Trump’s Mercantilist Mess — Robert J. Barro

When US President Donald Trump boasted that trade wars are "easy to win" in March 2018, it was convenient to dismiss the remark as a rhetorical flourish. Yet it is now clear that Trump meant it, because he genuinely believes the bizarre and anachronistic macroeconomic theories underlying his approach....

When even Robert Barro is against you.

Interestingly, Professor Barro reiterates that imports are an economic benefit in the sense of increasing a nation's real wealth, and that trade is really about acquisition imports as real economic goods rather than increasing a country's financial wealth in terms of gold or, now, accounting entries.

By embracing a primitive mercantilist model in which exports are “good” and imports are “bad,” Trump has reversed this impeccable economic logic. In a mercantilist model, an excess of exports over imports contributes to national wealth through the accumulation of paper claims (previously gold). This seems to be what Trump has in mind when he complains that China is draining $500 billion per year from the US economy, mostly by exchanging Chinese goods for US Treasury bonds. Needless to say, it is hard to see how receiving a lot of high-quality goods at low cost amounts to “losing.”

Just as the MMT economists have been saying along with most other economists that understand trade.

Project Syndicate
Trump’s Mercantilist Mess
Robert J. Barro | Professor of Economics at Harvard University and a visiting scholar at the American Enterprise Institute

Trump’s Cross of Gold — Barry Eichengreen

US President Donald Trump wants to compress the United States trade deficit and enhance the competitiveness of domestic manufacturers by using tariffs to raise the price of imported goods. And the fixed exchange rates he needs to achieve that goal are the real reason behind his nomination of Judy Shelton to the Federal Reserve Board.... 

Project Syndicate
Trump’s Cross of Gold

Barry Eichengreen | Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund

Bill Mitchell — The German undervaluation obsession is resistant to ‘reform’

Martin Höpner, who works at the Max-Planck Institute for the Study of Societies in Cologne, recently sent me a copy of his latest paper – The German Undervaluation Regime under Bretton Woods: How Germany Became the Nightmare of the World Economy (published January 2019). He presented this research at a Makroskop workshop in Wurzburg on October 13, 2018 – I was on the same panel as him at that workshop and enjoyed some very productive conversation about these issues. It is a very interesting historical analysis of the way that the German elites (central bank, industry groups, banks, politicians, and trade unions) have collaborated since the 1950s to suppress domestic consumption and maintain the nation’s export competitiveness, even though this has undermined material prosperity for workers. The relevance of the analysis to current debates about the Eurozone and its capacity for reform are that the undervaluation regime is entrenched in Germany’s institutions, its history, its culture, and its power elites and have been that way for many decades. What the Europhile progressives, who still think reform is possible, have to show is that this entrenched position can somehow be abandoned. They have never provided any convincing argument to substantiate that hope/belief. That is why I continue to call them out as dreamers – good intentions but naive to history....

It is hugely to the advantage of the German elite to devalue the DM in effect by substituting the euro for it. This is the foundation of contemporary German mercantilism. It is a major reason the EZ cannot work. The advantage to Germany is too great under it, and the German elite is not willing to give it up.

Bill Mitchell – billy blog
The German undervaluation obsession is resistant to ‘reform’
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

The Euro is Not Without Alternative
Wolfgang Streeck

Ramanan — John Maynard Keynes On Surplus Nations’ Obligations

For The Economist, Germany’s behaviour is a threat to free trade. For Post-Keynesians, Germany’s behaviour is expected (and ought to be different) and is a good reason to reject free trade.

But it’s not a bad thing that The Economist recognizes Keynes’ insights.

The Case for Concerted Action
John Maynard Keynes On Surplus Nations’ Obligations
V. Ramanan

C.P. Chandrasekhar and Jayati Ghosh — Where will global demand come from? (4 charts)

The authors attribute the problem chiefly to mercantilist Germany.

Real-World Economics Review Blog
Where will global demand come from? (4 charts)

C.P. Chandrasekhar and Jayati Ghosh

John Weeks — Eurozone’s So-Called Recovery Masks A Dark Secret: Mercantilism

Broad opposition in Europe to the Trans-Atlantic Trade and Investment Partnership has prompted its supporters to summon the “protectionist” spectre. In response to the criticism of TTIP by US presidential candidates and progressive politicians in Europe they, according to media reports, are talking up the end of “free trade” that has allegedly brought so many benefits (to so few).

By contrast, we find little reporting of the considerably stronger spread of EU mercantilism, the witch’s familiar of fiscal austerity. Adam Smith defined mercantilism as government policy that seeks to “restrain imports and encourage exports”. It is as applicable to current EU austerity programmes as it was to Smith’s world three centuries ago.

In the 18th century governments used direct restrictions on imports and other market interventions in an attempt to achieve permanent trade surpluses. Governments implement the 21st century version of mercantilism with different policy instruments. In the place of direct restrictions on trade we now see real wage reductions, manipulation of business taxes, and currency depreciation through loose monetary policy (so-called quantitative easing and negative interest rates).

This “market friendly” version of mercantilism allows the ideologues to maintain the fiction of “free trade” while pursuing the mercantilist goal of persistent trade surpluses. This perverse inversion of rhetoric seeks to justify recovery in Europe based on beggar-thy-neighbour policies.…

Real versus financial terms of trade:

For over two hundred years opposition to mercantilist policies characterized the economics profession almost regardless of theoretical or political orientation. I can recall that when I took international trade theory many years ago at the University of Michigan, my professor (PhD under Milton Friedman) contemptuously dismissed concerns about a trade deficit. He considered a deficit a positive outcome, allowing a country to consume more than it produced.

How times have changed. The seizure of policy debates by advocates of austerity has rehabilitated trade surpluses from mercantilist delusion to competitive virtue. For the theologists of austerity the national equivalent of household prudence means consuming and investing less than a country produces. Contrary to common sense the new economic theology considers this squandering of national resources as “saving”.…

Conclusion:

Export-led growth is the bad economics of the early 18th century. Reviving it in pursuit of persistent trade surpluses will fatally undermine the euro zone, then the European Union itself.

flassbeck economics
Eurozone’s So-Called Recovery Masks A Dark Secret: Mercantilism

John Weeks | Professor Emeritus at SOAS, University of London

Larry White — Alexander Hamilton, Banking Mercantilist

Hamilton modeled the Bank of the United States after the Bank of England. But in truth, the monopoly privileges of the BOE and other national banks of Europe were badges of mercantilism, and drags on financial and economic activity by comparison with free competition in banking services. A more wholesome, solid, and beneficial credit system could be observed in Scotland at the time, with free entry into nationwide branch banking. Hamilton’s “masterpiece” was oblivious to the benefits of competition in banking, much less the separation of banking and state. In his banking policy views, as in his tariff policy views, Hamilton was a retrograde mercantilist.

Hamilton was absolutely a mercantilist. He recognized that the US was in competition with mercantilist England and that the nascent republic was in no position to experiment. Hamilton's plan was to emulate success.

Although Hamilton’s Report on the Bank alludes to Smith’s understanding of how banking promotes the wealth of a nation, Hamilton either didn’t understand Smith’s policy message — the more banks competing the better — or rejected it as not helpful to his own mission of empowering the federal government, for which his chosen means was to forge an alliance between the government and a new privileged financial elite.

Good historical article, if this is your thing.

Alt-M
Alexander Hamilton, Banking Mercantilist

Larry White

Eric Schliesser — The Euro Survival Explained By One Graph (which also helps explain why the crisis will not be resolved)

Digressions&Impressions
The Euro Survival Explained By One Graph (which also helps explain why the crisis will not be resolved)
Eric Schliesser | Professor of Political Science, University of Amsterdam’s (UvA) Faculty of Social and Behavioural Sciences

Dani Rodrick — The New Mercantilist Challenge

The history of economics is largely a struggle between two opposing schools of thought, “liberalism” and “mercantilism.” Economic liberalism, with its emphasis on private entrepreneurship and free markets, is today’s dominant doctrine. But its intellectual victory has blinded us to the great appeal – and frequent success – of mercantilist practices. In fact, mercantilism remains alive and well, and its continuing conflict with liberalism is likely to be a major force shaping the future of the global economy.....

Mercantilist theorists such as Thomas Mun were in fact strong proponents of capitalism; they just propounded a different model than liberalism.
The liberal model views the state as necessarily predatory and the private sector as inherently rent-seeking. So it advocates a strict separation between the state and private business. Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power.....

A second difference between the two models lies in whether consumer or producer interests are privileged. For liberals, consumers are king. The ultimate objective of economic policy is to increase households’ consumption potential, which requires giving them unhindered access to the cheapest-possible goods and services.
Mercantilists, by contrast, emphasize the productive side of the economy. For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages....

These different models have predictable implications for international economic policies. The logic of the liberal approach is that the economic benefits of trade arise from imports: the cheaper the imports, the better, even if the result is a trade deficit. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports....

What Rodrik doesn't mention is that this was reflected in US economic history in the preference for the American system of managed trade championed by Henry C. Carey, for instance, over the British system of "free trade" while the US was still emerging. Recently, China has been emulating this model.

The upshot:

As a result, the new economic environment will produce more tension than accommodation between countries pursuing liberal and mercantilist paths. It may also reignite long-dormant debates about the type of capitalism that produces the greatest prosperity.

What's at stake is neoliberal globalization under the current American model, which the US considers a matter of national security since it's project of permanent military, political and economic hegemony depends on it.

Project Syndicate
The New Mercantilist Challenge
Dani Rodrik |Professor of Social Science at the Institute for Advanced Study, Princeton, New Jersey

Reuters — China's FX reserves may stoke inflation, a 'big burden': premier

"Frankly speaking, foreign exchange reserves have become a big burden for us, because such reserves translate into the base money, which could affect inflation," Phoenix New Media Ltd quoted Li as saying during a visit to Kenya. 

"From China's perspective, macroeconomic controls could face tremendous pressures if the overall trade is imbalanced."

China will take steps to reduce its trade surpluses with the rest of the world, including Kenya, Li was quoted as saying.

Translation: China's mercantilist trade policy is creating distortions in the domestic economy, as well as affecting the value of the RMB  in the currency market that the peg is not completely offsetting as China increases the float.

How it is it that foreign reserves have become a burden since they translate into base money? Chinese companies exports goods to the US, UK and EZ and get paid in USD, GBP, and EUR. Chinese companies are not allowed to convert the proceeds from sales into RMB in the currency market, since that would undermine the peg.

So the People's Bank of China borrows the proceeds from the exporters, puts the foreign currencies into bonds of the respective countries, and only allows Chinese companies to draw on a limited amount of RMB, mostly to pay bills and for investment. The problem with "inflation" comes importing, especially energy, in an undervalued currency and from a run up in investment that leads to asset inflation and from there to price and wage inflation. China has been dealing with this through financial repression — keeping interest rates low to encourage investment and reduce interest payments that could increase domestic demand that would fuel price inflation, hence rising wage demands.

Reuters (May 11, 2014)
China's FX reserves may stoke inflation, a 'big burden': premier
Reporting by Kevin Yao; Editing by Clarence Fernandez

Ignacio Portes — How the Left Underestimates Chile’s Right-Wing Keynesians

Chile’s caste of technocrats is smarter than what the left generally gives it credit for. The country’s post-dictatorship neoliberals, most of them inside the Socialist-Christian Democrat coalition, not only inherited the disciplined workforce of the Pinochet years, they also have read Keynes, and use his recipes all the time to escape the typical problems that the more fanatic and less pragmatic market fundamentalists create on their own economies, although they do it in quite a conservative way....

The social divide is similar to what it was in the Pinochet years (crumbs notwithstanding), but demands for reform have been successfully contained for more than 2 decades since the end of the dictatorship, and have only recently started surfacing.

And when they surface, what both the Pinochet/libertarian right and the more neoliberal within the Christian Democrat/Socialist Party coalition tell the wannabe reformers is: if we do what you want and start redistributing wealth, helping the unions and so on, all the growth that Chile has benefited from by being so friendly to international capital—all it’s given us, like boosting construction, mining and other dynamic sectors—will go away. And they are right in a sense, because the world is rigged for international capital, which can boycott any government they don’t like by simply moving elsewhere.

In this context, where national workforces are being played against each other to see which of them can serve the market more effectively, it’s hard to see how a movement of students, a couple of trade unionists and well-meaning citizens and some half-assed center-left politicians inside one country could defeat such an octopus of a system. A homeostatic octopus at that, which has the power to regulate its movements in such a way as to control and eliminate any localized effort to reduce its power. Raise your taxes, raise your salaries? How bad, we are going elsewhere then, good luck paying for all that new infrastructure and investment you needed. Behave like a good boy, do what capital says? Good boy, here, have some of my dollars, have a bit of jobs and welfare, at least for as long as the resource-extracting economy lasts or someone starts behaving better than you....

Still, all these extractive, export-based models in Latin America tend to run in the long term into the same problem: whenever the international prices for the commodities they export fall, their highly dependent economies weaken or collapse. When that happens, the masses who more or less kept quiet despite their subordinate position, placated by continued growth, find out they suddenly don’t even have an expanding pie anymore, and even worse, that their rulers are coming for a bigger share of it even if it’s now shrinking, in order to “make the economy more competitive” and re-boot it into profitability and growth, a process which makes class struggle inevitably resurface, exposing the farcical nature of the neoliberals’ harmonious depiction of society, at no small social cost.

So there might be no choice but this: to start thinking of ways of transcending national barriers to stop the race to the bottom, and instead join efforts to confront it. Neoliberalism, neo-imperialism, and neocolonialism still rule through the power of "free markets, free trade, and free flow of capital," along with the power that capital bestows on its owners.

Naked Capitalism

Ignacio Portes: How the Left Underestimates Chile’s Right-Wing Keynesians

Yves Smith 

Jörg Bibow — Euro Delusion and Denial Keep Authorities Entranced

German mercantilism is the foundational problem and there is zero motion toward fixing it.

Multiplier Effect
Euro Delusion and Denial Keep Authorities Entranced
Jörg Bibow

Matthew O'Brien — Germany's Export Obsession Is Dooming Europe to a Depression

Europe is in a depression, because Germany is afraid of a recovery [not on its terms].

It's afraid that more inflation and more spending would wreck its export-led growth model. And afraid that southern Europe would stop trying to adopt that model if they had an easier way out. So Germany has left them no way out....

The euro's problem, as the U.S. Treasury points out, is Germany wants the rest of Europe to become sellers too, but isn't willing to buy more itself.

Germany, of course, calls this criticism "incomprehensible." Its Economics Ministry thinks that its massive trade surplus just shows the "strong competitiveness of the German economy and the international demand for quality products from Germany." But that's a non sequitur. Germany doesn't have such a big trade surplus because it sells so many quality products. It has such a big trade surplus because it sells so many quality products and it buys so little. Nobody is asking Germany to stop making quality products. They're asking Germany to start paying their workers more and to start buying more from abroad. In other words, to tolerate a bit more inflation and government spending.

But the opposite has happened. Germany has fought any and all monetary easing out of fear of nonexistent inflation. And it really is nonexistent. In October, overall euro zone inflation fell to a four-year low of 0.7 percent, while German inflation was just a tad higher at 1.2 percent. Despite this, Germany's central bank still opposes easier money, because it sees the specter of inflation in ... apartment prices in its major cities. It'd be funny if it weren't dooming southern Europe to a depression. See, with German prices (and wages) rising so slowly, Europe's crisis countries can't regain competitiveness by having their own just rise slower. They have to cut wages instead—which, as Iriving Fisherpointed out back in 1933, can throw an economy into a death spiral by making debts harder to pay back.

Austerity, though, has already thrown southern Europe into a death spiral.

The Atlantic | Business
Germany's Export Obsession Is Dooming Europe to a Depression
Matthew O'Brien

Jörg Bibow — Euro Crisis Sees Reloading Of Germany’s Current Account Surplus

Who is running the largest current account surplus in the world? China? Saudi Arabia? Both wrong! These are only the number two and three countries. China had a record $420bn surplus in 2008, but that imbalance has more than halved since. As a share of GDP China’s external imbalance is down from ten to two-and-a-half percent since the global crisis — evidence of a remarkable rebalancing. The oil price would need to be significantly higher still to make Saudi Arabia the number one.

So for 2012 the number one prize actually goes to: Germany!

Multiplier Effect
Euro Crisis Sees Reloading Of Germany’s Current Account Surplus
Jörg Bibow

Dirk Ehnts — People’s Republic of Britain?

Summing up: the UK – and other European nations – have returned to the doctrine of mercantilism. This is a major defeat for progressive economists and economics as a discipline. It will also endanger the European project as it is unlikely to bring either peace or prosperity to the European people. Instead, it will bring more social and economic insecurity as governments prepare to pull back from the provision of essential service like health and education. A race to the bottom regarding regulation, wages and protection of workers is something which Europe cannot win.

I see this kind of reasoning by politicians like Cameron as a smoke screen behind which the society is dismantled. Lower taxes for the rich, fewer opportunities for the poor. Shift the blame to foreign countries if people protest. Economics is politics. Bad politics equal bad economics and vice versa....

What we see in Europe now is a political crisis that has brought about policies that repel the social progress made since the Age of Enlightenment. Political reforms have nothing to do with international trade. They are about redistributing wealth from poor to rich.

econoblog101
People’s Republic of Britain?
Dirk Ehnts | Berlin School of Economics and Law

More on neoliberalism as a political philosophy based on neoclassical and Austrian economics.

Dirk Ehnts — On the imposition of the German export-led growth model on the eurozone

So, where does it leave the world? Will perhaps China be turning into a net importer vis-a-vis the euro zone? Will it be Eastern Europe? The US quite certainly won’t have it, since they just had a real estate bubble. Politically, we are back in mercantilist times where nations compete for markets and international cooperation takes a back seat. In order to become competitive, you could either increase productivity or cut wages. 

Obviously, since government spending is cut, the euro zone opts for the second alternative. This means that purchasing power of households who depend on income from wages (and not interest from invested capital) will fall. Instead, a bigger part of production will be exported in exchange for foreign assets that might be defaulted upon by those that emitted them (think of Iceland). In how far that is to promote peace and prosperity in the European Union or elsewhere I have no idea.

econoblog 101
On the imposition of the German export-led growth model on the eurozone
Dirk Ehnts | Berlin School for Economics and Law

Otaviano Canuto — Currency War and Peace

WASHINGTON, DC - Much of the hype surrounding last month's meeting in Moscow of G-20 finance ministers and central bankers was dedicated to so-called "currency wars," which some developing-country officials have accused advanced countries of waging by pursuing unconventional monetary policies. But another crucial issue - that of long-term investment financing - was largely neglected, even though the endgame for unconventional monetary policy will require the revitalization or creation of new long-term assets and liabilities in the global economy....

... global leaders should work to maximize the liquidity that unconventional policy measures have generated, and to use it to support investment in long-term productive assets.

Caijing
Currency War and Peace
Otaviano Canuto | Vice President for Poverty Reduction and Economic Management at the World Bank

Ha-Joon Chang — Britain: a nation in decay [or the race to the bottom]

Ha-Joon Chang nails it. The UK problem is Thatcherism aka Neoliberalism, in which the goal is to run permanent trade surpluses by running financial repression domestically, i.e., suppressing worker compensation and benefits by eliminating the welfare state, in order to become more competitive in the global economy. Just like Germany is doing.

In reality, though, the coalition government isn't as stupid or stubborn as it appears. It is sticking to its plan A because spending cuts are not about deficits but about rolling back the welfare state. So no amount of evidence is going to change its position on cuts.
Lost in this cross-wired debate is the issue of the long-term future of the economy. Britain has been finding it difficult to recover from the financial crisis not just because of its austerity policy but also because of its eroding ability to engage in high-productivity activities. This problem is most tellingly manifested in the country's inability to generate a trade surplus despite the huge devaluation of sterling since 2008.

The Guardian
Britain: a nation in decay
Ha-Joon Chang | Professor Economics, Cambridge University
(h/t Kevin Fathi via email)

Unfortunately, Prof. Chang perpetuates the myth about Keynes and the long term when he writes,

John Maynard Keynes once famously said that in the long run we are all dead. But a lot of us have to live for a while yet. A series of short-run policies, whether based on the coalition policy of spending cuts and loose monetary policy or on the opposition policy of increased government spending, isn't going to address the challenges facing the British economy. It is time to think for the long term.

Keynes was actually criticizing the assumption of economic equilibrium being automatically achieved in neoclassical mechanics by the working of the invisible hand absent interventions. Keynes knew, of course, that the neoclassical model is time-independent, and the adjustment could come quickly — or not. Even presuming the correctness of the model, why wait when policy tools are readily available to bring about a return to full employment and optimize output by acting now.

Andrea Terzi — Do exports LOWER a nation’s living standards?

In the U.S. and (particularly) in euro countries, policies aimed at stimulating exports are (sadly) considered an effective response to lagging growth (U.S.) and recession (Euroland). Viewing a net export balance (i.e., an international trade surplus) as an economic virtue and a growth engine is a relic of Mercantilism that has had a powerful comeback, not coincidentally, with the abandonment of fiscal policy as a counter-cyclical tool.

MEPOC — Mosler Economic Policy Center
Do exports LOWER a nation’s living standards?

Andrea Terzi | Professor of Economics at Franklin College, Lugano, Switzerland

Jörg Bibow — On Net-exports Life Support: Germany Is Back at It, and Now Euroland Is Too

One thing is for sure: the German authorities will continue preaching the gospel that price stability, austerity, and structural reform are good for growth and well-being, no matter what dimension the collateral damages insanely inflicted across Europe in this holy war might still reach. As an über-competitive Germany brought crisis to Europe, beware what a Europe striving for über-competitiveness under German command might do to the world.

Multiplier Effect
On Net-exports Life Support: Germany Is Back at It, and Now Euroland Is Too
Jörg Bibow

This is the hidden agenda behind the creation of the euro and a united Europe that would be competitive with the US and China as it emerges. Was Oswald Spengler prescient after all in The Decline of the West (1918, 1922)?

Some, such as Amaury de Riencourt in The Coming Caesars,[16] maintain that Spengler's predictions have been borne out as the United States has pushed aside the other powers of the West and established a Pax Americana. De Reincourt's work suggested that the United States of America would enter its Caesarian phase in the 1990s. They also point to trends in arts and philosophy.

On the other hand, it has been argued that Spengler believed that the West's final, "Caesaristic" phase was destined to be fulfilled under German domination;[17] Germany's defeat in the two World Wars has therefore prevented that transition from taking place. Spengler did of course warn that Hitler was not the right man to guide Europe into the preliminary stages of Caesarism; he thought that Hitler would badly mishandle the whole process. (source)