Monday, 6 March 2017

Nouriel Roubini- discovers a 'temporary but persistent' effect. Wow!

Amartya Sen is no longer the stupidest Econ Professor in the World. That title belongs to Nourinal Roubini who has discovered that a thing can be 'temporary but persistent'. This deserves a Nobel prize.

Nourinal, a modest man, buried his discovery in the following article for Project Syndicate. (My remarks are in bold) 

America’s Bad Border Tax-
The United States may be about to implement a border adjustment tax.  Or it may not. The Republican Party, now in control of the legislative and executive branches, views a BAT – which would effectively subsidize US exporters, by giving them tax breaks, while penalizing US companies that import goods – as an important element of corporate-tax reform. Really? Is the Republican party a monolithic party with an univocal view on BAT? Brady & Ryan- and most House Republicans may be on side, but there are a lot of skeptics. They claim that it would improve the US trade balance, while boosting domestic production, investment, and employment. They are wrong. The claim is a positive one. We can have a discussion about its truth-makers. We can't say the claim is wrong for any a priori reason unless, of course, we believe that something can be 'temporary but persistent' in which case we can believe anything at all by the logical principle ex falso quodlibet- from a false premise anything at all can be deduced.

The truth is that the Republicans’ plan is highly problematic. Along with other proposed reforms, the BAT would turn the US corporate income tax into a tax on corporate cash flow (with border adjustment), implying far-reaching consequences for US companies’ competitiveness and profitability. A BAT is like an exogenous shock. There is a one-off shakeout and then improved competitiveness all round- provided drivers for autonomous growth continue to operate. Since the US is technologically advanced and has such localised drivers, a shakeout is a good thing. Profitability is a separate matter. The alternative to BAT is not the status quo (otherwise Trump wouldn't be in the White House) but 'voluntary quotas' and other non Tariff barriers which create rents and harm competitiveness and, long term, profitability, output, and employment as well.
Some sectors or firms – especially those that rely heavily on imports, such as US retailers – would face sharp increases in their tax liabilities; in some cases, these increases would be even greater than their pre-tax profits. Yes. There will be a shakeout of firms that are poorly managed and can't climb the value chain. That's a good thing. It frees up resources. Meanwhile, sectors or firms that export, like those in manufacturing, would enjoy significant reductions in their tax burden. Only if there is no equal and opposite dollar appreciation. Is that what you are assuming Nourinal? Or are you just taking the piss? This divergence seems both unwarranted and unfair. Urm... the warrant is provided by a Democratic process. We may feel the outcome of a Democratic process is unfair but there is a Democratic way in which we can reverse that outcome. 

The BAT would have other distributional implications, too. Studies indicate that it may hit consumers among the bottom 10% of income earners hardest. Any change in economic policy, or exogenous shock, can be shown to affect the bottom tenth the worst according to some metric because  that is where elasticities are lowest. But the bottom tenth changes in composition all the time. If the effect of BAT & subsequent retaliation is to decrease Capital mobility and Technology offshoring then some people in the bottom tenth will be better able to climb out of poverty. Of course, they will be replaced by others less elastic in their behaviour by reason of some vulnerability we can and should separately address.  There is no knockdown distributional or a priori normative argument here. Yet it has been promoted as a way to offset the corporate-tax cuts that Republicans are also pushing – cuts that would ultimately benefit those at the top of the income distribution. Once again Nourinal is fallaciously assuming that the composition of the top percentile won't change. It will. Those whose wealth is generated by US workers gain at the expense of those who are off-shoring jobs. The point about BAT is that it can reduce Corporate rent-seeking. That's why Trump was sceptical about it.
 Alan Auerbach- educated at Yale and Harvard and now a Prof at Berkeley (that's right, he's a pinko pointyhead who advised Kerry in 2004)- is the big brain behind BAT. This is his policy paper for the Centre for American Progress. Not exactly a shil for the Koch Bros, right? But Nourinal isn't gonna acknowledge this. He writes as though this whole thing has been cooked up by them nasty One percenters.

Making matters worse, the BAT would not actually protect US firms from foreign competition. So it won't reduce competitiveness? Good to know. Economic theory suggests that, in principle, a BAT could push up the value of the dollar by as much as the tax, thereby nullifying its effects on the relative competitiveness of imports and exports. Cool! In that case, Nourinal, you were wrong to say that exporters would gain an 'unwarranted and unfair' advantage over importers.

Moreover, the balance-sheet effects of dollar appreciation would be large. Because most foreign assets held by US investors are denominated in a foreign currency, the value of those assets could be reduced by several trillion dollars, in total. Cool! Since US investments abroad are more productive than foreign investments in the US, the net wealth effect boosts US aggregate demand while incentivizing better global portfolio choice by US investors. Win Win! Meanwhile, the highly indebted emerging economies would face ballooning dollar liabilities, which could cause financial distress and even crises. Highly indebted emerging economies have structural problems which should be treated with a separate package of policy instruments. Tinbergen's rule applies. This isn't an argument against BAT, it is one for effective Overseas Aid policies.
Even if the US dollar appreciated less than the BAT, the pass-through from the tax on imports to domestic prices would imply a temporary but persistent rise in the inflation rate. Wow! Economists didn't know something could be both temporary and persistent! This discovery deserves a Nobel Prize! Perhaps what Nourinal means is 'There will be a one off price shock and then later on, as a result of retaliation, a secular cost push trend which persists.' But that's not what he said. Why? Nourinal is just taking the piss. Some studies suggest that, in the BAT’s first year, the new tax could push up US inflation by 1%, or even more. So nobody will notice. The US Federal Reserve may respond to such an increase by hiking its policy rate, a move that would ultimately lead to a rise in long-term interest rates and place further upward pressure on the dollar’s exchange rate. Long term interest rates should be higher. A sharp shakeout, due to dollar overshooting, is a good thing. Nourinal is aware that this talk of a one off one percent price shock aint scaring nobody. It really does not matter and the dynamic benefits are considerable.

Yet another problem with the BAT is that it would create massive disruptions in the global supply chains that the US corporate sector has built over the last few decades. Again, a good thing. Supply chains need to be disrupted so new Technology take-up is incentivized. The alternative is rent-seeking non-tariff barriers which have dynamic costs. By undermining companies’ capacity to maximize the efficiency of labor and capital allocation – the driving motivation behind offshoring – the BAT would produce large welfare costs for the US and the global economy. Exogenous shocks build, not undermine, capacity to efficiently allocate resources. No shocks- or shocks fully compensated by rent-seeking- undermine the entrepreneurial skill-set involved in 'creative destruction. That's not a good thing. Why have a market if we deny ourselves the 'autonomous growth' type dynamic benefits associated with entrepreneurial culture? 
Rent-seeking behaviour results in 'dead-weight' welfare losses. Auerbach designed BAT so as to eliminate that type of 'excess burden'.
The final major problem with the BAT is that it violates World Trade Organization rules, which allow border adjustment only on indirect taxation, such as value-added tax, not on direct taxes, like those levied on corporate income. Given this, the WTO would probably rule the BAT illegal. In that case, the US could face retaliatory measures worth up to $400 billion per year if it didn’t repeal the tax. That would deal a serious blow to US and global GDP growth. Retaliation is a given. But, the world has changed. Europe will sooner or later realise that it can't do fiscal harmonization based monetary union- BAT based subsidiarity is the way to go. Smaller countries have to go in for Industrial policy- they have to shield 'autonomous growth' type niche industries from exchange rate overshooting.
China will see that claw-back on Intellectual Property helps it with its own capital flight and corruption problem.  There is a different path out of US 'exorbitant privilege' and China appears cohesive enough to commit to it over the course of this year. Mexico and Canada, too, may find that they retain gravity model absolute advantage while gaining 'autonomous growth' type benefits for dynamic socio-political elements within their polities. 

No comments: