Whisky business: tariffs and their consequences

In March 2018 the US imposed tariffs on steel and aluminum imports.  In reaction the European Union imposed tariffs on American goods to maximize political damage to Republicans, including tariffs on bourbon made in my home state of Kentucky.  In response the US announced in October new tariffs on Scotch whisky and French wine.

In a recent WP column, Catherine Rampell examined the consequences of this escalating tariff war.  Overall US whisky exports dropped 16 percent while EU exports fell 27 percent.  There also are domestic losses associated with declining wine and Scotch imports -- namely fewer jobs and lower profits for the firms that import, transport, and retail the goods in question.  

In the meantime employment in primary metals manufacturing is actually down since the US started this escalating tariff war, which is proving not so easy to win.

Powell on labor force trends

Today's WP summarizes FRB chair Jerome Powell's analysis of why the labor force participation rate of prime age adults has (1) declined over the last 60 years and (2) become lower than the rate in most other well-to-do nations.  This is an important issue for the prospects for continued economic growth.    With the unemployment rate at all time lows and job vacancies exceeding the number of job seekers, future gains in GDP are contingent on more people entering the labor force.

In the 1960s, virtually all men between the ages of 25 and 54 worked or were looking for work.  Today that rate has gone down to 89 percent.  Labor force participation hinges on the rewards for working versus the value of not working.  One might argue that the rewards for not working have risen, leading to more labor force dropouts.  But single men do not qualify for many income maintenance programs and the inflation-adjusted payout from these programs has declined over the last 40 years.  Also, income maintenance programs are far more generous in Western Europe than the US.

Powell points to two trends that have driven more men to drop out of the labor force: education and opioids.  Today's jobs require more skills than those one or two generations ago, but education levels have not kept up.  Research on the impact of  opioids is just getting geared up.  To date it shows a correlation between low (high) labor force participation with high (low) opioid use across communities.  This begs the question of which came first.

To this list I would add two more items: a declining marriage rate and video games.  Married men are more economically active and make higher wages than unmarried men, although again establishing cause and effect here is challenging as women are less likely to marry men who are unlikely to contribute to a household's economic well-being.  As for video games, research shows they provide a low cost mechanism for passing time with some social interaction that increases the payoff for not working.  

Saving NCAA men's basketball

This has been anything but a great season.  There is no Zion Williamson or Anthony Davis on the court.  The ACC has three good (not great) teams and then a lot of mediocrity.  Most other conferences are the same way.  Lots of fouls getting called and lord help us when the officials have to visit the monitor to review a play.

Mark Story, a sports columnist for the Lexington Herald-Leader (which along with the Kentucky Sports Radio blog are your go-to sources for the winningest team of all time) has some great suggestions on how to improve the game:

1) Let players who enter the NBA draft and are not selected return to college.  This would shift some talent back to the college game that will otherwise play overseas or in the NBA G League.

2) Let players make endorsement deals.  It's their name and number on the t-shirt; give them a cut of the action.  Again this will make a difference for the stay-in-school versus bolt-for-overseas decision.

3) Reduce the use of video replays.  Story recommends giving each coach the right to request two replays per game.  I would add this -- require replays to be complete in two minutes.  If there is not a clear case for overturning a call by then, the call should stand.

Trade deficit shrinks, so what?

The trade stats for 2019 show that the trade deficit shrank by $11b, a 1.7 percent drop.  This is an economically significant number.  But what does it mean?  Trade deficits reflect the difference between exports and imports.  They shrink if exports grow, holding imports constant, or if imports decline, holding exports constant.

Nothing is ever held constant in the real world, however.  In 2019 the volume of both exports and imports became smaller, reflecting the trade barriers created by the US and some of its trading partners.  But imports declined more than exports, so the deficit shrank as well.

Are we better off with a smaller deficit?  Exporters would say no.  Nor would the companies with global supply chains that have had to play guessing games with tariff timing and exemptions.

Protectionism has sprouted up in a number of countries as part of a portfolio of nationalist, inward-looking policies.  Politicians promised that trade wars would lead to domestic job growth.  So far, there is no evidence in the US of a recovery in manufacturing in response to a smaller volume of imports.

Should we get used to slower growth?

Yesterday's GDP report indicated that growth slowed to 2.1% in 2019:4.  This is basically the same rate as prevailed in the last two quarters.  Most economists believe this indicates the long term growth potential for the US because (1) the economy is at full employment, (2) labor force growth is likely to remain modest because of population aging and immigration restrictions, and (3) declining productivity growth.

Will this be the new normal?  It is clear that the cut in corporate taxes in 2017 so far has not launched the GOP-promised surge in corporate investment.  The stimulus from the household tax cuts is in the rear-view mirror.  As for the Fed, it is hard to cut interest rates when rates are near zero.

Coronavirus may very well result in a dip in GDP growth in 2020:1 and election uncertainty could be a drag for the coming year.  On the plus side, 3.5 percent unemployment has resulted in rising incomes for those who have not fared well since the Great Recession.  Continuing that trend would be no small accomplishment.