Monday, November 20, 2017

Progress = Change = Dislocation

I saw this recent post by Don Boudreaux, where he is discussing the issue of foreign trade, and how the fact that foreign trade "destroys jobs" is an entirely uninteresting point.  Every bit of economic activity creates change, which means it creates dislocations.  All economic progress of any type "destroys jobs".  That is, in fact, it's virtue, all things considered.  How many 18th century jobs have you been pining after?  Thank your lucky stars those jobs were destroyed.

So, if one's intuition is to fight international trade in order to protect jobs, one's intuition is to fight literally all economic activity.  All growth.  All abundance.  Everything beyond a dirt floor and an ox.  That may not be the intention.  But, it is true.  The only way one could favor any economic progress would be to ignore or defeat that intuition, selectively.

That sounds extreme, doesn't it?  I am taking a marginal point and stretching it to an unfair extreme.

In 1942, the Supreme Court, almost completely selected by FDR by that time, ruled in Wickard v. Filburn:
An Ohio farmer, Roscoe Filburn, was growing wheat to feed animals on his own farm. The U.S. government had established limits on wheat production based on acreage owned by a farmer, in order to stabilize wheat prices and supplies. Filburn grew more than the limits he was permitted and was ordered to pay a penalty. In response, he said that his wheat was not sold, so his activity could not be regulated as commerce, let alone "interstate" commerce (described in the Constitution as "Commerce...among the several states"). The Supreme Court disagreed, stating that, "Whether the subject of the regulation in question was 'production', 'consumption', or 'marketing' is, therefore, not material for purposes of deciding the question of federal power before us...[b]ut even if appellee's activity be local and though it may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce and this irrespective of whether such effect is what might at some earlier time have been defined as 'direct' or 'indirect.'"
I'm afraid that my rhetoric doesn't even fully describe the extent of existing US law.  The New Deal did apply this logic universally and locally.  It's even worse than my exclamation above, because, in this case, not only was this not an international transaction; it wasn't a transaction at all!  And, the justification for it was explicitly to harm consumers so that some producers could be sheltered from competition.

So, if you think it's too extreme to suggest that opposing international trade is the equivalent of opposing tractor manufacturing in order to protect the oxen industry, I am afraid the federal government has already galloped past you.  They say it's the equivalent of making it illegal to grow your own food during a depression.  Except, the federal government makes this reductio ad absurdum in approval of the intuition.  And the Supreme Court concurs.

Filburn was recently cited as precedent that allows the federal government to prosecute marijuana growers who are following state laws regarding marijuana they grow for their own personal usage.  It was also cited in Obamacare cases.  This isn't an archaic position.

10 comments:

  1. Don't worry. Long ago rural economic interests captured the USDA and converted it into a subsidy-and-protection racket for Rural Pink America.

    But I am surprised you do not mention the most prominent restriction on free trade in the United States: property zoning.

    D Bx rarely, if ever, rants against property zoning, perhaps the largest structural impediment in the US economy today. But he can hardly go a day without railing against protectionists.

    What gives?

    ReplyDelete
  2. Add on:

    I realize to "be against free trade" is to hold hands with Neanderthal Luddites. Who are xenophobic.

    But ponder:

    1. Current-account trade deficits lead to capital inflows. We have tight property zoning. Ergo higher house prices.

    2. We have a central bank with a squeamish hysteria regarding "tight" labor markets. There is not enough monetary offset for outbound money flows if a central bank is too tight. The Fed says we are "beyond full employment" despite there being about 1.2 people looking for a job for every job opening.

    3. In recent posts, Krugman points out the surge in foreign capital investment leads to income flows to foreigners. The way the Tax Foundation puts it, "Interest and dividends from foreign investment in the United States would accrue to foreigners…."

    Oh, that. You mean a Hong Kong guy collects rents on an Santa Monica apartment, and spends the money at home?

    I guess that makes sense. If I buy a Brazilian restaurant, I would expect (ultimately) to extract more income from Brazil than I put in. Why else buy? The global banking system makes this possible.

    I would say chronic national current-account trade deficits are a debatable issue. On the other hand, I think property zoning is an obvious bad.

    So why is the topic always "free trade"?

    ReplyDelete
    Replies
    1. Do you think LA real estate would sell for 3x income like it does in Dallas if we didn't have a trade deficit?

      Delete
  3. The middle ground, it's a real thing. Not everything is about "Muh GDP"; you skew too heavily in favor of the idealistic macro, as high IQ wonks (and most economists) are prone to do. But I still enjoy the blog.

    ReplyDelete
    Replies
    1. Thanks for being a reader, CB, and for the input.

      Delete
  4. On Dallas-L.A.: my guess is chronic inflows of foreign capital seeking housing investments in L.A. exacerbated a bad situation. As an aside I just did some pen-for-hire work for institutional property investors in the Far East.

    They explicitly mention zoning as one factor that encourages their investment in Far East cities despite an outlook for possibly higher interest rates from central banks.

    ReplyDelete
    Replies
    1. I think it is best to think in terms of equilibriums, not in terms of buyers and sellers. If Apple reports a good quarter and their share price rises 10%, volume will be high, and you will find buyers who say, "We saw the good quarter, and that caused us to become buyers." This makes it seem like more buyers pushed the price up. But, really, the price rose because the value rose. If Apple was a private firm, its value would have risen just as well, even if it is not as easily measured.

      Those investors mention zoning. Of course. Zoning is a reason the values are high. But, the value is high because of the zoning itself, not because the zoning has attracted them to the market.

      There are many sourced of buyers for homes in less expensive cities, too, and they pay prices in those cities that reflect the lack of a zoning factor.

      Zoning changes the price. The buyers are a secondary effect.

      Delete
  5. Interesting point.

    I see your point, in some ways.

    If a property throws off $100 a year after expenses, then it is worth $1000, if 10 x earnings is the going rate. No matter if the buyer is from Luxembourg (putatively the largest investor today in US real estate) or Cleveland.

    But there is supply and demand.

    I disagree with your premise 'buyers are a secondary effect." Sheesh, what do we always say? "Supply and demand set price."

    With the additional demand from offshore, the going rate for domestic real estate is pushed up. With foreign buyers, the price is no longer 10 times earnings, but, say, 12 times earnings. Sure, some domestic buyers also pay 12 times earnings, but the new higher level is set globally. Some domestic buyers drop out, replaced by foreign buyers at the 12 times level.

    It looks like domestic and foreign buyers are all paying the same price for a piece of property, but the price has been established by global demand, not only domestic demand.

    They saw this in Vancouver when house prices fell 33% after China capital controls came on. Sure,domestic and China buyers were both paying 33% less after the capital controls. But the decrease in foreign capital into Vancouver had a marked effect. I have linked you to stories on that.

    To reiterate I am happy to have free trade. Great. But with property zoning the norm and housing already scarce, such large inflows of capital into limited supply of US housing...well you will see results.

    ReplyDelete
    Replies
    1. There is some effect. Zoning turns a $100,000 house into a $400,000 house. Foreign buyers with some sort of tax arbitrage then might turn it into a $420,000 house. With all the tax benefits that accrue to domestic owner-occupiers, I think it would be difficult for foreigners to outbid domestic buyers by too much. And, in total numbers, the data I have seen puts total foreign ownership at pretty low levels in most cities.

      Delete
  6. "The National Association of Realtors released a report Tuesday that said foreign buyers and recent immigrants spent an estimated $153 billion on American properties in the year ending March 2017. That was a 49% increase over the previous year and the highest level since record-keeping began in 2009.

    The purchases accounted for 10% of the total value of existing home sales in the U.S. The report did not include new homes."

    --30--

    My guess is foreign buyers are concentrated, and not particularly active in, say, Missouri.

    So, 20% of buyers are foreign in, say an L.A. or other closed access cities As you have noted, there is a curious overlap between closed access cities and where business is growing and people want to live. What a strange quirk.

    But the question is, are foreigners the marginal buyers? That is, they are willing to pay more, and so they set the price level that everyone must meet.

    If I buy gold at $1,400 for a long time, I may be but a minor player but the price will move up to $1,400 as long as I keep buying.

    Add on: Foreign capital is pouring into US apartment buildings through limited partnerships. I have done pen-for-hire work in this area. In general, you get a minority share of US equity, a US general partner (the face) and the foreign capital (commonly 80% of the equity).

    So, is this LP buying counted as foreign buying of US residential property? Who knows, but I doubt it. These are US based limited partnerships, joint ventures etc. Tracking capital flows is probably impossible, what with LLCs, offshore entities and the Cayman Islands etc.

    This study found current account traded deficits boomed house prices:

    https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr541.pdf

    Same this one

    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991876

    "These findings of a strong effect of the current account on home prices suggest macroprudential policies regarding leverage and credit may need to be even stricter than would be the case if housing bubbles were simply “home grown”."

    Another look:

    http://blog.jparsons.net/2011/03/housing-bubble-and-trade-deficit.html

    and more:

    http://voxeu.org/article/asset-price-booms-and-composition-capital-inflows

    There are some academics who say the link between capital inflows and house prices is weak.

    So, like I say, in macroeconomics, no one is ever wrong. But ideology seems to premise the results

    "Free trade" is the most revered and genuflected-to totem in the entire orthodox macroeconomics pantheon.

    Still much of the Far East has boomed, and they are not using the free trade model.

    In the US and Great Britain wages have stunk for 40 years and now house values are going nuts. Free-trade debtor nations.

    Yes, property zoning is the great curse.

    But something about running chronic and large current account trade deficits….really, can a nation consume more than it produces and prosper, forever?

    "There is no ruin in a nation. To finance imports, keep borrowing and selling more assets!"--John Maynard Cole







    ReplyDelete