Where is Intro to IR When You Need It?

One of the basic claims I make as a poli sci professor is that my goal is to help the next generation become more informed citizens, so that they understand their interests, and can vote accordingly.  So, when I see a a guy getting upset that his business is hurt by tariffs, I want to scream.

I wish more voters had intro to International Relations. Trump kept his promise on trade and it has had predictable results. Guy was brpetrayed by his own ignorance https://t.co/tROnwa4GoX

— Steve Saideman (@smsaideman) January 7, 2019

I didn't spend a lot of time on International Political Economy in my Intro class (I don't teach it anymore as my Carleton course load is purely grad student stuff, but I miss it--twas a fun class to teach).  IPE is not my strength, but I did get the basics across:

• free trade is the story of concentrated pain and diffuse benefits: that consumers benefit but not obviously so by lower trade barriers but less competitive sectors get hit hard.  And politics often means that smaller groups actually have louder voices because they can organize.  Hard to organize all consumers to care a lot about paying too much for their sugar.
• reciprocity is a thing.  It can lead to cooperation or conflict, as the strategy of responding to what the other country did can lead to gains over the long term or unending rivalry.  The key: don't expect your nasty moves to go unpunished.
• finally, I basically sold them Helen Milner*: that because many firms rely on exports or rely on importing components, they will not want tariffs as they hurt their sales abroad (due to retaliation) and they hurt their sales at home because their stuff gets more expensive since they have to build the cost of higher inputs, as the tariffs are indeed a tax they must pay stuff they import, into the price of their goods.

So, anyone taking my Intro to IR class would know that a politician promising to raise barriers to trade would be bad to vote for if one had a job that depended on either using foreign components (which is very, very common especially in the auto industry) or selling abroad (which would include most bigtime farming such as soybeans).  Of course, the Americanists will tell me that people don't vote their interests, and it was more important to people that they get a President who fight immigration even if it was not a threat or to support their values even if he didn't live by them, etc.

Thus, I wish that more Americans had a basic knowledge of International Relations.  They don't get that in high school civics classes (one reason I avoided that class and happened to discover by accident in college that Poli Sci includes IR).  At the college level, American Politics may be required, but IR?  Probably not.  Too bad.



*  That book is also a great demonstration of how to turn a dissertation into a good book.

Why Tariffs Suck Mightily

Once again, I caveat that I don't study International Political Economy, but have opinions and such anyway, partly because I voyaged through some of that stuff as I studied for my PhD comprehensive exams and partly because I taught a smidge of it in my intro to IR classes.

Why do tariffs suck?  My brother asked about this, so I thought I would give it a shot here. 

First, they are a tax.  They artificially raise the price of a good or service (seems mostly on goods since we care more about protest manufacturing jobs) so as to make domestically produced goods more competitive.  Anyone who opposes taxes should oppose tariffs, but, well GOP hypocrisy is nothing new.  The question with any tax, from my point of view, is whether a tax is progressive or regressive--who bears more of the burden: the relatively well off or the relatively less well off.  For tariffs, it depends, I guess, on what the tariff is on and how the costs get passed on (more on that in a second).  Anyhow, first, tariffs are taxes.

Second, as a tax, they make stuff more expensive without changing the value--so they are inflationary.  We have gotten so used to low inflation that we have forgotten that inflation is bad for people with fixed incomes and people with low incomes.  Given that we have not had much wage growth for what? Thirty years?  Not good.

Third, more importantly, tariffs make stuff more expensive, so people have less money for other stuff.  Here's the fun thing: it allows domestic producers to raise their prices to just below the level of the tariff, so they get to capture some profits.  Woot?  Depends on where those profits go.  See aforementioned wage stagnation reference.  The classic stat I remember from long ago was that various protections on steel jobs in the 1980s cost something like $200,000/job saved.  Guess what?  Steel workers were not getting $200k....

Fourth, as Milner reminds us, much of what we buy includes foreign parts, so raising the prices of inputs via tariffs increases the costs of other stuff, making them less competitive on world markets, such as .... cars made in the US these days.  Seems like Trump wants to undo every Obama legacy, including saving the auto industry.  Think about it: a Honda made somewhere else with European or Asian steel will cost less than a Honda made in the US with more expensive steel (either American or foreign with tariffs added).  So, tariffs may help one industry but harm others. 

Fifth, reciprocity is a core reality in International Relations for good or ill--countries respond to what one does.  So, other countries put tariffs on American goods, making them less competitive in European and Asian markets.  How are soybean farmers doing these days?  Oh wait, the US government can pay off some of these folks.  Sure, who gets these payments?  Everyone who is harmed or those who are politically relevant to those in power?  Markets may not be perfect (indeed, they need to be regulated to soften shocks), but political payoffs to the losers of tariffs is kind of a dumb way to deal with international trade.  Instead, maybe invest money to train people in industries that are harmed by international trade, and, more importantly these days, automation?

Six, comparative advantage is a thing.  Yes, some countries will out-compete the US because they have cheaper labor, weaker regulations, natural endowments, etc.  We can't expect the US to have tariffs on those areas where the US is at a disadvantage and other countries not do the same.  The comparative advantage logic, if allowed to play out, allows us all to get more stuff for lower prices and higher quality than if we all just relied on our own domestic producers.  Yeah, it causes economic pain to some sectors.  The reality is this: that pain is concentrated in some sectors while the rest of society benefits.  Which is why it is natural politically to have high tariff (and non-tariff barriers): politicians pay more attention to the small groups with much pain than the larger groups where the pain is spread out.  In a democracy, um, that ain't good.  So, again, the question is how to deal with the pain experienced by the small groups.  Tariffs are a crappy way to deal with such pain.  

I have forgotten other dynamics and issues.  It is the case that international trade can lead to races to the bottom--deregulation, low wages--but it probably also has something to do with the fact that there is less absolute poverty in the world now than ever before.  Oh, and folks getting more income to work can ultimately lead to more pressure to improve labor regs and environmental policies.  For instance, the legitimacy of the Chinese government now hinges more than ever on whether people can breathe. 

There are tradeoffs involved, there is no perfect solution, but here's iron law of policy in the 21st century: if Trump is doing it, it is almost certainly dumb and self-destructive.

Amateur Political Economist and Austerity

Caveat: I am neither an economist nor a political economist, so I may be straying into territory that I know not.

Today's post by Dan Drezner about Angela Merkel came two days after I had a conversation with a German post doc who is hanging out at NPSIA this fall, and both post and conversation dwelt on the same basic issue.  Dan argues that Merkel, while getting much credit for being a pillar of the international order (liberal or whatever), her responses to the Greek crisis and larger financial crises of 2008 did significant damage to this order. 

When the post doc said she was planning a conference and wanted to build a theme around Germany's role in the world, and was at a loss.  That Canada's role in the world is as a peacekeeper--at least its self-perception, but Germany has just been restrained for seventy years.  I pushed back a bit, suggesting that Germany's brand was to fight inflation (and I should have included budget deficits).  That non-Germans have certainly noticed Germany's role in economic relations, compelling countries to spend less and perhaps tax more.

I have been arguing here and there that while much of the "populism" we see in Europe is due to the migration crisis, it is also a crisis of the parties.  That center and center-right parties pushed austerity plans that reduced the help given to people harmed by international economic shocks.  That left wing parties didn't do enough to fight such efforts and were sometimes complicit.  Which has left people dissatisfied with mainstream parties, causing them to look to the far left, far right or to opting out.

In the US, Obama did try to do stuff to cushion workers from the crisis, but he was fought at every step by the Republicans and didn't have sufficient support among the Democrats.  He probably could have done more.  Funny how the Republicans cared so much about budget deficits during a recession and not so much during an expansionary period.

Yep, I am a Keynesian.  I don't understand all of the negative consequences that come with the Keynesian toolbox, but the idea of counter-cyclical policies--of governments spending more during recessions--makes sense to me. That economists got taken in by a bad idea--austerity as a magic bullet--does not make sense to me.  That politicians on the right grabbed on to it makes perfect sense since they want to starve the government and make government spending less legitimate.  Note how the GOP is now back to caring about deficits and wants to cut the social safety net more rather than, dare I say it, reversing the monster tax cuts that have created these deficits.

Anyhow, I don't know Merkel's background and politics to know whether she was playing party politics, whether she was buying into the austerity fantasy, or whatever.  I do believe that she was generally a force for good in maintaining European unity in the face of Putin and now having to deal with Trump, even as I whined about Europe being too slow/weak in its response in the Baltics.

My first reaction to Merkel deciding to leave her post as leader of her party and putting a clear end in sight of her Chancellorship was that democracies must democracy--that turnover is necessary.  That we need to be cautious about betting on individuals rather than institutions.  The question now is whether German institutions will produce new leadership that supports the international order in ways that undermine it less, if that makes any sense.

Trade War 101

I was quick to tweet but slow to blog about Trump's desire for a trade war because I don't research or teach International Political Economy.  However, the stuff here is so very basic that I can at least highlight some of the truly stupid stuff here.

1. Countries will respond, raising barriers to American goods, so many American companies will be hurt.
2. Any/all companies in the US that use steel/aluminum as inputs will have to raise the prices of their goods, making them less competitive on world markets and more expensive to those who buy them (tis bad for the car industry, for instance).  Others have pointed out that there are far more jobs and money in the businesses where people rely on steel/al products than in the production of steel and aluminum.  This is like fucking over the solar industry for the very small coal industry.
3. As a result, this may cause inflation (going along with huge deficit spending in a relatively booming economy).  
4. This will undercut the international institutions that the US built to, um, help the US.  While these agreements/norms/institutions were built so that others would buy in, they were very much aimed at creating an international environment conducive for US businesses.  Given that the World Trade Organization and other dispute panels have more often found in favor of American complaints than Chinese, for instance, this gutting of the trading order is not good.
5. Steel is not coming back.  The rust belt will not unrust.  
6. Protectionism like this always costs far more per job saved than what those jobs pay.  In other words, this is a very inefficient way to help these workers.  Better safety nets and training programs would be far better.
7. Targeting allies is bad.  This will hurt Germany, Japan, and Canada probably more than it hurts China and certainly far more than Russia.  So, yeah, another example of Trump, stuck in the 1980s, hurting the US position in the world.  
8. Pretty sure all of that supposed infrastructure program (not to mention a wall) require steel, so the prices of such stuff will escalate.

Of course, Trump doesn't care.  He is just angry at some slight, and we just have to be relieved he chose trade war rather than the other kind of war vs. North Korea or Iran.  Trump has never demonstrated much insight from the lessons of the 1930s, and he has always been a mercantilist.  The only good economic deal is an exploitative one.  The problem as I started off with is that other countries are not like contractors in the NY construction business--they can and will retaliate.  I have long wondered why the markets have liked Trump because this day was coming.... but they got their tax cuts.

Since tariffs are taxes, Congress does have a say.  Will they undelegate the authority they delegated to the President?  Will the GOP in Congress resist?  Is this like the tax cuts or like the Russian sanctions?  I have no idea since it requires Paul Ryan and Mitch McConnell to do the right thing.  How likely is that?

G What?

The debate about Ottawa and its relative wonderfulness (or not) started with the notion that its capital is not fit for a G-7 country.  Which, of course, raises the questions of what a G-7 country is and is Canada really one of them?  Indeed, the first meetings of what became the G-7 didn't include Canada way back in the early 1970s. 

The basic idea is to have these meetings of the biggest/most advanced industrialized countries to help coordinate the world economy.  They don't have control, but if they coordinate their policies, they can push/shape/influence exchange rates and other aspects (I think, I am not an IPE expert). 

Russia was included for a while but got booted because of that whole Putin thing.  China?  Not invited yet.  But does Canada belong?  If you had to come up with a list of the major players in the international economy and restricted it to democratic countries with capitalist economies (no China, no Russia), who would be included?  Again, size is key since the size of one's market matters a great deal.

Well, the first question is whether to have the EU as a member or have some countries in it, since the EU is a larger economy than all under most measures except where China bounces past.  But the EU is not as coherent as it should be, and there is the pesky reality that the UK has its own currency, which matters for stuff that relates to currencies.  I tend to be an EU skeptic, so they are not on my list, and that does match reality since the current G-7 include four European countries--France, Germany, Italy and the UK. 

So, the largest economies basically goes as follows:

1. China
2. United States
3. India
4. Japan
5. Germany
6. Russia
7. Brazil
8. Indonesia
9. France (sometimes ahead of Indonesia)
10. UK
11. Mexico
12. Italy (sometimes ahead of Mexico)
13. South Korea
14. Saudi Arabia
15. Canada

Hmmm, if you drop out China/Russia/Saudi Arabia since it seems to be a democratic club, then one has to ask about the up and coming big economies of India, Brazil and Indonesia.  India has been democratic for nearly its entire history, but one would not call it an advanced industrial or post-industrial economy.  Brazil?  Its democratic record is not bad of late but most recently seems to be most interesting from a political stability standpoint.  Indonesia?  Shorter history of democracy, not an advanced economy.  Mexico?  Semi-failed state....  So, dropping those (and I would hesistate to drop India and Brazil, but let's go for what the G-7 has tended to stand for), we get:

1. United States
2. Japan
3. Germany
4. France
5. UK
6. Italy
7. South Korea
8. Canada

 Um, ooops.  South Korea has been a pretty advanced economy for quite awhile, sufficiently democratic since the 1980s, and is probably seen as a more significant actor in the world economy than Canada, especially when oil is cheap. 

So, if you had to only have seven, I am not sure Canada belongs.  It gets close only if one drops some major economies that probably have more influence.

Asking if Ottawa is a good enough capital for a G-7 country, which is a silly way to talk about it anyway, might be missing the point.  Perhaps not G-7 worthy, but G-7 or G-15?  Sure.