Don’t Be Afraid of Trade

One of the economic concepts that is most frequently misunderstood by non-economists (and probably by economists too) is the trade deficit. First, a definition. The trade deficit refers to the difference between the amount of goods a country imports and the amount it exports. As the graph below shows, the US has had a large trade deficit for the past several decades. It has been importing goods at a much higher rate than it has been exporting them. Nobody disagrees with that definition or that fact. The debate comes in when people start to decide whether this situation is actually a problem.

Part of the problem is simply an incorrect interpretation of what the trade deficit measures. It is common for non-economists to confuse this trade deficit with the equally frequently maligned budget deficit, which measures the difference between how much the government spends and how much it takes in as revenue. Unfortunately, our own president is among those who have made this mistake. According to Trump:

“The United States has trade deficits with many, many countries, and we cannot allow that to continue … with South Korea right now, but we cannot allow that to continue. This is really a statement that I make about all trade: For many, many years the United States has suffered through massive trade deficits; that’s why we have $20 trillion in debt.”

This statement is complete nonsense. The trade deficit with South Korea or any other country has absolutely nothing to do with the US government’s $20 trillion debt. The debt is the consequence of perennial budget deficits that derive from the US spending a ton of money on military, social welfare, and other government programs.

The trade deficit isn’t really a debt at all. It simply represents the fact that the US buys more goods from foreign countries than they buy from us. In the short run, a trade deficit is almost certainly beneficial for the US. As Milton Friedman eloquently explains in a video I posted a while ago, what a trade deficit really means is that foreigners are giving us real goods and services in exchange for pieces of paper. We get TVs from Japan. All they get are US dollars.

However, a more careful criticism of trade deficits recognizes that trade deficits can be good for the country in the short run, but represent a cost in the long run. Noah Smith articulates such a point in this post, where he argues that the trade deficit is a “loan of real goods and services.” He gives the example of somebody in the US buying a car from Germany. If the US citizen pays in dollars, he calls this an IOU to Germany. At some point, a German will use the dollars to buy goods and services from the US. Even if the dollars were used to buy an asset like a stock, eventually that stock will be sold and the dollars from the sale will be used to buy goods and services. His logic makes sense. Every dollar must eventually come back to the US in some form or another at some point.

But thinking of the trade deficit as a debt seems to me to be either misleading or completely wrong. One confusing point here is that the trade deficit is a flow, while debts are stocks. What is the value of the debt the US has to repay? The stock of all goods and services ever imported minus all goods ever exported? The current stock of foreign dollar holdings? I’m not sure there is any consistent definition of what this debt is that we are supposed to repay. Even if there were, I don’t think the idea of the trade deficit as a debt is meaningful.

Let’s flip Noah’s story. Assume a Chinese citizen really wants to buy Apple stock since they think it will increase in value. They need dollars to buy Apple stock so they exchange some Yuan for dollars and buy stock. At the same time, Apple needs to buy parts from China to make iPhones, so it imports them, trading dollars for Yuan in the process. For simplicity, assume these two transactions exactly cancel out. Where are the IOUs here? Does either country owe a debt to the other? It certainly doesn’t seem like it to me. The stock of dollars and Yuan in either country is exactly the same as it was before the transaction.

It is even clearer that the trade deficit is not a debt if we consider what happens if Apple suddenly goes out of business. The value of their stock goes to zero and their imports also go to zero. The trade deficit that was created by Apple is gone and no US goods were ever given to China. I imagine Noah considers that analogous to defaulting on a debt, but I don’t buy that analogy at all. Does he think Apple owes a debt to all of its shareholders or just its foreign ones? Isn’t the risk of Apple’s stock price falling inherent in its purchase? If you still aren’t convinced, Daniel Ikenson also has an excellent rebuttal to Noah’s article.

The other important point to keep in mind that is implicit in the example above is that foreign countries don’t just buy goods and services from the US. They also buy assets (stocks, bonds, etc.) or invest directly by building their own factories and capital equipment here. The current account (goods and services) and the capital account (assets) are always in balance by definition. A current account deficit is always offset by a capital account surplus.

This fact means that there are two ways we can frame the US’s large trade deficit. It could be that Trump is correct and we are really just falling behind in competitiveness. Nobody wants US goods anymore so they don’t buy our exports while we eat up their imports (which again is not necessarily bad – we get goods and they get paper). Or it could be that the US is home to many of the safest and best performing assets in the world. Other countries are dying to invest in US companies (and treasury bonds) and the result is a huge capital account surplus. One statistic won’t tell us which story is more accurate, but I think it’s pretty safe to say that we don’t have to be too worried (either now or in the future) about the trade deficit.

Climate of Complete Outrage How the Reaction to Bret Stephens Proves His Point

The New York Times recently caused a stir by hiring Bret Stephens, a conservative journalist, for their opinion page. Stephens holds many views that clash with some of the sacred cows of the progressive movement. These ideological breaches include criticizing Black Lives Matter, saying that campus rape is not an “epidemic,” and denying that climate change will result in catastrophic changes. Naturally, his hiring has brought forth the ire of the left, and the recent publication of his first article has caused an explosion of hatred across my Twitter feed. If you haven’t already, go read the article here before continuing.

Now, just for a few minutes try to put aside any pre-existing biases you have and let’s look at Stephens article as objectively as possible. The article, titled Climate of Complete Certainty, does not argue that climate change is a hoax (“None of this is to deny climate change or the possible severity of its consequences”). It doesn’t claim that we should reject any attempts to mitigate the effects of a changing climate. Its message actually has very little to do with climate change itself. Instead Stephens attempts to make a broader point about intellectual discourse: nothing is ever certain, and pretending that it is will never convince somebody on the other side. Arrogance does not induce agreement.

It doesn’t seem like anybody listened. The responses have instead ranged from further asserting that climate change is real (which Stephens didn’t deny in this article), threatening to cancel NYT subscriptions, and attacking Stephens himself. This kind of reaction is exactly what Stephens warned about. Rather than engage his argument with a reasonable response, his opponents don’t give even a sliver of probability to the idea that he might have a point.

Disagree with the left and you’re not just wrong – you’re an idiot. You’re not just uninformed – you’re ignorant. You’re not just a skeptic – you’re evil. Some people might be 100% sure that climate change is real and that we need to do something about it right now to prevent catastrophic consequences. The reality is that some people aren’t so sure.

Perhaps it is true that the evidence is against climate skeptics. Maybe they don’t have a great argument to support their side. And certainly the scientific consensus seems to be that global warming is likely to be a major problem (although for everyone who likes to use this argument as the end of the discussion, I hope none of you agreed with Gerald Friedman’s analysis of Bernie Sanders’s economic plan either – the consensus among trained economists was just as strong against his calculations). That’s not the point. Regardless of whether you believe climate skepticism is stupid or not, the best way to convince somebody their ideas are stupid is not to tell them they are stupid. Instead the first task should be to understand why they think differently than you do.

But there’s an even bigger problem here. The certainty in the correctness of ideas also leads to outrage at the notion that anybody else could believe otherwise. And it’s not just climate. After Brexit passed last year, JK Rowling tweeted “I don’t think I’ve ever wanted magic more.” Really? Never? Even in the worst possible case of the effects of Brexit I can’t imagine it shaving more than a couple percentage points off GDP. From the UK. One of the richest countries in the world. Maybe magic could’ve helped with terrorist attacks, or disease, or starvation, or Syria, or the millions of other atrocities that occur on this earth every day. Nope. Brexit is the worst thing that’s ever happened. Well besides Trump. And whatever Paul Ryan said most recently. And this article. Wait, how many worst things ever can there be?

When every little point of dissension results in this level of vitriol, what is left for truly important issues? If we treat Trump like Hitler, what do we do in case of an actual Hitler? I don’t want to claim excessive outrage is the exclusive domain of the left either. Hillary Clinton’s emails. The Benghazi attack. Colin Kaepernick kneeling for the national anthem. Outrage from the right at all of them. Everything has become a game where it doesn’t matter how trivial the issue is as long as the other side comes out looking bad.

This is not debate. In a debate each side offers their perspective and their reasoning. The goal is to change minds, to convince the other side that your evidence is more compelling than theirs. More and more it seems that nobody actually wants that kind of discussion. The goal for many today doesn’t appear to be to change anyone’s mind. It’s much simpler: crush the dissenters (or maybe cut them open HT: Vitaly Titov).

But if you really want to change minds, I have a few suggestions. Don’t start with “How could you think that?” but “Why do you think that?” Don’t argue from outrage, but from compassion. And don’t attack Bret Stephens. Listen to him.

One of These Things is Not Like the Other Government vs Corporations

Facebook: “We are a nation of immigrants, and we all benefit when the best and brightest from around the world can live, work and contribute here. I hope we find the courage and compassion to bring people together and make this world a better place for everyone.”

Google: $4 million in donations to immigration causes


Starbucks: Plans to hire 10,000 refugees

Lyft and Uber: After some controversy about eliminating surge pricing around JFK, Uber now plans to spend $3 million on affected drivers. Lyft will donate $1 million to the ACLU

Apple: “Apple is open. Open to everyone, no matter where they come from, which language they speak, who they love or how they worship. Our employees represent the finest talent in the world, and our team hails from every corner of the globe.”


Thank goodness we have a benevolent government to keep these evil corporations in check.

Study Finds That Nobody Changes Their Mind After Reading Fake News

You'll Never Believe What Trump Said About It

The title, in case you didn’t already guess, is fake news. There was no study. But think about your reaction when you read it. Raise your hand if you said “wait a minute, I always thought fake news was a huge deal but I guess this study proved me wrong. I’ll just change my mind without thinking about it at all.” Anyone? Yeah I didn’t think so. And if you aren’t convinced by a headline on a reputable publication such as this one (OK maybe not so much), are you really buying the fake headlines that the Pope backed Trump or that Hillary actually didn’t win the popular vote?

Recently there has been an uproar surrounding these fake headlines. Germany wants Facebook to pay $500,000 for every fake news story that shows up. California (of course) wants to pass a law that will make sure every high school teaches its students how to spot fake news stories. I wish those stories were themselves fake news, but they appear to be all too real.

Now there probably are some people who do read these fake headlines and don’t do their research. Maybe they’ll store it somewhere in the back of their mind and use it as evidence to support their positions in debates with their friends. But I suspect that the only people who believe a fake headline are ones who were already inclined to believe it before they read it. No study has been done, but I’ll make the claim anyway: Nobody changes their mind because of fake news.

(One qualification to the above point is that it may break down if real news were censored. Here I am thinking about a case where the government restricts the media so that propaganda becomes the only source of information. Obviously that would be a major problem)

Perhaps more concerning is that people also don’t seem to change their mind because of real news either. They don’t let the facts guide their positions, but instead seek out the facts that support the positions they already held. Is believing a fake news story any worse than only believing the stories that confirm your preconceived inclinations?

In other words, the problem is not fake news. The problem is confirmation bias. Everyone’s guilty of it. I certainly am. How could you not be? With the internet at your fingertips, evidence supporting nearly any argument is freely available. And I don’t just mean op-eds or random blog posts. Even finding academic research to support almost anything has become incredibly easy.

Let’s say you want to take a stand on whether the government should provide stimulus to get out of a recession. Is government spending an effective way to restore growth? You want to let the facts guide you so you turn to the empirical literature. Maybe you start by looking at the work of Robert Barro, a Harvard scholar who has dedicated a significant portion of his research to the size of the fiscal multiplier. Based on his findings, he has argued that using government spending to combat a recession is “voodoo economics.” But then you see that Christina Romer, an equally respected economist, is much more optimistic about the effects of government spending. And then you realize that you could pick just about any number for the spending multiplier and find some paper that supports it.

So you’re left with two options. You can either spend a lifetime digging into these dense academic papers, learning the methods they use, weighing the pros and cons of each of their empirical strategies, and coming to a well-reasoned conclusion about which seems the most likely to be accurate. Or you can fall back on ideology. If you’re conservative, you share Barro’s findings all over your Facebook feed. Your conservative friends see the headline and think “I knew it all along, those Obama deficits were no good,” while the liberals come along and say, “You believe Barro? His findings have been debunked. The stimulus saved the economy.” And your noble fact finding mission ends in people digging in their heels even further.

That’s just one small topic in one field. There’s simply no way to have a qualified, fact-driven opinion on every topic. To take a position, you need to have a frame to view the world through. You need to be biased. And this reality means that it takes very little to convince us of things that we already want to believe. Changing your mind, even in the face of what could be considered contradictory evidence, becomes incredibly hard.

I don’t have a solution, but I do have a suggestion. Stop pretending to be so smart. On every issue, no matter what you believe, you’re very likely to either be on the wrong side or have a bad argument for being on the right side. What do the facts say, you ask? It would only be a slight exaggeration to say that they can show pretty much anything you want. I’ve spent most of my time the last 5 or so years trying to learn economics. Above all else, I’ve learned two things in that time. The first is that I’m pretty confident I have no idea how the economy works. The second is something I am even more confident about: you don’t know how it works either.

Three More Reactions to Trump

This post will be the last on Trump for the foreseeable future, but I just wanted to highlight three excellent reactions to Trump’s victory.

First: An interview with Jon Stewart, who makes the current crop of late night political comedians look like amateurs. Two nice quotes:

I don’t believe we are a fundamentally different country today than we were two weeks ago. The same country with all its grace, and flaws, and volatility, and insecurity, and strength and resilience, exists today as existed two weeks ago.

I thought Donald Trump disqualified himself at numerous points, but there is now this idea that anyone who voted for him has to be defined by the worst of his rhetoric.

Second: A beautiful piece by Lyman Stone. Please read the whole thing, but here are a few highlights:

You did this. I did this. We showed politicians that vitriol and hatred were effective. In our Facebook rants, in our un-friending, in our mob-shaming, in our boycotting, in our isolation, in our chanting, in our occupying, in our insulting, in our violence and our counter-violence, in our preference for the shouted epithet over the whispered encouragement, in our love of charisma and wrath over decorum and respect: we did this.

The next time your activist friend tells you they’re renewing their passport because Trump is going to institute fascism, respond, “Oh, come on friend, you don’t know that. That’s just fear and paranoia speaking.”

When your friend angrily shares on Facebook about how Clinton is going to steal our guns, don’t click “Like.” Click the crying one, and leave a comment, “I worry about 2nd Amendment rights too: but dude, this is just fear and paranoia speaking. The President and Congress don’t even close to have enough legal power to take our guns even if they wanted to.”

every time I’ve successfully persuaded someone else of something meaningful, it’s because I took the time to listen, to communicate empathy, to assure them that I thought they were a valuable person.

And in the long run, it is only mutual sympathy and compassion that can save us from violent tyranny.

And finally: An essay (short book?) by Scott Alexander. As always with his essays, it’s long but worth it. A slice:

All this stuff about how he’s “the candidate of the KKK” and “the vanguard of a new white supremacist movement” is made up. It’s a catastrophic distraction from the dozens of other undeniable problems with Trump

So our different ways of defining “open white supremacist”, even for definitions of “open” so vague they include admitting it on anonymous surveys, suggest maybe 1-2%, 1-2%, 4-7%, 3-11%, and 1-3%.

But doesn’t this still mean there are some white supremacists? Isn’t this still really important?

I mean, kind of. But remember that 4% of Americans believe that lizardmen control all major governments. And 5% of Obama voters believe that Obama is the Antichrist. The white supremacist vote is about the same as the lizardmen-control-everything vote, or the Obama-is-the-Antichrist-but-I-support-him-anyway vote.

Politifact says that Hillary and Obama wanted a 700 mile fence but Trump wants a 1000 mile wall, so these are totally different. But really? Support a 700 mile fence, and you’re the champion of diversity and all that is right in the world; support a 1000 mile wall and there’s no possible explanation besides white nationalism?

Listen. Trump is going to be approximately as racist as every other American president. Maybe I’m wrong and he’ll be a bit more. Maybe he’ll surprise us and be a bit less. But most likely he’ll be about as racist as Ronald Reagan, who employed Holocaust denier Pat Buchanan as a senior advisor. Or about as racist as George Bush with his famous Willie Horton ad. Or about as racist as Bill “superpredator” Clinton, who took a photo op in front of a group of chained black men in the birthplace of the KKK. Or about as racist as Bush “doesn’t care about black people!” 43. He’ll have some scandals, people who want to see them as racist will see them as racist, people who don’t will dismiss them as meaningless, and nobody will end up in death camps.

Stop making people suicidal. Stop telling people they’re going to be killed. Stop terrifying children. Stop giving racism free advertising. Stop trying to convince Americans that all the other Americans hate them. Stop. Stop. Stop.

How Trump Won a Divided America It's About Discrimination, But Not the Kind You Expect

Required Reading: I Can Tolerate Anything Except the Outgroup by Scott Alexander (It’s long but it’s well worth it – way more important than anything I have to say)

In this election, as in every election I can remember in my lifetime, I was faced with two unappealing choices. President Clinton represented a continuation of many of the trends – more regulation, more spending, bigger government – that in my view have been slowly eroding the features that make this country great. President Trump, who explicitly promises to make America great again, plans on doing so through policies that will almost certainly have the opposite effect. So my choice was easy: none of the above (AKA Gary Johnson). I could have probably justified a Hillary vote on the presumption that she would be less risky than Trump, but, being in a state where the result was already decided, I saw no reason to compromise my values and vote for the (slightly) lesser of two evils.

And yet when I got to the voting booth and looked over the ballot, my hand hovered momentarily over Trump’s name. I have no desire to see Donald Trump as president of the United States. His policies are bad and his personality is worse. Still, for a split second my body and mind were in conflict. Despite everything I know about him, despite his economic illiteracy, despite his remarks about women, about Mexicans, something inside me wanted to forget all of that and vote for him anyway. At first I didn’t understand why. Now I do. And It has nothing to do with Donald Trump.

I grew up in Massachusetts and currently live in California. Throughout my life I’ve been surrounded by what Scott Alexander refers to as “the blue tribe” in the essay above. Most of my friends lean liberal politically. My professors even more so. And there’s always been some awkwardness when they find out I don’t. I’ve seen the look many times: equal parts bewilderment and disdain, something between how could you think that? and are you sure you know what you’re saying? Of course, the ones who know me well (usually) realize that in the end I’m on their side, that we both have the same goals despite differences in opinion on how to get there. But they can’t help that initial response.

I align most closely with Alexander’s gray tribe (if you didn’t do the required reading, the gray tribe essentially encompasses libertarians). I’ve become pretty good at emphasizing points of agreement with the blue tribe and downplaying differences (usually the first sentence after I tell people I’m not a Democrat is a quick “but don’t worry I’m not a Republican either”). I imagine “the look” for a true member of the red tribe is much worse.

What’s the image that comes to mind when you think of a Trump supporter? Maybe you think that they’re not America’s best. They’re people that have lots of problems and they’re bringing those problems with them. They’re bringing prejudice. They’re bringing hate. They’re racists. And some, you assume, are good people (In case you didn’t catch the reference). Maybe that’s an exaggeration, but I don’t think it’s too far off the mark for the way many people view Trump supporters. Is your vision of a Trump voter a thoughtful, respectful citizen? Or is it closer to that “basket of deplorables” that Clinton referred to?

What is discrimination? A simple definition is ascribing qualities to an individual based on assumptions about a group they belong to. We tend to apply the term mostly to race, or gender, or religion, but it’s broader than that. Democrats claim to be the party of tolerance, and in many ways they are. Blacks? Great. Mexicans? Welcome home. Gay marriage? Why not?

But how do they feel about Republicans? Social conservatives? Trump voters? Are Democrats still feeling so tolerant when it comes to the Red Tribe? Racial diversity, religious diversity, cultural diversity. All important. Ideological diversity might trump them all. And yet ideological discrimination has never been more severe.

Some call it the “smugness of the press” or of liberalism in general. Ross Douthat calls it the “Samantha Bee Problem.” Chris Arnade talks of the dominance of the “front row kids” over the “back row kids.” Jonathan Haidt warns of “The Righteous Mind.” They all come back to the same idea. We’ve developed a society based on bubbles. People live in the world they want to live in, they hear the ideas they want to hear, and they block out the rest. Recently, many people have sensed a shift in power in these bubbles, as liberals have seemingly taken control over much of the country. Watch the news or a Hollywood movie, visit a university or a major city. Based on these experiences, one might wonder why our elections are even close. Whether this shift in the balance of power is real or imagined, Trump was the response. Once again, I can’t explain it any better than Scott Alexander:

“It’s about the feeling that a group of arrogant, intolerant, sanctimonious elites have seized control of a lot of national culture and are using it mostly to spread falsehood and belittle anybody different than them. And Trump is both uniquely separate from these elites and uniquely repugnant to them – which makes him look pretty good to everyone else.”

Look at the exit polls. Obviously, most people that agree with Trump on the issues voted for him. At least 40% of the country was always going to vote Republican regardless of the candidate. Where Trump did surprisingly well was in capturing voters who didn’t like him all that much.  60% of voters said Trump is not qualified to serve as president. 18% of these people voted for him anyway. 70% of voters said Trump’s treatment of women bothered them “a lot” or “some.” He got 11% and 75% of voters in these categories respectively. Just looking across the issues, a majority of voters align more closely with Clinton on almost every one. Trump won anyway.

How did he do it? Probably the most revealing category showed that 39% of voters said the primary reason they voted was because their candidate “can bring change.” Trump won 83% of them.

This wasn’t a positive vote, but a negative one. Not a vote for Trump so much as one against Clinton. Not for deportation or tariffs or any specific policy, but against the status quo. Against the arrogance, the paternalism, the elitism. Against the look. And I think it’s misplaced. I don’t think Trump will bring the kinds of change that so many desire. But I can understand the impulse. Because for a brief moment standing at the voting booth on November 8, 2016, I felt it too.


It’s Not the End of the World

President Trump. A year ago I never would have predicted I’d be writing those words. I’m not happy to write them now. Trump is xenophobic, misogynistic, and racist. He supports economic policies that economists, a profession notorious for disagreeing about everything,  unanimously reject. His manner is crude, his speech unsophisticated, his words antagonistic and petty. Donald Trump is, as far as I can tell, a terrible human being. He could very well be an even worse president.

But we’re going to be ok.

The US government was specifically designed to prevent any single individual from having too much power. It was designed under the assumption that men are not angels. It was designed for Donald Trump.

There’s not going to be a wall. The 35% tariff on China is an empty threat. NAFTA is not going anywhere (the TPP might not be so lucky, but remember that Clinton was also against it). I would even be surprised if Obamacare is substantially changed. As bad as many of his ideas are, President Trump doesn’t write the laws. It is of course important to point out that Republicans also have control of both the Senate and the House, but these are largely the same people that have had control for the last 2 years. I expect a shift towards Republican ideas – lower taxes, fewer regulations – and those policies on their own might be worrying enough for many of you. But I do not expect any catastrophic changes. Let’s wait and see what happens before we go crazy. If there’s no use crying over spilled milk, there’s certainly no use crying over milk that has yet to be spilled.

Markets appear to feel the same way. After some concerns last night about the stock market going crazy, the results today seem much closer to business as usual. And I think this lack of chaos in stock markets is indicative of a broader theme: politics isn’t everything – not even close.

According to the state of my Facebook and Twitter feeds, Trump getting elected is the worst event that’s ever happened in the world (only slightly edging out Brexit). Take a deep breath. Regardless of the identity of the individual sitting in the oval office, the world moves on. Scientists will continue to make breakthroughs that improve technology, eliminate diseases, and help us deal with a changing environment. Entrepreneurs will continue to  look for new ways to please consumers as they create new products and new businesses. Writers will keep on writing, teachers keep on teaching. Amazing new things are created every day and one man won’t change that. Progress in this country has never come from politicians.

Your family is still there. Your friends are still there. Your career, your hobbies, your dreams – they’re all still there. For most people, the important aspects of their personal lives have little to do with the president. Is Trump’s election a step backward? I think so. Is it concerning that half of the country thinks it’s ok to elect a president like Trump? Of course. I’m not going to deny that there are deep rooted problems that remain in our society. But a Clinton victory wouldn’t have changed any of that. We need to work hard to solve these problems and that starts by understanding why so many voted for somebody whose policies are bad and morals even worse. I don’t think it’s primarily racism, and I’ll have more on this later. But for now go do something that makes you happy and be thankful that we live in a country that is strong enough to withstand a bad leader. It’s not the end of the world.

P.S. I’ve been wrong about Trump from the beginning, so I could easily be wrong here too. But Scott Adams (author of the Dilbert cartoon) has been right from the beginning and he agrees that Trump is not going to be so bad.

P.P.S. Here’s another good article that echoes similar themes