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Notes -
It's About Stupid Economics, Stupid
Two items of late have caught my eye. The first is this effortpost by Tyler Cowen from Marginal Revolution. I have the feeling that more than a few mottizens are regular MR readers or, at least, one of the blogs in the larger MR orbit. It covers the economics and regulatory process of an unrealized capital gains tax.
What makes this post noteworthy - all substance aside - is that it is a lengthy effortpost. Cowen largely does not do that. Most of the daily blog posts are link dumps. Occasionally, he'll add maybe up to 75 words of commentary usually on very academic economic things. He re-posts his own Bloomberg Column. An extended takedown of a single policy proposal (with a new follow up today) is remarkable.
The other item I'd pair with this; both Harris and Trump are against the potential U.S. Steel acquisition (by a Japanese firm). This tracks with Trump since forever. A big part of his career was him seeing the Japanese buy important NYC real estate and he's never gotten over it. In fact, a lot of his foreign policy is exactly what you'd model for a Reganite businessman from the 1980s. For Harris this tracks as far as "big business bad" goes (see: Lina Khan at the FTC), but her comments on it have been designed to appeal to highly emotive pro-USA union workers. It is remarkable how much both of the candidates' comments on this specific US steel deal could be swapped with a zero percent chance of detecting it.
Nationalistic arguments for blocking the U.S. Steel deal are emotive. "National Security" concerns are not with zero merit, but would be a red herring. This seems to be, like most things with this Presidential race, vibes based.
Regardless of its economic "merits" an unrealized cap gains tax will never get enacted. It's dead on arrival for any Congress you can think of over the next 4 years at least. Again, it's a vibes based signal of "those darn rich folks!"
The culture war angle here is interesting because of the incredible horseshoe shape in this case. The overlap is real and significant. Both candidates ignore some pretty basic economic theory in order to win some vibes-votes. Not at all unheard of. What is the fact that they both are ending up in the same place despite being "on opposite sides of the spectrum."
I see this as the inevitable outcome of a large portion of the population (baby-boomers with about 50% of millenials aiding and abetting them) simply wanting to avoid reality for as long as possible and being willing to vote note for someone who agrees with their favored method of ignoring that reality.
Sort of relevant, but here's a fun question I ask people to guess.
What is the market cap of U.S. Steel? Here are some reference points to aid you.
So, how much does the stock market think U.S. Steel is worth?
I genuinely do not know, so I'll guess $10 bn.
You're spot on. It's $8.6 billion. Like any good student, you guessed the teacher's password!
The point I was making is that despite this company being "essential" to the U.S. economy, it's worth 1/5th as much as an energy drink company. In fact, the energy drink and burrito sectors of the economy are 10x the value of the steel sector.
The U.S. economy has been so hollowed out that these remaining old economy companies linger on like zombies and political footballs, basically forbidden from ever making a dollar of profit for their investors.
But I think there is a genuine difference between Trump and Harris here. In the Trump world, tariffs go up, regulation goes down, and U.S. steel might actually reward its patient investors. In the Harris world, regulation goes up, and maybe the steel industry gets a bail out or something, but 100% of the value is captured by unions so the company continues to exist as a zombie like it has for half a century. In the Harris economy, nobody in their right mind invests in steel, or autos, or any heavy industries. Detroit, Ohio, and western PA exist as pitiable charity cases while the smart money starts another energy drink company such as Celsius (market cap $8.7 billion).
I'm not sure Trump's tariff plan will work. It might not. But it's at least trying to let the industrial regions stand on their own two feet again.
Tariffs go up, so U.S. steel books more revenue but the downstream price increases mean that the workers' (and investors'!) dollars are worth less. Say what you want about mainstream economics, but tariffs are universally seen as nothing more than self-inflicted price floor raises.
Re-industrialization is a good concept, but it's incredibly fraught. Look at the CHIPS act. This was specifically designed to be a quick-and-easy cut-the-corners "high tech" boost to the economy and the number one complaint about it is that literally nothing has happened. Forget good or bad in terms of economic value, the checks aren't getting cut and so stagnancy reigns.
A (re)industrial policy could be good or it could be bad. Either way, it relies on state capacity and a semi-functional bureaucracy. I don't see that prerequisite as being met right now. That's why Trump's Schedule F reform is actually far more important for those Western PA steelworkers. It's just impossible to make that connection clear in a 10 second sound bite.
Yeah, the CHIPS act was a disaster and I think all the money will be wasted. But with steel tariffs, we're not trying to rebuild something complicated from scratch. We're just trying to overcome Chinese dumping. And we're not asking the government to make decisions, we're just letting the market do the work with our thumbs on the scale a bit.
Note that without tariffs or other industrial policy the Big 3 automakers will be bankrupt and out of business within 10 years. I wonder how economists would suggest dealing with this disruption. Welfare for the laid-off workers? Retraining as coders? The neoliberal consensus has already devastated the Rust Belt pretty thoroughly, so I doubt there solutions will work this time.
And of course, looking at things from an economics-only perspective ignores the fact that we are in a great power struggle with China, one in which we are losing badly. Tariffs allow us to prevent Chinese dumping with the fewest disruptions to the market possible. The alternative proposed by Harris is more socialism.
Chinese dumping of steel isn't a problem in the slightest. In 2017, the last full year before the Trump tariffs, the volume of Chinese steel importiwas so low I can't even find statistics for it; it was outside the top ten, lower than countries like Turkey and Taiwan that no one seems too concerned about. I imagine that the number is even lower now. We currently only import about a quarter of our steel the number one supplier being Canada by far, and number two being Mexico, neither of whom are subject to tariffs.
Weird considering China produces 12.5 times as much steel as the U.S. and 60% of the world total. I have to imagine that would impact global prices. But I'll accept that perhaps China isn't dumping steel to the U.S. specifically, just pretty much every other industrial product.
We import about 3 times as much from China as we export.
China doesn't export raw/barely processed materials (like steel) but finished goods. Chinese steel is turned into cars, ships, airplanes, buildings, tools etc.
The Chinese government is directing economic expansion in new directions, now that physical infrastructure's mostly been built out cheaply. Local steel demand is falling a bit as things rearrange themselves, leading to an increase in Chinese steel exports (to Africa etc.) but it's not even 10% of production. Indeed, exports make up less than 20% of the Chinese economy overall.
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