The ultimate Trump infrastructure project

A key plank of Trump's economic platform is his proposal for massive infrastructure spending, which some estimates put at $1 trillion, to boost the US economy.  He will pay for this by tax cuts, one of the most significant being the proposal to cut to 10% the tax on repatriated funds that big corporations currently hold offshore.  There is one infrastructure project, the biggest of all, that he should consider.

When I wrote in the Mensa magazine 30-odd years ago of my imaginary future train journey to America, Harry Harrison, sci-fi author of Soylent Green, commented in a Cambridge pub, "Ah, you'll be using my tunnel."  He had written a sci-fi novel called "Transatlantic Tunnel."  "No," I told him, "I'll be going the other way round."

My imagined train journey would go through the Channel Tunnel, across Europe and Siberia, and then across the Bering Straits Bridge to be greeted in Alaska by a high school marching band at the train station.  I later discovered I was by no means the first to suggest such a venture.  William Gilpin, first governor of the Colorado territory proposed this in 1890, and Joseph Strauss in 1892 drew up engineering designs for such a bridge.  Others have taken it up since.

It is by no means beyond our capabilities.  The deepest water depth is about 55 metres, and the link might be achieved by a 25 mile bridge to the intervening Diomede Islands, and then either a bridge or a tunnel to Alaska.  There is no doubt it could be done, and would provide a link for trade and commerce as well as passengers.  Pipelines alongside could carry oil or gas supplies.

Why it should be done is partly symbolic as well as economic.  The election of Donald Trump will probably mark a thaw in the West's relations with Russia.  President Trump will acknowledge Russia's need for dominant influence on their "near abroad," just as he will respect China's aspiration to be a leading Pacific power.  The easing of tensions will defuse potential conflict, and might be symbolized by the new physical link connecting America and Russia.

The project would generate vast numbers of jobs in both America and Russia, not only for the link itself, but also for the supporting infrastructure.  More than that, though, it would be a symbol of a truly interconnected world.  This is a project he might consider to be worthy of his presidency.

The latest misleading story about climate change

Zoe Williams tries to scare the bejabbers out of all of us with he latest story about climate change:

When it looked like the news couldn’t get any worse, it did: worse in a way that dwarfed our petty elections and clueless, pendulum analyses, worse in a way that dusted the present with the irrelevance of history. In the journal Science Advances, five of the world’s most eminent climatologists warned of the possibility that warming may be significantly worse than we thought. Previous consensus was that the Earth’s average temperature would go up by between 2.6C - life-altering but manageable - and 4.8C - cataclysmic. Now, the range suggested by one projection goes up to 7.4C, which is “game over” by the 22nd century.

This is not going to happen. No, not because all climate science is a crock, not because CO2 is plant food or any of that. But because this report is based upon something that will not happen:

Using the Representative Concentration Pathway 8.5 for future greenhouse radiative forcing

RCP 8.5 simply is not going to happen. As Matt Ridley has been saying for some years now that is not a possible path for our future. It requires that we use more coal in hte future than we do now. That we use energy less efficiently than we do now, more of it and a greater portion of it comes from coal. This is just not going to happen.

As Bjorn Lomborg pointed out near two decades ago all we have ever needed to do to avoid those terrors of boiling Flipper in the meltwater from the last ice floe is to get solar power down to about the price of coal fired. Which we've done. And no one thinks that it is going to stop getting cheaper off into the future either.

The truth about the catastrophic part of climate change is that we've already done what we needed to do to avoid it even if the direst original predictions were true. We needed that economic change to reduce coal burning, the economic change which has been achieved through solar cost reduction. We're done therefore - we are, after all, only a year or two away from people preferentially installing solar purely on cost grounds.

And any and every report, paper and surmise which is based upon RCP 8.5, or the earlier scare story of A1FI, is simply untrue. For we've already done enough to avoid those emissions pathways.

It’s all been said before

Working in free market economics can sometimes feel as if one is merely writing footnotes to an 18th century Scot.  Pretty much anything worth saying has already been written by Adam Smith, and often all that we can do is collect some more evidence, quantify the effects that he predicted, or apply his wisdom to the modern world.

Maybe that explains some of the wilder economic theories of recent decades; some people will write anything, no matter how daft, just to try to be original.

But in my field of tax, it turns out this feeling that it’s all been said before is even older.  Never mind the 18th century; the basic economics of business tax was summed up in the 1500s:

“Taxes and imposts upon merchants do seldom good to the King’s revenue … the particular rates being increased, but the total bulk of trading rather decreased.”

That was Sir Francis Bacon, lawyer, politician and scholar under Elizabeth I and James I, credited with being one of the founders of the enlightenment, scientific method, the modern approach to the common law, and America.

As with Smith on economics, what more is there to say on business taxation that does not merely expand on what Bacon wrote over four hundred years ago?  If you tax something, you have less of it.  If you tax business, even though the Treasury may see a direct benefit, the indirect effect is that the whole country is made poorer.

It sums of most of the few things we know for certain about tax.  What matters isn’t who actually pays the tax and how much is collected, but what the wider effects are; what economic problems does the tax cause and who bears the cost of those?

And Bacon had grasped a fact that seems to have eluded many campaigners today; different taxes have different effects, and taxing businesses is one of the most economically damaging ways for a government to try to raise revenue.

With business tax, we know that the vast majority of the burden of the tax falls not on business owners but on workers, as higher taxes result in less investment into business, and therefore fewer jobs are created and those that are tend to be less productive and so lower paid.

Second order effects, the incidence of taxes, endogenous growth theory, the Laffer Curve, negative externalities, optimal tax theory; the phrases weren’t invented but the concepts were all there in one paragraph, in the writings not of a modern academic but of an Elizabethan courtier.

Still, at least in tax the work was only done four hundred years ago.  Pity those negotiating post-Brexit trade deals, where the definitive treaty on international trade was signed eight hundred years ago:

“All merchants shall have safe and secure exit from England, and entry to England, with the right to tarry there and to move about as well by land as by water, for buying and selling by the ancient and right customs, quit from all evil tolls”

Magna Carta of course.  That’s import duties dealt with as well; is there anything left to write about?

A bold move for Britain

One of the campaign pledges made by Donald Trump was that he would renegotiate the North American Free Trade Agreement (NAFTA), which came into force on January 1st 1994.  Basically it involves free trade between the United States, Canada and Mexico.  Canada's Prime Minister, Justin Trudeau, has declared himself ready to renegotiate the treaty.

This gives the UK a great opportunity to extend free trade in the aftermath of Brexit. The UK could apply to join the renegotiated NAFTA, taking part in the negotiations to hammer out a new treaty that included the UK.  It would then become the North Atlantic Free Trade Agreement, but would keep the NAFTA acronym.

Several influential Conservatives have indicated that there might be opportunities for closer transatlantic economic ties.  Indeed, Sir John Major floated the idea during his premiership.  It would give the UK a head start in its bid to launch bilateral and multilateral free trade deals once free of the EU's protectionist grip.  And it would make nonsense of the always absurd notion expressed by President Obama that Britain would be "at the back of the queue" in any trade deal with the US. 

Prime Minister Theresa May is expected to use her Lord Mayor's Banquet speech to declare her support for free markets and free trade.  A move toward joining a revised NAFTA would underscore that commitment and give people confidence that she meant it.

Not one pound, not even one penny

We've mentioned before that we think that leaving the EU is a great opportunity for us to properly sort out British farming. Wean it from the teat of subsidy that is, go the full New Zealand and offer not one pound, not a penny, as subsidy to farmers.

It would appear that the likely next leader of the NFU has got some of the message:

Farmers will lose most of their direct subsidies after Brexit and must do more to prove that any remaining support delivers public benefits, a farmers’ leader has said.

More than £2 billion a year is paid to farmers based on the amount of land they own but Minette Batters, deputy president of the National Farmers’ Union, accepted that these payments would all but disappear once Britain left the EU. The National Trust and many campaign groups have already called for an end to these “basic payments”. Ms Batters revealed that the farming industry also accepted the need for radical reform of subsidies.

That's nice but not good enough. There should be no subsidies whatsoever. Needless to say The Times doesn't agree:

Subsidies should be scrapped altogether when Britain leaves the EU, this argument runs, since they only prop up failing businesses. That would be a mistake. Many farms, particularly hill farms and small farms in Scotland, Wales and Northern Ireland, would no longer be viable. Large rural areas would be overtaken by brambles, thistles, nettles and scrub. Productive potential would be lost and landscapes sullied. Emissions would rise as Britain sent lorries and aircraft to fetch food from abroad. Prices in the supermarket would shoot up too. That hits the poorest hardest, as more of their income goes on food.

This is to miss the point that subsidies come from somewhere. Taxpayers cannot be made worse off through rising food prices if they also don't have to pay the subsidies at the same time. However, it's here that they are truly in error:

 The CAP’s main condition is on land ownership: the bigger the farm, the bigger the subsidy. Ms Batters reckons that this is unlikely to go on after Brexit. Neither should it. Bigger farms are normally those least in need of the subsidy to survive. Supporting smaller farms also avoids mass consolidation which narrows the gene pool and renders crops less resilient against disease.

The focus should be on providing farms of all sizes with the capital to invest in more productive equipment and training to use it.

Sigh. Subsidy to the simple ownership of land just increases the capital value of that land as David Ricardo pointed out that it would. not having such subsidies would therefore lower the price of farmland. And a lower cost of farmland reduces the amount of capital needed to be a farmer - thus neatly providing farmers with more capital simply by abolishing the subsidies.

Our very demand, the removal of all subsidy, would produce the very thing The Times desires, more capital for farmers.

We've got to get this right about the robots stealing all our jobs

Another one flowing from that assembly line of pieces mithering about what will happen once the robots steal all our jobs. And this is one area where we might hope that automation will indeed take over, and quickly too, because we should assume that machine learning will lead to the fully automated version being correct.

Automation does not lower the price of labour, automation raises the rewards to labour:

To sample what lies ahead, my colleague Ryan Avent in his book in automation’s impact, The Wealth of Humans,tried out a computer program that copied complex analytical journalism. Happily for my trade, the result was not a must-read. Yet even if we columnists are not yet to be displaced by some offspring of Sophia, with an expertly engineered prose style, it’s a safe bet that some parts of many jobs will be altered or eradicated by automation much faster than we reckoned on or find comfortable. A report for the World Economic Forum estimated that technology would create about 2m jobs by 2020 worldwide, but displace 7m.

For the educated and financially secure, this causes apprehension enough. Now imagine you are either without a job or in low-paid, patchy work, in economies facing the resulting efficiency gains but lowering the price of labour and wearing away workers’ bargaining power.

I think we'll all agree that the world is rather more automated than it was 240 years ago, when Adam Smith published WoT? And I think we'd all agree that labour is paid rather more today than then? Thus what is going to be our first pass attempt at portraying the relationship between automation and the rewards to labour? More means more, right? 

In more detail we could take Paul Krugman's explanation. The average wage in an economy is determined by the average productivity of labour in that economy. Up goes the productivity and up goes the wage - automation increases labour productivity.

We can even dig right down into the details and consider why a barber in Nuneaton makes a higher income than a barber in Nairobi. Both are doing the same task using the same technology with the same level of productivity. But as William Baumol's cost disease argument points out, the higher productivity of the alternative uses of that labour pull up that barber's wage. 

And it really is that alternative use of the labour which determines the general level of wages. And as automation makes the labour running the machines more valuable so does the real wage rate rise.

As it must do of course - because now we've the machines making myriad things which must be consumed, we humans are the only people who can do the consuming and thus we get to consume more. Our real wages have risen.

Shocker as government decides to spend money effectively and efficiently

We do think this is a very odd thing to be complaining about. Then again, it's from ResPublica, who do tend to complain about odd things.

The problem is that Heseltine’s panel has, on average, just £1.4m for each initiative it supports. To put that into context, the first phase of regeneration of Sheffield’s Park Hill estate required £39m of public funding and redevelopment of the Castle Vale estate in Birmingham was made possible by £198m of government support.

The current onus on commercial viability is likely to mean densifying estates and using new home sales to fund wider redevelopment. There is a real danger that this will entrench the north-south divide, leaving behind those places outside London and the south-east where redevelopment of this kind is not commercially viable, or where bricks and mortar regeneration is not the answer to concentrations of multiple disadvantage.

"Commercially viable" is just another way of saying effective, or efficient. So, the complaint is that government is gearing up to spend our money in an effective or efficient manner. Which really is an odd thing to be complaining about.

We are aware of how taxation works - we raise it where we can, spend it where we must. It is not true that tax raised in London, by far and away the major tax paying area of the country, should be spent in London. But that "must" in where we spend it means that it should be spent where it produces the most value.

And that means, if we're going to be talking about buildings, we spend the money where the valuable ones are - in London. This way we get the most bang for our buck, pop for our pound.

Another way to look at the same point is to note that there are parts of the country where people simply do not care to live. Well, OK, the people have spoken, what's the point therefore of spending fortunes of other peoples' money on places where people do not wish to live? 

Peak globalisation?

"Peak oil" was always a myth.  The notion that the world might eventually run out of it ignored how markets work.  When demand of a commodity exceeds supply prices tend to rise, leading people to use less of it and to develop substitutes.  Barely had the printer's ink dried on "peak oil" stories when hydraulic fracturing unleashed vast quantities of shale oil and more importantly, the less polluting shale gas.  Developments in photovoltaic solar power and battery technology make it more likely that oil will be left in the ground by mid-century, rather than disappearing altogether.

The notion of a "peak" is a useful one, however, if it is used like the phrase "high water mark" to denote that something which was once advancing is now diminishing from its highest advance.  Globalization has been advancing across the world for decades.  It has brought millions of people in poorer countries into the world economy, and has created wealth on a scale never before seen in human history.  It has benefitted poor people most, advancing global GDP per head nearly as much in 25 years as was achieved in the previous 25,000 years.  During that time global poverty was reduced from 37% of humanity to less than 10%, and world under-nourishment has been halved.

Yet there are signs that the advance of globalization might not continue as it has done.  There seems to be increasing resistance at political and popular levels to free trade deals negotiated between groups of countries.  The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada took seven years of painstaking negotiation, and was even then nearly forestalled by the Belgian Wallonia Parliament.  It took days of frantic dealing to finally clinch the deal.  The Trans-Pacific Partnership (TPP) of 12 Pacific Rim Countries was signed in February 2016, but will not come into effect until it is ratified.  As time passes it looks less likely that it will be. 

Negotiations to secure the Transatlantic Trade and Investment Partnership (TTIP) to secure freer trade between the US and the EU seem to have run into the ground, with several European ministers describing the deal as dead.  It seems unlikely that it will go ahead.  If President-elect Trump meant what he said, even the North American Free Trade Agreement (NAFTA) will be up for renegotiation, and is likely to become less free.

Where once the prospect was of more and more countries committing themselves to free trade with each other, the agreements that would enable this are proving more elusive than expected, and resistance is mounting.

A similar effect can be seen with respect to the free movement of labour.  Countries which once signed up to the practice of allowing foreigners entry to live and work within them are showing increasing reluctance to the idea.  Some are limiting numbers, some are raising barriers.  In many countries resistance among the domestic population has forced politicians to withdraw support for free movement and to advocate stricter border controls.

The vision of a world in which goods and peoples can move freely cross borders is looking very much less likely than it once did to come about.  It may well be that the globalization of the world's economy, a factor that has multiplied wealth in so many places, has reached its peak and is starting to recede.  If true, this will present tough challenges for the UK as it leaves the protectionist bloc of the EU and moves to negotiate wider free trade for itself with non-EU countries.  It may well find itself moving against a tide flowing the other way, but even if this is true, it should not weaken our resolve.  We can become richer through free trade even if parts of the world retreat into a nationalistic protectionism.

Fawcett Society falls foul of Barbie's problem - math is hard

The Fawcett Society tells us that yesterday, Thursday, was Equal Pay Day. Women earn, on average, less than men, therefore women will be working for the rest of the year for free.

Women will in effect work for free for the rest of the year because of the gender pay gap, which will take 60 years to close at the current rate of progress, campaigners say.

The Fawcett Society called for more action from the government and employers to tackle pay discrimination, job “segregation” and help women into senior posts.

Thursday has been labelled equal pay day (EPD), with the society saying the 13.9% pay gap means women are in effect working for nothing from now until the end of the year.

There is a problem with this calculation. Their basis is this:

EPD is calculated using the mean full time gender pay gap , which is currently 13.9%.

We have been through this a number of times over the years. Sir Michael Scholar, of the UK Statistics Authority, was most insistent upon the point in a couple of letters.

We must, when discussing this point, use the median full time pay gap, not the mean. That median is currently some 9.6% or so.

What this means is that the Fawcett Society is protesting on the wrong damn day. This is quite apart from the fact that the remnant pay gap is about the choices made by parents over who is the primary child carer and pretty much nothing else.

The upside of Trump

S&P 500 futures indexed to 100 on the day of the election.

Before the American election, the Brookings Institution predicted that a Trump victory would wipe 10-15% off the value of the S&P 500 share index. This turned out to be wrong: in fact, share prices rose strongly, reversing an initial 5% crash to finish the day at an all-time high. And note that, unlike the FTSE rise after Brexit, this is not being driven by a collapsing currency.

What’s going on here? I, like Brookings and most other people, did not expect this. In fact I expected economic apocalypse if Trump won – akin at the very least to the Brexit crash, if not on a par with the dot.com bubble crash. Trump made economic and labour protectionism the central theme of his campaign, both of which we would normally expect to hurt the economy and hence the price of company shares.

As Jonathan Portes writes, in these two areas the President has a lot of power. If he does impose punitive tariffs on China and Mexico (leaving NAFTA) the impact could be two years of lost growth. A crackdown on illegal immigration, let alone deportations, would also be very economically costly. I recommend all of Jonathan's piece, which makes for sober reading.

But despite all this, people with skin in the game seem almost relieved about the result. One reason might be that, because the Republicans now control both houses of Congress and the presidency, and look likely to be able to choose another two Supreme Court justices during the next four years, policies that are normally off the table might actually now happen. The net effect of these, in economic terms, might be reasonably positive:

1. Tax cuts on capital. At 35%, corporate tax rates in the US are very high by the standards of some countries – the UK’s rate is 20% and Ireland’s is just 12.5%. Trump has said he’d like to cut this to 15%; the tax plan favoured by Congressional Republicans would cut it to 20%. On top of this, a one-time tax rate of 10% on “offshored” profits might be on the cards – US firms are keeping over $2 trillion in cash overseas in expectation of a future tax cut, and the Republicans will be keen to bring that money on-shore for investment and profit returns to shareholders. Altogether, the GOP’s tax plan, according to the Tax Foundation, could boost GDP by 9.1% over the longer term. 
2. Repealing Obamacare. Obamacare is enormously unpopular among Republicans, and according to economist Casey Mulligan acts as a tax on full-time work and earnings. Mulligan argues that these effects are likely to have reduced weekly employment per person by 3%, incentivising many employers and employees to shift to 29-hour weekly work schedules to avoid the rules affecting workers on at least 30 hours a week. In total he claims that this has led to a 2% fall in GDP. If the GOP repeals most or all of Obamacare, a growth boost seems likely. The US healthcare system would still be a mess, though.
3. Deregulating finance. I imagine that at this point the average reader is about to faint, but there’s more. Trump has proposed a moratorium on effectively all new financial regulation and the dismantling of Dodd-Frank, the 22,000-page financial regulation bill passed after the 2008 crisis. That would include getting rid of the Financial Stability Oversight Council, whose job was to monitor and individually regulate the actions of systemically important banks. The post-2008 regulations have been enormously costly to banks (perhaps imposing $36 billion in costs), including smaller community banks, and if Matt Yglesias is right that Trump’s policies mean a return to 2006 levels of regulation then that’s good news for them. It’s probably not as bad news for everyone else as it sounds – bad regulation seems like the best explanation of why the financial crisis happened and adding more instead of reforming the existing rules may just compound the problem. 
4. Privately-funded infrastructure spending. Trump has repeatedly promised ‘huge’ infrastructure investment. One problem (of many) with huge spending on infrastructure is that the US government already has a lot of debt. A senior advisor to Trump, Peter Navarro, has proposed using private financing to fund new infrastructure like roads and new oil pipelines, from which they could then draw revenues by charging user fees. This isn’t as free market as it sounds, though, since a large tax credit is being proposed to help firms finance these projects. But a step towards private infrastructure would be very welcome, and this may be a way of going ahead with the infrastructure projects that there is a business case for.
5. Monetary easing. Unusually, substantial infrastructure spending may happen without being offset with tighter money by the Fed as we would normally expect, says Lars Christensen, because Janet Yellen appears to agree that fiscal stimulus is desirable right now. This would only be a good thing if it turns out that the Fed has kept money too tight over recent years, and is still a very bad way of easing monetary conditions compared to straightforward monetary policy, but markets may judge it to be better than nothing. (Lars stresses that New Keynesians do not favour this kind of 'massive infrastructure spending' policy, and it would be a mistake to tar them with that brush.)

To be clear, I am very disappointed that Trump won. His victory probably is, to some extent, a rejection of free trade and immigration, and anyone who believes in these things should be horrified. Trump himself is a horrible man: an erratic, racist misogynist who has courted and won the support of straight-up neo-Nazis. And his pro-Russian foreign policy is extremely worrying if Putin continues to aggress against the Baltic states. Perversely, these things may have been great strengths for him – proof that he was not part of the politically correct establishment.

But markets are suggesting that his victory may not be quite as bad as we had feared. It's possible that our hatred of Trump on a personal level led us to overestimate the long-term costs he'd impose on the world. Maybe the markets are wrong, maybe as we learn more they'll change their mind, but right now I feel much calmer about four years of Trump than I'd expected.