work by George Saravelos. Is there a reference to this work so we can read up on what Saravelos et al. have contributed?
About a month ago I made almost exactly the same points and arguments to my two GOP senators. Alas, the replies I got (probably from some junior staffers) demonstrated that they had absolutely no understanding about the connection between current account deficits, interest rates and exchange rates. And it’s not like this is all that difficult to understand.
I will confess that current account balances have always been one of the harder things for me to comprehend in economics. Maybe in part because as Professor Frankel states above, there are so many different ways to measure it. I seem to remember a matrix of numbers to calculate the current account deficit in my Comparative Economics class (taken eons ago) and feeling a headache arise. I think I got most of what Frankel said above. I wish you guys would show the numbers for the increase in the debt during the Reagan years, because I think it blows the “lower tax rate=higher growth=higher government revenues” argument all to hell. I don’t even think the Michael Deavers, Martin Feldsteins, or Glen Hubbards of the world ACTUALLY believe it. It just gives them a cynical bullsh*t excuse to take a large crap on low income people—such as Trump/Republicans are now with the elimination of the middle income tax deductions.
@ Commenter “pgl”—-
Here is a link to the paper I AM ASSUMING is the same paper Professor Frankel was making reference to. It’s a pdf link so you can even save it on your drive if you want.
https://www.deutschebank.nl/nl/docs/Euroglut_here_to_stay_trillions_of_outflows.pdf
I love access to these FREE white papers on the internet. This is the type thing Aaron Swartz was fighting for before the FBI got on a Barney Fife power trip and destroyed Swartz’s life. It is also what the FCC and Ajit Pai are now trying to kill off by snuffing out Net Neutrality.
I put up the wrong paper. I googled a bunch of search terms and couldn’t find it. But Greg Ip of WSJ wrote up something on price transfers nearly exactly a month ago. The paper was co-wrote by Saravelos, Robin Winkler, and Oliver Harvey. A lot of investment banks charge for the service of these type research papers that give “deeper insights” into the market, so it must be only Deutsche Bank paying customers can view this paper. Here is the WSJ link, just click the X in the upper right of the pop-up advert after the link jump: https://www.wsj.com/articles/this-one-weird-tax-trick-could-shrink-the-trade-deficit-1513593001
Also, if anyone is a poor schmuck like me, don’t have cable/satellite and can’t get much supplemental info to the Senate floor video streams, this young doe-eyed lady is a great follow on Twitter to know what’s going on on the DACA-CHIP vote: https://twitter.com/LisaDNews
Thanks for the hard work. Will take a look at these links!
Paywall and it is why I never post nor link
the WSJ.
@Bill Billson
Did you try going in through the Google link?? It’s an old trick that has worked for years now. Admittedly WSJ’s paywall is a little harder. I got into this article at least 3 times doing that, so I don’t know why it would be any different for you.
Still can’t get the ENTIRE article up??
I’m hesitant to share a little trick I learned because I’m afraid if it becomes commonly used they will find a way to block it. But I know a way you can get in 99% of the time. If you know the author of the article, follow their account on Twitter or even just go to their Twitter account page. It’s rare they don’t promote their own articles. Click on the link in their feed. BLAMO!!! You’re in.
Thank you, Mr Herzog, for the reminder !
http://www.foxbusiness.com/features/2017/12/18/this-one-weird-tax-trick-could-shrink-trade-deficit.html
“Independent research suggests this could reduce the trade deficit by half, or roughly $250 billion a year, and deliver a one-shot 1% or greater boost to annual gross domestic product. This would be an accounting effect rather than a change in actual business or worker income.”
From the story:
“a U.S. company may design a smartphone in California, spend $250 assembling it in China, then sell it for $750 in a third country. The $500 difference represents the output of American designers, marketing executives and engineers and should be treated as an American export. To minimize U.S. tax, though, the company may lease or sell its intellectual property to an Irish subsidiary for a nominal amount, and the Irish subsidiary sells the phone for $750. Its resulting profit is taxed at Ireland’s 12.5% rate, or lower.”
Via the Double Irish Dutch Sandwich, the effective tax rate is 2.5% as 80% of these Irish profits end up in Bermuda. The company is Apple but they do not make the iPhones. Foxconn does. BTW – the new tax law includes something called GILTI (global intangible low taxed income). When I finally figure out how to explain this weird provision – maybe I will post an explanation on Econospeak.
The economy hasn’t recovered in per capita real income growth:
https://www.advisorperspectives.com/dshort/updates/2017/12/21/q3-real-gdp-per-capita-2-39-versus-the-3-16-headline-real-gdp
Apparently, many workers lost higher paying jobs and gained lower paying jobs or dropped out of the labor force entirely. An aging workforce doesn’t come close to explaining the slow “recovery” from the steep drop, particularly with older workers working longer – the aging shift began in 2000 and takes place slowly. I think, the corporate tax cut is most important, because it’ll expand and upgrade the capital stock, to raise productivity and wages, increase dividends and share buybacks, to raise retirement savings, and boost wages, bonuses, benefits, and jobs, all contributing to more spending. Entitlement reform can expand the labor force, to increase production, generate tax revenue, and slow or reduce entitlement spending. Therefore, it may not cause much more inflation and strengthen the dollar much initially.
“The chart includes an exponential regression through the data using the Excel GROWTH function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than the long-term trend. In fact, the current GDP per-capita is 9.3% below the pre-recession trend.”
Exponential regression is such a fancy way of saying trend line! Look – this is not news at all. Of course when a Great Recession lowers investment in new physical capital, destroys human capital, and also leads to less R&D one should not be surprised that output per capita growth will fall. Trump has the solution – tax cuts for the rich!!!!
“the aging shift began in 2000 and takes place slowly. I think, the corporate tax cut is most important, because it’ll expand and upgrade the capital stock, to raise productivity and wages, increase dividends and share buybacks, to raise retirement savings, and boost wages, bonuses, benefits, and jobs, all contributing to more spending. ”
Let’s unpack this. Yes – this decline did start with Bush43’s tax cut for the rich. Trump wants to do the same thing and hope for a different result?
Bottom Trader pretends the latest tax cut will lead to a lot more investment but many actual economic models suggest otherwise. He also pretends that giving shareholders more dividends (which is what is more likely than being spent on capital) will lead to an economic boom because people will consume this extra income.
But wait – in a full employment economy more consumption (less national savings) means less investment demand. So Bottom Trader’s latest contradicts itself. This is the nonsense one gets when one parrots political talking points before actually doing a sensible economic model.
FreeLuncher is famous for contradicting himself without even being aware of it. Nothing new there. What he doesn’t seem to understand is that new investment dollars will have to come for foreign investors. Nothing necessarily wrong with that and it could increase GDP; however, that does not mean it increases income for workers and it almost certainly means an appreciation of the dollar, which will hurt exports. If you work in the tradable goods sector (viz., manufacturing and agriculture), then the Trump tax cuts are really bad news. We’re likely to see a rerun of what happened to those sectors in the mid-80s thanks to St. Ronnie’s clueless economics. Once again, false consciousness among Trump’s supporters will end up making them worse off. All they’ll have left are old “Make America Great” hats as they wait in the unemployment line.
“What he doesn’t seem to understand is that new investment dollars will have to come for foreign investors. Nothing necessarily wrong with that and it could increase GDP”
Everything you said past this is spot on but let me note that a rise in GDP could correspond to a fall in gross national income as the income derived for foreigners invested here will accrue to foreigners.
Negative name caller #2, 2slugbaits, again is unable to comprehend what people write and economics in general. I stated the dollar will strengthen, although not much, because we’re not at full capacity and with higher productivity. Also, inflation may not accelerate much to where higher interest rates crowds out investment.
And, in negative name callers #2 upside down world, Reagan’s Average Per Capita Real GDP Growth of 3.61% in 1982-89 is no good, but Obama’s Average Per Capita Real GDP Growth of 1.34% in 2010-16 is something to admire.
If trade deficits didn’t shrink dramatically under Obama, which added to GDP, it would’ve been worse. And, without the fracking boom, to add to GDP, it would’ve been even worse than that. Moreover, we almost maxed out the countries credit for that measly growth, and had to shrink the military to where it’s spread out too thinly.
Is a bot writing this gibberish? Let’s see. A stronger dollar does what to net exports? Oh yea – it reduces them. A point Dr. Frankel made. DUH!
The Average Annual Per Capita Real GDP Growth of 3.61% was in 1982-88.
Obviously, the best explanation of the economy by the liberal/socialist is calling people names. The demographic shift had nothing to do with the Bush tax cuts, which created one of the mildest recessions in history and built upon the 1982-00 economic boom. Tax cuts are a fiscal expansion, which raise income and spending. Do you really believe the charts above suggest the output gap is closed and recent corporate announcements contradict my statements? Don’t know why you believe the economy needs to underproduce for long periods of time – I guess, you believe in long U-shaped recoveries or the destruction of potential output to close the gap.
FreeLuncher You still don’t get it. The tax cuts cannot simultaneously be applied to capital deepening and increase consumption spending. Buying back shares does not deepen the capital stock; it simply appreciates the value of existing assets. If there is a resulting wealth effect, then that increases consumption, not investment. If the tax cuts increase the value of retirement savings, then this will increase current consumption unless you believe you want to be the richest man in the cemetery. Corporations handing out bonuses means those profits will not be plowed back into R&D and investment. That’s good for current period workers; not so good for future workers. You’re just throwing up all these wonderful things that you’d like to see happen without recognizing that some of those good things contradict some of the other good things.
Historically (going back to 1870) per capita GDP has been 2.2%. It is true that over the last decade per capita GDP has slumped below that level. That’s partly a consequence of ill-advised fiscal austerity when the economy actually needed an expansionary fiscal policy; i.e., it’s the old Summers/DeLong/hysteresis problem. Over the long run there is only one way to increase the per capita growth rate, as opposed to a level shift in growth. Try reading some textbooks on modern growth accounting. You have to increase the old Solow/Swan residual if you want to increase the growth rate. As a practical matter that largely means making workers smarter and more innovative. Instead of tax cuts for the rich, what we should be seeing is a balanced budget fiscal expansion with more spending on education…and I don’t mean Trump University. It means more regulated competition and less unbridled rent-seeking. It means shorter copyright and patent timeframes. It means doing pretty much everything that Team Trump opposes.
Negative name caller #2, expanding and upgrading the capital stock can lead to higher productivity, higher wages, and therefore more consumption.
“Obviously, the best explanation of the economy by the liberal/socialist is calling people names. The demographic shift had nothing to do with the Bush tax cuts”
Boy did you go off topic. OK – you believe we are below full employment. It may be the case but then tax cuts for the rich represents dumb fiscal stimulus as the bang for the buck will be small. We could instead have high bang for the buck fiscal stimulus in terms of transfers to the poor (something you oppose) and infrastructure investment.
Once again Bottom Feeder babbles on contradicting himself many times. Keep it up buddy as it is really getting funny.
Negative name caller #1, so, you believe giving away money to the poor is more stimulative than providing the poor with a better job.
Don’t be too hard on bottom feeder. He is only a phd junior. He never had the chance to complete his education, before moving on to being a failed banker. He is filled with facts, but fails to understand how they are related. He knows just enough to be dangerous.
Negative name caller #2 jr – Baffling – I completed my college education. It’s the failed policies you support that failed – your policies filled with fantasies, shifting blame, and never learning from your mistakes – which makes you a consistent danger to society, particularly towards working people.
@pgl
I would strongly argue it started with Ronald Reagan. You had a guy who WANTED TO BALANCE THE BUDGET–Walter Mondale—who was SCORNED by an entire nation by speaking it out on a televised debate. In essence, ALL Walter Mondale was really talking about was REVENUE NEUTRALITY. But heaven forbid you tell a post-1981 America that they had to PAY for a bridge, an interstate highway, academic/scientific research, or their own military. But at this point with a significant portion of the nation that can’t read on a 4th grade level (much less BOTHER to read a newspaper), it doesn’t really matter where it “started” does it??
Smaller firms may benefit the most from lower business taxes and less regulation. They’ll be able to pay higher wages, to increase productivity. Also, there may be more business start-ups and expansions, to increase capital spending. I suspect, smaller firms will direct a much larger proportion of the tax and regulation windfalls towards wages and physical capital, than large firms.
More babbling from a bot? The reality is that this alleged tax simplification mad the tax code much more complicated. It is the large firms that hires the high priced tax lawyers to exploit this contrived mess – not your smaller firms.
FreeLuncher Negative name caller #2
FYI. The reason I started calling you “FreeLuncher” is because you ignore tradeoffs. That’s what gets you into all those contradictions that are plain as day to everyone else.
expanding and upgrading the capital stock can lead to higher productivity, higher wages, and therefore more consumption.
This is true, as long as you understand that this would be a level shift and not a change in the steady state growth rate. And that’s an issue with you because you don’t always seem to understand the difference. But in addition to your comment about increasing the capital stock you also said the Trump tax cuts would:
increase dividends and share buybacks, to raise retirement savings, and boost wages, bonuses, benefits, and jobs, all contributing to more spending.
Now parts of that could very well be true. It could increase dividends and share buybacks and contribute to more spending. The problem is that this statement and the prior one that I highlighted cannot both be true at the same time. That’s what I mean by trying to have a free lunch. If you want to increase the capital stock, then you have to reinvest profits rather that disbursing them as higher dividends, bonuses and share buybacks and other things that contribute to more spending. If you want to increase capital investment, then that means less current period saving, not more. But you’re trying to have it both ways. You want increased consumption and increased investment. That’s Stephen Moore style boosterism, not macroeconomics. You can’t just magically assume some kind of immaculate investment. If it doesn’t come from greater domestic saving, then it must come from foreign saving. It’s pretty hard to imagine a plausible scenario in which running large current account deficits does not affect the interest rate or the exchange rate. You might think that there’s a lot of slack left in the economy, but the Fed doesn’t and they’re the ones who set FOMC policy. Interest rates will increase. You can take that to the bank. In fact, they’ve been increasing quite sharply lately, or hadn’t you noticed? Pretending that increases to the capital stock just miraculously appear like manna from heaven is just free lunch thinking. It’s why the Reagan 1981 tax cuts were such a disaster and had to be scrapped and replaced with the more responsible 1986 tax bill.
Speaking of Stephen Moore boosterism – note this earlier from Bottom Feeder:
‘Reagan’s Average Per Capita Real GDP Growth of 3.61% in 1982-89 is no good’.
Ignoring the immense drop during 1981/82 in measuring growth is pure intellectual garbage. That the Stephen Moore’s have pulled out this intellectual garbage has often been noted. But leave it to Bottom Feeder to play this canard again. The man has lots of statistics but very little true economic integrity and clearly zero integrity.
Negative name caller #2, what you don’t understand is some portion of the tax cuts will go into capital spending to increase productivity and raise wages. So, GDP = consumption + savings will rise.
Also, the IMF in September 2017 stated:
“In economies where unemployment rates are below their averages before the Great Recession (such as Germany, Japan, the United States, and the United Kingdom), slow productivity growth can account for about two-thirds of the slowdown in nominal wage growth since 2007. Even here, however, involuntary part-time employment appears to be weighing on wage growth, suggesting greater slack in the labor market than headline unemployment rates capture.”
“what you don’t understand is some portion of the tax cuts will go into capital spending to increase productivity and raise wages. So, GDP = consumption + savings will rise.”
My Lord – you do not understand basic macroeconomics. If we are at full employment, there would be no immediate increase in GDP. For anyone to write such stupid intellectual garbage tells the rest of us you are either not trying to engage in a real discussion or you are the most clueless person ever.
I have long held that $300 is too much for Greg Mankiw’s macroeconomic text, you clearly need to read it. OK cheapo, I will buy it for you if you promise to read the whole thing. Until you do – stop wasting our time with your serial incompetence.
Econbrowser – January 2017:
“The fraction of U.S. GDP devoted to investment in nonresidential equipment and structures has been below the historical average every year since the Great Recession. Lower investment spending means not just lower demand for goods and services. Over time it has left us with less productive capital than we would have had if historical trends had continued. There has been a clear slowdown in the rate of growth.”
My comment: It seems, the U.S. economy became more labor intensive, because the weak recovery, from the severe recession, hasn’t yet fully re-employed the jobs lost in the recession and fully employed population growth, keeping labor relatively cheaper than capital. So, replacing and expanding the capital stock have been limited. Eventually, physical capital will replace labor when the labor market tightens and wages rise. Lower business taxes may accelerate higher wages and more capital spending.
Professor Hamilton attributes part of the decline in capital spending to: “As we move from brick-and-mortar stores to online sales, we need fewer retail structures.”
What does Amazon pay?:
July 2013:
“The average U.S. warehouse worker, at Amazon or anywhere else, earns a third more than a retail worker. The median hourly wage of a warehouse worker is $13.50, or about 30% more than the average U.S. retail worker’s pay of $10.09, according to the Department of Labor. Amazon pays…an average hourly wage of about $12.”
The real minimum wage in 1968 was $10 an hour. Obviously, there has been some productivity gains (I heard, about 10 years ago, productivity in the fast food industry increased about 30%, since 1968, which is slow). How many millions or tens of millions of Americans are earning less than a (independent) subsistence wage?
“How many millions or tens of millions of Americans are earning less than a (independent) subsistence wage?”
Lots and whenever any of us suggest we help these individuals – YOU blame their poverty on their alleged laziness. Of course it is not laziness but leave it to you to dishonestly claim so in one comment and then pretend you care about them.
Let’s not forget, that over the very long run, growth rates must trend down to 0% – or have we all forgotten that exponential growth rates are finite?
And, just for fun, why don’t you all chalk out what a modest 2% real growth rate in per-capita household incomes leads to over time. Everyone a millionaire, everyone, woman, man and child…
I’ve long looked at the value of the dollar as one of the prices that changes to assure that the identity that the current account deficit equals the savings investment gap prevails. For example, under Reagan the dollar soared when the Japanese wanted to buy more dollars to invest in the US than the current account provided. So the dollar rose, leading to a larger current account deficit. Ii followed that the larger supply of dollars lead to a weaker dollar.
We had crowding out under Reagan and Bush. It is just that it worked through the dollar, not interest rates.
We are now undertaking the same fiscal policy as under Reagan and Bush. So why should you expect different results? We will get crowing out as the federal deficit absorbs a larger share of GDP. The only question is how will it show up — a stronger dollar, higher interest rates or some combination of them.
We are now undertaking the same fiscal policy as under Reagan and Bush. So why should you expect different results?
Exactly. And why do folks in farming and rust belt manufacturing expect a different result? They voted their jobs away, but I guess they’ll always have that MAGA hat.
As to interest rates, look at the 3-month and 2-year rates today compared to where they’ve been the last five years. Yikes.
Farm income is often from sales abroad. To the degree that fiscal stimulus appreciates the US$, this will hurt exports and farm income. To the degree that we use trade protection for the importing competing sector’s benefits, the same logic holds. Trump’s brand of economic policy is very bad news for farmers.