deficits

JP Morgan Chase: “U.S.-China endgame involving 25 percent U.S. tariffs on all Chinese goods in 2019”

That’s according to Bloomberg. With little prospect of a restart for U.S.-China trade talks, JPMorgan Chase & Co. now expects an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade. “JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25 percent U.S. tariffs on all Chinese goods in 2019,” JPMorgan strategists including John Normand wrote in a note…. “Looser Chinese monetary policy ensures that the U.S. dollar will become an ever-higher yielder versus the renminbi for the rest of the cycle.”… Here is a graphical depiction of the implied path of exchange rates: Figure 1: Trade weighted nominal value of Chinese yuan, 2010=1 (blue, left log scale), b...

And Back in Fiscal-Land

The FY2019 projected deficit balloons, as the estimated “dynamic” effects of the Tax Cuts and Jobs Act prove minor (quelle suprise!) Source: Committee for a Responsible Federal Budget. For the actual, recorded effects on corporate tax receipts thus far:Source: Slok, “Global markets: US overheating and Treasury supply pushing US rates up. Trade wars and Turkey pulling US rates down,” Deutsche Bank, September 2018.

Guest Contribution: “Fall in US Trade Balance, Led by Ag. Exports”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. As of July, the US trade deficit was running worse than a year ago, despite improvement earlier in 2018. A new Census report today suggests: (1) further deterioration of the trade balance in August, and (2) a role for exports of food & feeds which, after rising in the spring, have apparently fallen sharply since June: -6.3 % in July and -9.5 % in August. [Advance Economic Indicators, Sept. 27, 2018, Table 1. U.S. Intl. Trade by End-Use Category]. This is consistent with the story that retaliatory Chinese tariffs against US exports of soybeans and other farm products caused shipments to be moved forw...

The Trade Deficit Rises

From Goldman Sachs (Hatzius, et al.) today: The trade deficit rose to $50.1bn in July, from a revised $45.7bn in June. Total exports fell 1.0%, as the total drop in exports ($2.1bn) was comprised primarily of declines in civilian aircraft ($1.6bn) and soybeans ($0.7bn). The decline in soybeans exports likely reflects payback following a sharp increase in June ahead of Chinese retaliatory tariffs. Total imports (+0.9%) rose, reflecting increases in both petroleum imports (+3.7%) as well as nonpetroleum imports (+0.6%). The deterioration was in line with expectations, so no major impact on GDP predictions for 2018Q3 GDP. Figure 1 shows the nominal deficit, and normalized by GDP. Figure 1: Nominal trade balance in billions $ SAAR (blue), as ratio to nominal GDP, cubic interpolation of quarter...

Trade Deficit Rising!

Since 2017Q1. By Mr. Trump’s own metric, we’re losing. But it’s a stoopid metric for evaluating “unfair”-ness. From the last GDP release (which incorporates March trade release):Figure 1: Net exports to GDP (blue), and net exports excluding petroleum products (red), as a ratio to GDP, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. Here’s a detail, in nominal dollar terms: Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red), both nominal, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. As noted in numerous instances (EconoFact, Steil/BI), trade deficits usually ...

Guest Contribution: “An Economic Platform for the Democrats”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared in Project Syndicate. Democrats are gearing up for the November mid-term elections, in which they hope to take back the US House of Representatives. Candidates are finding that the voters are not necessarily paying close attention to foreign affairs or even Trump scandals, and are more concerned about “pocketbook issues.” The conventional wisdom still stands: underlying the shock election of Mr Trump was a perception by the median household that it has been left behind by globalization and technological change and that the gains have been going to the rich instead. The Democr...

Maybe We Will Get That Crowding Out That Rep. Paul Ryan Feared

Remember? “Borrowing and spending by the public sector will crowd out investment and growth in the private sector.” Paul Ryan, “Path to Prosperity” (April 2012). The reasons why interest rates did not rise appreciably in the wake of the American Recovery and Reinvestment Act included the accommodative Fed policy (see this post for graphical analysis augmented by a very little algebra), and the slack in the economy. Neither of these conditions hold in 2018, so one might think that elevated interest rates due to the massive increase in Federal government deficits and debt will now show up. A recent Goldman Sachs report (Hatzius et al, May 12, 2018) makes this point, as shown in the impulse response functions (IRFs) associated with a 1 percentage point of GDP increase in the structural budget...

The Reagan Tax Cuts and Defense Buildup: Supply-Side Miracle or Keynesian Stimulus?

I keep on hearing about the supply-side miracle associated with the the Reagan era tax cuts. What do changes in estimated potential versus actual output suggest? Figure 1: Year-on-year growth rate of real GDP (blue), and of potential GDP (red), calculated as 4th differences of logged values. Dashed lines at effective dates for Economic Recovery Tax Act of 1981 and Tax Reform Act of 1986. Source: BEA, CBO. The variation in actual output clearly exceeds that of potential GDP, suggestive of a nonvertical aggregate supply curve. (It’s also interesting to see that potential GDP growth was accelerating before the enactment of the first Reagan tax cut; it also decelerated after the 1986 Tax Reform Act.) Now, it could be that CBO mismeasured potential GDP. Is there another way to determine whether...

Twin Deficits Redux? CBO Predicts

From the recent CBO Budget and Economic Outlook, the projected current account and implied cyclically adjusted budget balance. Figure 1: Structural/cyclically adjusted Federal budget balance (dark blue), and current account balance (dark red), both as a share of GDP. NBER defined recession dates shaded gray. CBO projection period shaded gray. Projection of structural budget balance estimated by author using June 2017 estimate, adding in legislative changes reported in CBO (2018). Source: BEA 2017Q4 3rd release, CBO (2018), and author’s calculations. So, the twin deficits re-appear, as many of us had predicted. Interest rates rise as fiscal policy collides with tighter monetary policy. Today, the IMF released its forecasts in the semi-annual World Economic Outlook, the CBO forecast for the ...

Tax Cut and Budget Balance Mythologies

In the current discourse, there seems to be some amnesia with respect to when tax cuts occurred, why they occurred, and how they affected Federal budget deficits. Here is some data (read comments to this post. Figure 1: Federal budget balance as share of GDP (blue), cyclically adjusted budget balance as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations. EGTRRA is the Economic Growth and Tax Relief Reconciliation Act, JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act. Some people have argued that these tax cut acts actually improved the budget balance (or increased tax revenues). The data shown above argues against this point (as does a large empirical literature).

The Budget Deficit Outlook, Post-TCJA and Omnibus Budget

Relative to before. Source: CBO, Budget and Economic Outlook, April 2018 via Kaplan/NYT. these estimates include macro feedback effects (i.e., dynamic scoring). So much for tax cuts paying for themselves (if anybody ever really believed that).

What’s the End Game?

From Toles: The question we should be asking (prompted by my thinking about the relevance of game theory) is which payoff matrix is of relevance. Here, it makes sense to differentiate between the objectives of Mr. Trump and the United States as a whole. To degrade China’s ability to ascend the quality ladder, and maintain US technical leadership in advanced production technologies. To reduce the bilateral trade deficit with China. To reduce the overall US trade deficit. To increase the Republican party’s ability to retain control of the legislative branch. To activate nativist and xenophobic groups within the Trump electoral coalition. To satisfy atavistic desires to impose pain on foreign parties. Surely, this is not an exhaustive list, but I think it covers a lot of possibilities. It is ...

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