A moment of truth for the EU in the post-Brexit trade talks

Covid, summer holidays and the usual foreign policy rows have overshadowed the EU/UK post-Brexit trade talks.  A pity because this looks like a – perhaps the – key moment, as the ever astute Wolfgang Munchau points out in the Financial Times.

The issue is the EU’s insistence that the UK conform with the EU’s state aid and competition policy – in broad terms, the regime whereby the authorities arbitrate and ensure consistency between the member states’ freedom of action in industry regulation, promotion and subsidy. Continue reading “A moment of truth for the EU in the post-Brexit trade talks”

Trump’s (pre-Covid) economy gives clues for election strategy

One of the interesting things about the (pre-Covid) US economy was that, on the surface at least, it didn’t change all that much between Trump and Obama. Or so argues economist Pierre Lemieux in The Trump Economy: Three Years of Volatile Continuity for the Cato Institute.

His assessment on economic growth:

“Under Obama, the average annual growth [in real GDP per capita] starting in 2010 was 1.4%. Under Trump, it averaged 2.0%, though the upward trend slowed in 2019, falling to 1.8%, which is roughly the same level as 2017. These data are consistent with the continuation of a slow recovery from the Great Recession.”

And on labour markets:

“Overall, the poverty and unemployment picture improved slowly from 2009 to 2019, with no radical break when the occupant of the White House changed. The Obama economy and the Trump economy seem to be the same economy. This observation applies to many other measures of American prosperity”

OK.  An important general point – that presidents’ short-term influence on the economy is usually overrated and the influence of longer-term market and policy settings is underrated – is usefully made.  But you still ought to look at the changes in those settings to draw some conclusion about possible longer-term economic and political impacts.

Lemieux’s analysis identifies three substantial policy divergences between the two administrations.

Comprehensive tax reform in 2017 is the first.  This pushed down the cost of capital and increased investment. Lemieux cites evidence that it spurred economic growth in the following year by 0.8 percentage points.

But the tax cuts were not backed by reduced government spending.  So rising government debt, further boosted by Covid payouts, will require a response at some point.  The choice on how this is done – either spending restraint or higher taxes – remains a key dividing line between America’s political tribes.

The second divergence is on regulatory policy. Trump’s administration actually managed to stop (rather than just slow) the growth in the stock of regulation.

“… the Trump administration has roughly capped the total volume of federal regulations at, or slightly over, the 185,000 pages [in the Code of Federal Regulations] they comprised at the end of the Obama presidency”

The process was probably more shuffle than standstill but, even so, it represents a decisive change of intent from the sweeping regulatory surges in areas like resource use, financial services, healthcare and energy policy launched by enthusiastic politicians of all stripes and predating the financial crisis.  And it almost certainly needed a clear lead from the top (plus some excellent regulatory economists on the ground).

The third area is Trump’s break with the orthodox consensus on world trade.  

Managed stability has been replaced by an attempt to batter concessions out of China, win votes from the losers of globalisation, and challenge China’s bid for geopolitical hegemony.  The best you can say about the economics is that so far he seems to have got away with it (despite increased trade barriers reducing US GDP by an estimated 0.4%).

If you are a market liberal, you ought on balance to prefer the Trump mix – although you would be entirely justified in having some conniptions with regard to opportunism and lack of consistency.

And you might also want to use this analysis to evaluate how a Biden or Trump presidency might approach things after the November election.

First up, the case for more continuity.  Despite the rhetoric, both parties will at bottom be relying on workers and businesses in the private sector to generate post-Covid recovery by adapting to changed economic conditions.  Both are likely to spend freely to support those economically hurt by the pandemic (although it’s also reasonable to expect the winner to direct more pork towards ‘his people’).  Both are likely to favour strategic competition with China over market integration. No one wants to tackle the national debt before the market makes them do it.

And now the differences.  

Biden Democrats see a much bigger role for government in the recovery and are already talking about higher taxes on the usual suspects (business and the rich) to pay for extra spending on green subsidies, childcare and unionised jobs.  One can also safely predict a resumption of normal service from the regulatory bureaucracy. Trump and his allies seem less likely to take this path.

So in some ways, Covid might be clarifying the economic choices facing Americans  in November.  Which will surely be helpful after all that continuity.

Britain’s Battle of Brexit has an internal dimension

One of the chores of the Brexit process is the repatriation of powers from Brussels to Westminster.  Simple as making a list you might say.  But one aspect – bringing home the state’s economic regulatory powers – is causing a spat.

When the UK joined the European Economic Community (as it then was) in 1973, these powers were held at the national level.  But since then, in addition to ceding further powers to Europe, the central government has devolved substantial retained powers to regional administrations in Edinburgh, Cardiff and Belfast.  And the local politicians – seeking to advance their localist and autonomist agenda – are clamouring for a share of the handback.

So Westminster’s mandarins and politicians have come up with a plan, with a refreshingly deep foundation in history, economics and – yes – politics. Continue reading “Britain’s Battle of Brexit has an internal dimension”

Coronavirus – analysing the data makes you think we could do with more of it

If you want to understand some of the thinking behind the policy response to the spread of coronavirus, you might want to read the paper from the Imperial College COVID-19 Response Team, which is credited with accelerating the introduction of the current lockdown measures in the UK.

The paper builds a mathematical model for the spread of the infection and then applies another mathematical model for hospitalisation, treatment and death rates (both based on what experts think they might know so far about the virus’s behaviour and impact).  It models possible outcomes for three options: doing nothing, mitigation (ie, slowing down the spread), and suppression (ie, stopping the spread until a vaccine is developed), using judgements on the effectiveness of policies and actions by governments and individuals to achieve these effects.

To simplify, the assumptions put into the model suggest that more than 500,000 people in the UK could die prematurely if the virus is ignored.  Mitigating its spread could reduce this by half. The modelling suggests that suppression could reduce this into a range of 5,000 – 50,000 (compare this to the 10,000 deaths predicted for a typical flu season or the 616,000 annual deaths in the UK ). Continue reading “Coronavirus – analysing the data makes you think we could do with more of it”

Part 2: The economics and politics of coronavirus are hard to discern but may surprise

So to be clear, at this stage not much is clear.  But it’s surely possible to draw out a few facts and try to isolate what might emerge as significant.

Point one: We can be reasonably sure that there will be a large fall in measured economic output.

This will capture the changes in our collective economic behaviour, both voluntary changes in response to events, and those mandated by governments. Think restaurant meals uneaten, movies not watched, flights not taken, bungees not jumped, houses not painted, and so forth. Some things postponed, some gone for ever. Continue reading “Part 2: The economics and politics of coronavirus are hard to discern but may surprise”

Breaking news: Trump’s economic policies are inconsistent (also Pope admits catholicism)

Amidst the hurly-burly of impeachment, America’s economic policy seems almost a diversion.  A recent assessment by Canadian economist David Henderson provides a pithy summary of Trump’s successes and failures, and in the process raises some interesting questions on how right-of-centre political parties might need to adapt their policies. Continue reading “Breaking news: Trump’s economic policies are inconsistent (also Pope admits catholicism)”

Trump and free trade – its complicated

US President Donald Trump’s measures against Chinese trade have been criticised by a few people who you might expect to be sympathetic to a Republican president.  So its helpful to get a riposte from economist Casey Mulligan, who recently finished a year’s stint as the chief economist on Trump’s Council of Economic Advisers.

Mulligan starts off by comparing Trump’s trade restrictions to those implemented by hallowed free-trader Ronald Reagan – seen as a benchmark by some.

Continue reading “Trump and free trade – its complicated”

Regulation catching up with innovation: New York cabs as a case study

New York City’s taxi business has for years been a textbook example in how to wreck a market with bad regulation.  Then along came techology and innovation – in the form of ride sharing applications like Uber and Lyft – to sidestep the problem.  But the New York authorities are working hard to shut down the solution.

Archaic regulations limit the number of yellow cabs in NYC to less than 14,000.  Until recently, this meant that the value of the license to run a cab sold for as much as $1 million (with annual fees of $400 – $1650 on top).  Pent-up demand in a busy growing city made it worthwhile to pay (and recover the costs from the customers).  Economists complained (see this 1984 study) to little effect.

But ride sharing applications blindsided the regulations, letting you summon a private car service more easily than if you stepped out on the street to hail.  Supply expanded rapidly to service demand.  The number of Uber rides topped official cab rides in 2017. Depending on whose figures you use, the number of ride sharing vehicles has reached 100,000 (perhaps two-thirds of them Uber).

Getting round NYC has become easier and cheaper. Passengers have benefited from more than lower prices: levels of service and availability are much better in under-served outer boroughs like Brooklyn and the Bronx. Some passengers feel safer knowing that their ride is being recorded on a computer server somewhere. Wannabe drivers have more opportunities to get into the driving business and the number of drivers has increased.  And the value of the million dollar licence to print money at the expense of the public: that fell to less than $200,000.

But New York’s city government is not happy with the market solution to the problem it created and indeed nurtured for the better part of a century.  So its come up with a ‘temporary’ cap on car numbers and a mandatory formula for paying drivers a minimum wage, including when they are idle.  Expect these at a first order to limit supply and increase some fares.  Not much perhaps – but the big ride companies have already quietly stopped hiring new drivers.  And the impact of the initial rules may then provide an argument for more rules, until, at the limit, the ride sharing firms need to change their focus from identifying and meeting consumer needs to joining a regulatory cartel with the city’s political administration.  Like the yellow cab industry.

Nor is New York alone in its efforts.  The politics of distorting markets for electoral advantage is international and makes for odd political coalitions.  The Mayor of London, Mr Sadiq Khan, son of an immigrant and who draws much of his support from immigrant groups is being sued under racial discrimination laws for favouring the traditional expensive heavily-polluting black cab trade (88% of drivers are white) over the private hire / ride sharing firms (94% of drivers are ethnic minority).

Take advantage of ride sharing while you can.  There may be more opportunities to stand in the rain or at an airport trying to guess who has paid whom for the right to serve you.