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Trade: The View from China

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I just returned from an 11-day visit in Beijing. This time I expected to hear a lot about the ongoing trade dispute between China and the US, as business between the two countries is always a hot topic. I had several interesting discussions, but heard a lot less than I expected. The graduate business students I taught knew surprisingly little about it and were largely unconcerned. It was clear that the ongoing dispute is being downplayed in the Chinese media.

There was some coverage, however. Reports on government-controlled CCTV (in English) featured select US economists chastising the Trump administration for instituting tariffs with no mention of closed markets, currency manipulation, or intellectual property. CNN’s international network was the only other English option in my hotel. Not surprisingly, most of its US coverage was negative or neutral, portraying President Trump as an uninformed, protectionist leader largely opposed by most Americans. The CCTV/CNN narrative is clear: China wants free trade while the US seeks protectionism.

It is possible to learn more about the official US position on trade, but not easy. Various US news sources (including Fox News) are available online, but many such as the Wall Street Journal are blocked in China. Media outlets are controlled by the state and commonly air comments from US politicians and business leaders who agree with the official Chinese position on an issue.

Of course, the contrast in China between our current and most recent presidents is stark. Barack Obama is widely revered in China; “Maobama” t-shirts with a picture of Obama wearing a Chinese star cap were widely seen throughout Beijing during his presidency. I didn’t see any t-shirts featuring President Trump. He is not popular, but most of the Chinese I talked with criticized his “attitude,” not policy. In fact, I raised some issues related to trade fairness with one manager and was not rebuked. The manager said he wasn’t familiar with Chinese exchange rate policy or disparate restrictions on foreign companies.

The ongoing argument is really about leveling the playing field, not the merits of free trade per se. In fact, most US economists across the political spectrum acknowledge the economic importance of global trade. Ironically, the Chinese and US media are portraying President Trump—not the Chinese—as the anti-market villain while few Americans and even fewer Chinese appear to know much about the underpinnings of China-US trade. It’s time to have a real debate on the topic.

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Jack Ma & China-US Trade

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Jack Ma is chairman on Alibaba, China’s version of Amazon. He is one of the wealthiest and most influential business executives in China and across the globe. At the World Artificial Intelligence Conference in Shanghai earlier this week, he argued for a clear demarcation between firms and governments. “I personally think that the government has to do what the government should do, and that companies do what companies should do…Protecting the backward forces who are crying out loud will be the most important factor in destroying innovation” (source: Wall Street Journal).

Ma’s comments are welcome in a world where US and European executives often hesitate to defend free markets, development, and even their own firms. Ma’s case for markets is clear, rational, common sense. There is a regulatory role for government, but it should be limited. Firms—not governments—create new products and services, hire and pay employees, and promote economic development. Protectionism cements the status quo and should be rejected.

Ma’s comments have direct relevance to the ongoing US-China trade squabble. Intellectual property, currency devaluations, and limits to American firms operating in China are legitimate US concerns. Governments should secure and enforce intellectual property rights so firms can invest in discovery without fear of well-capitalized free riders copying and monetizing their innovations. But governments should not manipulate exchange rates and arbitrarily prop up some products at the expense of others when they do so. Dollar and yuan valuations would adjust appropriately on their own if left to global traders.

Of course, excessive government intervention into business activity is not restricted to China. Federal, state and local governments in the US collude with cronies in the business community to create subsidies and restrict innovation as well. Markets are freer in the US than in China, but it is fair for China to insist on a level playing field in both countries as well. In this instance, level should be less government control and influence across the board, not more.

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Why is the economy growing?

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The US economy is heating up. Trump supporters credit the President for the growth, while many on the left struggle to accept, understand, and explain a turnaround they claimed we’d never see. In fact, many Trump detractors predicted a stock market crash and a deep global recession shortly after the election. President Trump deserves some credit, but the situation is a bit more complicated. There are three things to keep in mind going forward.

  1. Don’t get confused about trade restrictions. From an economic perspective, tariffs always impede growth by increasing prices. Some protectionists are actually claiming that current economic growth is evidence that “tariffs are working.” The direct impact of tariffs is—and always is—negative but is currently of modest consequence given policy improvements in tax, regulation, and other arenas. Tariffs and threats of tariffs might be effective negotiating tools with China, but they don’t promote economic growth. Reducing and eliminating tariffs across the board should be the end game and will drive long-term prosperity.
  2. Cronyism is alive and well. I’m all for “draining the swamp,” but there’s a long way to go and a right way to do it. Consider Tesla. Elon Musk’s ongoing extraction of billions in taxpayer subsidies requires support from our politicians. The recent tax reform passed by Congress made some incremental improvements, but the current tax code remains a redistribution haven for those seeking to circumvent market discipline. There is still a shortage of courage and political will in Washington.
  3. President Trump had an easy act to follow. President Obama abandoned the idea of economic growth early on and was intent on demonizing business and expanding wealth redistribution for eight years. President Trump and Republican majorities in the House and Senate have delivered a renewed outlook and a number of better policies. The change has been welcome, but I’m convinced the economy would have improved even if the Republicans had done nothing. Put another way, the current growth is less about Republicans in power and more about Democrats out of power.

I’ll repeat: The President deserves some credit, but let’s no go overboard. The real test is ahead of us. Economic growth increases the tax coffers and creates political opportunities to fix long-term fiscal problems. Downsizing the welfare state isn’t so threatening when 401k accounts are growing and jobs are plentiful, but doing so still requires courage. We’re not there yet.

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Incentives matter

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Much of what we see in the business and political worlds can be explained by incentives. When companies, politicians, and governments create the wrong incentives, bad things happen. Consider the following example at Uber as reported in Tuesday’s Wall Street Journal:

Unlike taxis, ride-hauling services like Uber charge fixed fares to passengers based primarily on the projected distance they will travel, not the actual distance they ride. Uber encourages drivers to take the most direct route, but they are compensated based on actual mileage, incentivizing them to take longer routes at company expense. Out-of-town passengers usually have no incentive to pay attention. The practice, known as longhauling, is clearly unethical. Nonetheless, company policy encourages it, creating what economists call a “perverse incentive.” We should not be surprised when this happens.

Of course, there is a logical reason for compensating drivers based on actual mileage. They know the conditions on the ground and should be free to select the best routes for their customers even if it means deviating from the route recommended by navigation. But this post is not about Uber’s policy; it’s about the role of incentives.

This type of incentive problem is not unique to Uber. When a company reimburses travel expenses without tight controls, employees are more likely to stay at expensive hotels and eat well while on the road. When a government employs a voluntary income tax, individuals are more likely to fudge on the numbers. When EMPTALA guarantees emergency room treatment regardless of one’s ability to pay, some Americans will not pass on health insurance, take their chances, and just ignore the bills if they get sick. The list of examples in business and government is endless. Empirical evidence helps us understand the scope of these problems after the fact, but many of them could have been minimized or avoided altogether by considering the incentives in advance.

Many of these incentive problems occur because policymakers assume that people will overlook a perverse incentive and “do the right thing.” I’m not a cynical person, but this is usually folly. Consider the 2008 financial crisis. Politicians blamed lenders for issuing questionable loans—which some did—but they were simply gaming the system government created.

When it comes to economic policy, bad incentives usually come from government intervention. Free markets promote their own incentives, usually healthy ones, with limited or no government oversight. Companies that deliver better products at lower prices are more likely to succeed, while those that do not serve their customers well will eventually fail. Well-intentioned government schemes designed to aid the poor, clean up the environment, or promote other social objectives usually limit customer choice and favor large companies that can afford the compliance costs.

Incentives matter.

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Resolving Trade Disputes: Policy vs. Strategy

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I’ve lost track of the number of times a likeminded free-marketer has chastised me for failing to oppose President Trump’s approach to trade and tariffs. The exchange usually goes something like this:

Other person: Trump says we should “put workers first” and raise tariffs to reduce the trade deficit. How can you possibly support that as economic policy?

Me: I don’t.

Other person: Then why do you support his tariffs? Remember Smoot-Hawley? Don’t you know they will start a trade war and nobody will win?

Me: So, what should we do about unfair trade practices like higher tariffs from our trading partners, China’s requirement that many US firms partner with Chinese companies in order to compete there, or China’s inability to enforce intellectual property rights?

Other person: We should resolve these issues at the negotiating table.

Me: We have been trying to do so for years, but it’s not working.

Other person: Perhaps, but we should still negotiate. We shouldn’t start a trade war over it.

I’ve been searching for a simple way to explain my position in conversations such as these. I think it can be summed up by policy vs. strategy. Free trade is the best friend of workers, consumers, businesses, and even politicians. I do not support tariffs as economic policy, but that doesn’t mean I can’t support them as political strategy.

It should be obvious that “free trade” isn’t currently a two-way street. Many of our trading partners employ restrictive trade policies that they would find unacceptable from the US. China is the most obvious example. US action can evoke retaliation and ramp up a trade war, but the battle has already started.

Some business leaders and economists correctly note that the current arrangement is still a net benefit to the US and should be allowed to fix itself slowly over time. Others agree that “something should be done” but seem afraid to take any action. The first group is engaged in wishful thinking, while the second group does not appreciate the difference between policy and strategy.

Most of our trading partners benefit from the current system and will not change course unless they are forced to do so. The existing rules have been accepted for years, so why change now? The only way to make real progress at the negotiating table is to impose tariffs and other restrictions as bargaining chips on the US side. It will require some short-term pain, but it’s the only option that works. What are the alternatives?

The US is in a strong economic bargaining position now relative to countries like China, so I believe the odds of getting an acceptable deal soon are good. If not now, when?

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Dads, Paternity Leave, and Government Mandates

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The Family Medical Leave Act (FMLA) passed in 1993 provides (among other things) 12 weeks of unpaid leaves to moms and dads to care for their newborns. During the last quarter century, companies such as Facebook, Twitter and American Express have added paid leave as a job benefit. Nonetheless, men hesitate to take the leave, fearing that time off the job would hurt their careers and be seen as a lack of commitment to the company. Women are more likely to take leave but many struggle with the same concerns, according to a recent Deloitte survey (https://www2.deloitte.com/content/dam/Deloitte/us/Documents/about-deloitte/us-about-deloitte-paternal-leave-survey.pdf).

The survey provides several additional interesting findings. Not surprisingly, 54% of the respondents said that their coworkers would judge males more harshly than females for taking the leave. Half of the respondents said they would prefer more parental leave to a pay raise. This is another way of saying that they would rather work less for less money.

So, is paid paternity leave a good idea? Perhaps, but it depends on who gets to decide. Those on the political left use surveys like this one to justify their calls for more government regulation. To be clear, governments should NOT mandate any form of paid leave, as doing so inflicts costs on businesses that should be managed by the owners. But this doesn’t mean that providing paid leave is a bad idea. Many companies offer leave and other benefits to retain top employees. Indeed, 77% of respondents in the survey said that paid parental leave is a factor in employment decisions. Companies offering paid leave tout “corporate social responsibility” as the impetus for doing so, but it’s often just good business.

The beauty of the free market is that companies can try different approaches—new products, lower prices, pay more or less, and so on—and stick with what is most effective. Best practices are usually adopted by other companies, all by choice. For example, McDonald’s is using kiosks to take orders in many of its restaurants instead of hiring more workers. This is probably a good idea long term, but the results will speak for themselves and competitors will follow suit when doing so makes economic sense for them. The same is true for paternity leave. Like the minimum wage and health care, we will be better off if governments leave business decisions to investors who are risking their own funds in the marketplace. The market already provides incentives for them to do the right thing.

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President Trump: “End all tariffs.”

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I don’t understand everything President Trump says or does, but a lot of insight can be found in The Art of the Deal. He is not afraid to leverage strengths, call bluffs, and remain unpredictable. Many in the mainstream media see this as chaotic and a lack of preparation, but they continue to miss the point. While there are times when the President and some in his administration stray off message, there are other times when he hits the nail on the head. Consider his recent trade comments at the G7 summit.

Trump’s detractors have decried his calls for tariffs. They are correct in terms of long-term policy, but not necessarily from a positioning standpoint. When some of our Europeans railed against his calls for protectionism, the President turned the tables and took them at their word, calling for an end to all tariffs. If our trading partners really believe that tariffs are detrimental, then why don’t they join him and demand a summit to negotiate the expeditious removal of all trade barriers. They haven’t and probably won’t because the facts aren’t on their side. The Europeans spend a smaller percentage of their GDPs on NATO and have instituted their own tariffs on US goods and services. President Trump called their bluff.

Those who argue against the President’s proposed trade restrictions claim that he is igniting a trade war, but this argument ignores the reality of unfair trade restrictions in China, Europe and elsewhere. It also suggests that the US would be “starting a trade war” by instituting policies that resemble the ones already in existence in other nations. In essence, Trump is not really arguing that tariffs benefit anyone, but that they are necessary to prod our partners to level the playing field. Imposing tariffs gives him leverage at the negotiating table. While some of his statements seem to contradict this overall position, I believe it’s all about positioning for a better deal.

Agree or disagree with Trump on other trade issues, let’s get behind him on his call for a world without tariffs, barriers and subsidies. Free trade has spurned massive wealth across the world and will continue to be the engine of economic growth. Without a doubt, it’s the ideal.

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Update on Venezuela

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One Sunday, Nicolás Maduro was “reelected” president of Venezuela for a second six-year term. But most Venezuelans who oppose Maduro knew the process was rigged and refused to participate. Legitimate opposition parties were not allowed to field candidates and outside observers were not permitted in polling places. Although the nation has a population of about 32 million, Maduro was credited with only 5.8 million votes.

The current situation in Venezuela can be traced to Marxist Hugo Chávez’ ascendency to power in 1999. The corruption, redistribution, press control and industry nationalizations that followed have crippled the country. Inflation is currently estimated at 13,000% annually and 5000 migrants are fleeing the country daily, most to Columbia. There are hunger and healthcare crises as well. According to one study, the average Venezuelan actually lost 24 pounds in body weight last year. Even so, Maduro continues to blame evil capitalists and the US for the nation’s ills.

You might say that Venezuela’s demise is happening before our eyes, but for most Americans it’s not. CNN, CNBC, and other major media outlets have little or no interest in what’s going on there. Venezuela continues to be the most underreported economic story of the last two decades.

The truth is that Venezuela is an inconvenient truth for a mainstream media afraid to consider the cause. Before Chávez took power, Venezuela was a prosperous nation with the world’s largest proven oil reserves. The list of early Chávez admirers includes the likes of politicians Jesse Jackson and Jeremy Corbyn, Hollywood elites Michael Moore and Sean Penn, and even leftist economists like Joseph Stiglitz. The only rational explanation for the current tragedy is socialism but acknowledging this raises more questions. Bernie Sanders is a self-avowed socialist and Democrats from Obama to Clinton to Warren lean heavily in that direction. If socialism is responsible for the disaster in Venezuela, then why would it possibly work in the US?

As former British Prime Minister Margaret Thatcher warned, “The problem with socialism is that you eventually run out of other people’s money.” There is little left to confiscate in Venezuela and Maduro’s rigged reelection suggests that a peaceful end to the madness in the near future is unlikely. This is disturbing enough. But the lessons from Venezuela should serve as a wake-up call for all Americans. The economics of a welfare state, a “living” minimum wage, single-payer healthcare and free college for everyone don’t add up. If we venture down the same road, we will arrive at the same place.

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Real Diversity on Campus

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A recent study of faculty at 51 of the nation’s top 60 liberal arts colleges reveals that 39% of employ no Republicans as professors. While many colleges and universities in the US claim to be the foremost defenders of diversity, the concept is foreign in campus life.

https://www.nas.org/articles/homogenous_political_affiliations_of_elite_liberal

The findings reported here are not unusual. To be fair, studies like this often assume political affiliation to reflect worldview or ideology, which is not always or completely accurate. Self-proclaimed political “independents” could be Republicans in hiding, Democrats claiming to be openminded, affiliates of another party (e.g., Libertarians, Socialists, etc.), or genuine middle-of-the-roaders; we don’t know for sure. In addition, ideological balance—or lack thereof—varies across institutions and disciplines. Private colleges and flagship state universities typically lean more sharply to the left, as do professors in the arts and humanities. Of course, a professor’s political ideology does not necessarily translate into the classroom. I know progressives who are inherently fair and balanced.

These caveats aside, this study points to a reality few academics seriously challenge: Most college campuses in the US are ideologically progressive. A lack of genuine intellectual diversity shapes campus discussions in ways that promote certain views and discredit others. Many academic conversations consider only left-leaning views of a given issue. There are many examples, but let’s consider two.

(1) The U.S. Constitution: Two general schools of thought are originalism (it means what it says) and non-originalism (it should be flexible). Most professors seem to accept the latter “living and breathing” position as intuitively obvious and dispute how the Constitution should be stretched or whether it is even useful at all. Originalists are presumed to be ill-informed by default.

(2) Markets and Liberty: The two general views here are capitalism (individuals make their own economic decisions) and socialism (the state determines what is best). Most self-proclaimed advocates of capitalism on campus concede its “obvious flaws” and propose some sort of middle ground between liberty and statism. Like the Constitution, the notion of free markets is simply outdated.

On these and other topics, colleges and universities should welcome internal discourse and external speakers who present and challenge all sides. Speech on campus should be free and students should be taught to respect the ideas of those with whom they disagree. Politically incorrect views should be encouraged, including skepticism about the role of government, the current state of the press, the pros and cons of free enterprise, health care, and much more. A college education can be life-changing if it promotes real diversity and critical thinking. Whatever your point of influence—educator, student, taxpayer, or someone who hires college grads—I encourage you to insist on nothing less. Our future depends on it.

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Takeaways from the Zuckerberg Testimony

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I decided to wait a few days after Zuckerberg’s testimony to Congress before posting my comments to see if it had any staying power. I don’t think it did. This is unfortunate because there are several important takeaways.

First, I was miffed at how little Zuckerberg professed to know about the underlying issues. His response to the hotel question was baffling (https://www.youtube.com/watch?v=sWDwh5UxWMs). He struggled to define hate speech and actually suggested that an algorithm should make the determination (https://www.youtube.com/watch?v=jbN4-QTXQZQ). He was evasive, but most Senators gave him a pass.

Second, I was also astonished at how little those questioning Zuckerberg seemed to understand about Facebook’s business model. It’s really simple: Facebook gives you a platform, while advertisers pay the costs in exchange for the right to target you with their content. Effective targeting requires that marketers know who you are, which is why your personal data is so important. How can you engage Zuckerberg in a serious discussion if you don’t understand why Facebook’s success in the first place?

Finally, Zuckerberg seems okay with the inevitability of regulation. Of course, “government oversight” gives him cover and creates compliance costs that potential competitors would be less able to afford. His willingness to “work with Washington” has nothing to do with solving Facebook’s problems and everything to do about protecting Facebook’s control of the industry. He should be smart enough to do that on his own. There’s no reason why he can’t accept safeguard the data he captures or develop a customer agreement that a reasonable individual can understand.

Mark Zuckerberg is not my favorite person, but he’s a smart guy. I think he has little respect for privacy and I am concerned about the data breaches, but it’s time for consumers to accept some responsibility. If you are willing to post personal information on Facebook for hundreds of your “friends” to see, don’t be appalled when you discover that advertisers act on it as well. It should be obvious that public formats like Facebook will be full of fake news as well. While some industry oversight regarding the clarity of user agreements and data security is necessary, the federal government should largely stay on the sidelines. Government regulation usually makes things worse, this would not be an exception.

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