Is there Logic to Trade Tariffs?

US Trade Balance 2010-2014

Is a trade imbalance harmful and what are the ways to correct it?

How harmful is a trade war?  What can they do, and what else will we do?

You will not find any Ted Talks or sound bites here with carefully selected statistics to prove an emotional point – most likely to mislead, influence and control you.  But I will take the tabular data provided by sources such as the U.S. International Trade Commission (from which data for the above chart was taken) and place it in graphical form so you can make some sense out of it and decide for yourself.  If you dare to make up your own mind, that is.  It might not be safe to disagree with your friends now days.  People might think you support someone they hate, or think is an idiot.

I’m not saying decision makers aren’t idiots.  But idiots given three alternatives are right one time out of three.  Intelligent people lacking data and models of how things develop in the future, making decisions instead based on received wisdom or ideology, can be wrong every time.

In what industries are the trade imbalances?  Who are winners and losers?

Oddly this is rarely mentioned.  Instead reporters mention countries, which allows them to make obscure statements about who benefits from trade.  Is anyone benefiting?  Only one group.  Is it a general problem common to all industries?  Not by a long shot and the largest problem is already fixed, but the next two problems are entirely different.  Take a minute to look at the chart above.

First thing you notice is that the biggest trade deficit is for energy, but that it is rapidly coming up toward the breakeven mark.  This data stops at 2014, and by 2018 we are nearly ready to become a net exporter.  This was done with technology and productivity, not by employing a lot of people.  Before leaving the subject of energy, I want to point out that Saudi Arabia and the United Arab Emirates are trading partners with which we have a surplus, not a deficit.  For energy partners, we have deficits with Indonesia and Russia.  With Canada we are very nearly balanced, so it is a fair swap.

Electronics, clothing and automobiles are big offenders.  This has changed since the early 1960s when we led the world in making all three.  Warren Buffet’s claim to fame is that he shut down a textile mill (Berkshire-Hathaway) and converted it to a financial services firm, effectively a big proprietary mutual fund.  Most of the electronics now come from China, Thailand, and similar countries.  The autos come from Japan, Korea and Germany.

The next three biggest negatives are metals (such as the steel and aluminum in the news this week), machinery of various sorts, and believe it or not … footwear.  More than $20 billion a year of it.

The only industry in which we have a net export is agriculture, or food, around $30 billion.  Whatever you think of other people in the world, we feed them.

If you shut down all trade there would be a lot of disruption.  But on the whole, only one industry would be harmed, and not nearly by the staggering numbers by which a dozen other industries would be helped.  Prices of some things would be higher.  Those dollars would be spent here in the U.S., so it’s really not a problem.  Your neighbors would have jobs instead of unemployment benefits, and your taxes would be lower.

Are there particular countries with which we have an egregious trade imbalance?  Yes, see chart below:

top 10 trading partners

It looks like China accounts for 2.5 times the trade deficit of any other region, with the EU second, followed by Japan, Mexico, India and South Korea.  (Germany and France are included in the EU total.)  Although the deficit with India is about the size of the one with South Korea, it is much more egregiously unbalanced so I put India earlier in my list.  Mexico is not that badly unbalanced, actually, but is just a large trading partner with a degree of unbalance.

Which of these countries have deliberate policies of restricting U.S. imports?  China, Japan and the EU are very hostile to imported goods and services, even though all three have wealthy populations.  India might plausibly argue it is not a wealthy country, but in fact the attitudes of young Indians is quite anti-American.  They view western nations as targets for exploitation.  The U.K. and Mexico are very fair trading partners.

Is a trade imbalance a problem?

In my book on The Equity Premium Puzzle, I classify trade as to whether it is based on uneven distribution of resources between the trading parties, or on the cost of labor.  Trade based on uneven resources is helpful, I concluded.  Trade based on cost of labor is not, in the long run.  I will not repeat those rather complex arguments here, just reminding you of them.

If you become overly dependent on foreign sources for key industries, you can be controlled through trade sanctions and threats.  It would be unwise to depend on Chinese steel, aluminum and computers for our military equipment, or even in our economy to such a degree that China could dictate our foreign policy.  And they would.  We do it to people all the time, and China already does it to nations like the Philippines.

If foreigners accumulate enough money to buy your land and corporations, and you let them, then they control you just as surely as if you had a strategic dependence.  Your culture also becomes overly influenced by foreign ideas and values.

How do you correct a trade imbalance?

Normally a long term trade imbalance would weaken your currency, which would correct the imbalance by making your goods and services cheaper.  If this does not happen, either because other countries don’t have a trust factor to build up value in their currency, or have profligate expenses, or policies of excessive stimulus (e.g. China, the EU) which hold their currencies low, then you might need to do something else.

Here are the alternatives for fixing a trade imbalance:

  1. Let free markets take their course, and let your currency decline in value.  If others are manipulating their currency with stimulus, you will have to match them or this will not work.  In the U.S. we don’t tolerate inflation well, and are backing off of stimulus at the moment.  Our president has said he doesn’t want a weak currency, probably because it is inflationary.  So in the current case, we will not match their fiscal policy and letting free markets take their course is not going to help.
  2. Develop alternative sources for materials imbalances.  Oil is a classic example of this, and we have developed fracking technology, partly through government incentives to do so, and sure enough, the energy imbalance has dropped, and caused disruption around the world.  Since we were not previously doing a lot of new domestic drilling, this did not manifest as a displacement of jobs by productivity.  Notice that this does not apply to steel and aluminum.  China, for example, is not a great source of either.  They buy the raw materials from other countries, many of them in this hemisphere, sometimes from thieves or those who don’t mind destroying the environment to get them.
  3. Increase productivity to lower prices of the things you do export.  You have to be already exporting something for this to work, so it works with agriculture and financial services, but not with electronics and textiles because we have long ago abandoned those industries.  There are two problems:  First, it can reduce the number of jobs in those industries, since the main emphasis is on productivity.  Second, if your trading partner simply blocks your imports with rules and regulations, this doesn’t work.  Our fastest growing companies like Facebook, Google and Amazon are simply blocked by China’s totalitarian government.
  4. Impose tariffs on goods from countries with which you have a trade imbalance, in industries in which you have a trade imbalance, preferably in industries for which you have a critical need.  No point in picking fights over something unimportant.

To sum up, we already did number 2 in a big way, and strategies 1 and 3 are blocked by the policies and behavior of other countries.  That leaves 4, the tariff thing.

Will tariffs create a trade war?  Possibly.  There is nothing wrong with a trade war if you can win it, and it is a simple matter of adding up the numbers.  We have massive deficits with China and the EU.  As long as:

  • we only target industries in which we have large deficits with those two countries,
  • we are willing to match any retaliatory tariffs they impose,

then we will win any such trade war.  They simply have much more to lose than we do.  If trade with them stops altogether, fine.  I say we don’t even look back.  China would become a 3rd world country again.  The EU is already headed that way through mismanagement and unrestrained immigration.

How harmful is a trade war?  What can they do, and what else will we do?

The existing trade war.

In case you hadn’t noticed, there is already a trade war going on which is extremely vicious.  It is often illegal and targets any business that sells by mail order, whether it’s a mom and pop operation with a new kitchen widget, or the sleek products of our latest tech companies.

The small company products are the ones targeted illegally, sometimes aided and abetted by Amazon.  Chinese manufacturers clone a proprietary product and sell it as the original.  See well documented example of Elevation Lab’s under desk headphone holder.  For a broad based report including the kitchen widgets, see article on CNBC.

Large company products are copied in style, are usually not exact clones, and are sold under other brand names.  As far as what appears on the surface (I don’t know about the insides) this seems legal.  It is buyer beware.  Some devices don’t work.  Others work quite well.  I have bought a number of under-$100 tablets.  Half of them didn’t work or didn’t last and I threw them away.  The remaining ones work well, and even with losses were half the price of big names like Samsung and Apple.  I’m currently pondering whether to buy a laptop this way.  Here are examples of some current choices:

  • $999 Macbook 13″ directly from Apple
  • $399 refurbished (grade C) Macbook from Double Dex sold through Walmart
  • $289 new Jumper EZ book (note name and style similarity, see photos) directly from China on

macbook 13 from applemacbook 11 refurb

jumper 13 from banggood

The next steps in a China trade war.

I took the list of possible steps China would take from a BBC Business News article:

  1. File complaints to the WTO.  The World Trade Organization, successor to GATT, started after WWII, was designed to make it more profitable for countries to trade than fight.  Further, it was designed to give countries leverage to control one another without fighting.  Members of the WTO, in theory, must give every other member “most favored nation” status, not charging higher tariffs to one nation than another.  If they go to war, they can be sanctioned and trade blocked or tariffs imposed.  The WTO has not really been successful.  Russia joined only in 2012, and invaded Ukraine in 2014.  Some deterrent.  China has claimed an entire ocean region (probably for oil) of waters adjacent to major nations like The Philippines.  The WTO is rendered less effective by bilateral and regional trade unions, like the EU and NAFTA and the TPP, at better-than most favored nation trading terms, which is exempted under WTO rules.  In other words, the WTO has no teeth.  If you are already in a trade war, it does not affect your bilateral and regional trade agreements.
  2. Limit U.S. beef imports.  This is presented as if it were important.  They’ve only recently been allowed after being banned for more than a decade, so very little impact.
  3. Tell Chinese customers not to buy American cars.  GM does sell a good many cars in China.  But you don’t really think those are manufactured here and shipped there do you?  Of course not.  Here is a picture of GM manufacturing plant in Shanghai:
    GM Cadillac plant in Shanghai
    The real trend is toward Chinese manufacturing of cars sold in the U.S.  A Chinese company now owns Volvo.  As for GM, 32,000 Buick Envison models have been produced in Shanghai and sold in the U.S.  That is the tip of the coming iceberg.  Even Russia gets ripped off by China, with a contract for fighter jets canceled half way through as clones started rolling off Chinese assembly lines.  It’s not just China.  Take a look at 13 popular “American” models manufactured overseas.  GM is destined to become not a seller of American-made products in China, but yet another gateway for selling Chinese products in the U.S.
  4. Tell tourists to stop visiting the U.S.  The first problem I have with that is the idea of a country “telling” its citizens where to go.  We should not even be trading with such countries.  It is aiding and abetting totalitarianism.  The second problem I have with that is, well, let’s put it this way.  If you want your town to become a 3rd world tourist trap for wealthy Chinese, go ahead.  I’m not interested.  I’d rather be wealthy myself.  And I certainly don’t want my livelihood subject to the whims of a totalitarian government, long time strategic enemy of the United States, which uses the spending power of its citizens whom I’ve made wealthy as a strategic weapon.
  5. Sell some U.S. bonds.  Even the BBC reporter admits this is not much of a threat.  They would be picked up by other countries.  We are already raising interest rates, which is the effect of bond sales.  And since we have our own currency, we can create it through the Federal Reserve to buy bonds at any time, lowering the value of our currency and making our exports more attractive.  In other words, if the Chinese sell U.S. bonds, they merely give up the leverage they have used to make gains in the already-on-going trade war to begin with, and the U.S. trade imbalance with the entire world will self-correct by currency value changes as it should have long ago.


A trade war really is a kind of war.  The thing is, it’s like Pearl Harbor.  If you have been attacked, even if it is a sneak attack over time, you have to respond, or fold as a country.

Most likely, as the BBC reporter suggests, China will do nothing serious.  But the reasons are not given.  Here they are.  First, current trade policy moves will be seen as political posturing by Republicans who want to win (or avoid losing) in the fall 2018 mid-term elections.  Second, China will not so easily give up its strategic goal of being the [sole] manufacturer to the world, thus controlling the world.  It wants to capture the U.S. car market.  It is emulating Japan, and that’s what Japan did as a next step after capturing the U.S. electronics market.  It can’t do that if there is a trade war going on.

How did we respond to Japan?  Reagan imposed selective tariffs, and forced them to revalue their currency upward, which produced a deflationary catastrophe in Japan that cost them their leadership position in world trade.




Today v. Tomorrow: The Running Ostrich

running ostrich

Jobs that focus on short-term fixes today, at the possible expense of many tomorrows, outnumber jobs that focus on long-term outcomes by as much as 16 to 1.  I call this the strategy of the running ostrich, as pictured above with a bucket on his head.  See table:

Discipline Definition Jobs available
(LinkedIn, 1/1/2018)
Sociology the study of human society at a given period in time 7760
Anthropology the study of human beings and their ancestors through time 1405
Clinical and medical genetics provides counseling or treatment for genetic diseases prevalent today 7760 + 2216
Population genetics study of how population traits will change in the future based on selective pressures today 567

The running ostriches (engineers, physicians, politicians, military strategists, sociologists, etc.) are fascinated by how things work, and want things to work or “run” very well.  Today.  It is an affront to their efforts that things might work differently tomorrow and no longer run well.  That is at worst just another in a long line of challenges they will “solve.”

To suggest that the well running of things today might actually cause them to run poorly tomorrow is a fighting insult, whether one is talking about climate change or population growth or social upheaval.  It is long forgotten that originally oil-based power was orders of magnitude cleaner than wood-soot and horse manure for the same amount of heat, light or travel.  And rarely considered that solar power and electric cars may have some even greater consequences unforeseen by opportunistic social planners today.  And certainly don’t mention that treating genetic diseases will harm the genome, or paying for poverty will buy more poverty.

The Problem

The trouble is, even those who study the evolution of the future fail to account for themselves.  They fail to see they ignore the fact that they must ensure their own success to have any impact on the future.  They do not seize material or political power, assuming they stand “outside” the system they are studying.  But they are part of it.

An Example

A case in point is the famous Carthaginian general Hannibal.  He saw that the Roman Empire was destroying all the “barbarian” tribes.  Carthage did not.  It’s colonies merely traded with them.  Romans first established vassals, then came back to enslave, and finally committed genocide against any resistance left.  Hannibal saw that Rome must be stopped.  He saw the long-term consequences of Roman aggression for the evolution of the human population.

But Hannibal did not see himself as participating in that same human evolution.  He thought he could take a one-time action, standing outside human history, to intervene in it.  He was brilliant in its execution.  He defeated 70,000 Roman crack troops with far fewer soldiers, a band of allied tribes who did not even all speak the same language.  It was a remarkable feat.

But Hannibal did not see the need to return victorious to Carthage, to seize political power, perhaps to become an emperor.  And so Carthage, founded by a mythical queen on female values, preferred not to make war, to leave alone and be left alone.  Their Senate (yes, they had a senate like Rome) could did not support Hannibal.

What was the outcome?  Rome imposed a punitive treaty and war debt.  But after the debt was paid, they continued to harbor evil intentions toward Carthage.  Carthage actually started none of the wars with Rome.  The 2nd Punic War was started by Hannibal from Spain.  But Cato the Elder ended each of his speeches, no matter what the subject, saying: “Further, I think that Carthage should be destroyed.

And destroy they did, leveling the city in 146 BC killing around 150,000 civilians and enslaving a further 50,000.

The Sins of Rome

At what cost to the world was Hannibal’s idealism and shortsightedness?

Not only did Rome end Carthage, but many other peoples.  And what it didn’t end it enslaved or drove into violent resistance.  In the First Jewish War Rome killed 1.2 million Jews, and enslaved 60,000 of them for the purpose of building the Coliseum.  Over the life of the Coliseum, 400,000 people were “sacrificed” there along with a million animals.  The total gladiator deaths across the empire was 3.5 million, around 3 times the total number of deaths of Roman soldiers during the life of the empire and republic combined.

But weren’t the Carthaginians evil child sacrifice-rs?  Thanks to Rome’s leveling of the city, we can only dig up the ceremonial graves and make inferences.  The most pessimistic estimates are 25 infants per year, within weeks of birth, barely different than late term abortion.  The total could have amounted to no more than a few thousands over the entire life of Carthage.  Compare that to around ten million people killed by Rome.

What type of society was Carthage?

We cannot know what the world would be like if Carthage prevailed.  Presumably the Jews would not have been dispersed.  But the Arabs, Huns, Mongols and others would likely have come conquering just the same.  Carthage might have simply been overrun later by the Arabs.  Even the warlike Romans were overrun by various groups.  However a few points are interesting to contemplate.

According to some sources, though Carthage had slaves they did not go on slaving expeditions after about 500 BC.  (Tyre still did.)  One might suppose then that no, or fewer, slaves would have been brought to the New World.  The history of approximately half the world might be radically different, and more peaceful.

How exactly did the Carthaginians trade and “cooperate” with strangers?  Out-group vs. in-group cooperation is considered one of the strongest markets for an advanced society, capable of making a technological civilization.  Here is a remarkable description from Herodotus of Halicarnassus (about 430 B.C.) :

“The Carthaginians also say they trade with a race of men who live in a part of Libya (Africa) beyond the Pillars of Hercules (Straits of Gibraltar). On reaching this country, they unload their goods, arrange them tidily along the beach, and then, returning to their boats, raise a smoke. Seeing the smoke, the natives come down to the beach, place on the ground a certain quantity of gold in exchange for the goods, and go off again to a distance. The Carthaginians then come ashore and take a look at the gold; if they think it represents a fair price for their wares, they collect it and go away; if, on the other hand, it seems too little, they go back aboard and wait, and the natives come and add to the gold until they are satisfied. There is perfect honesty on both sides; the Carthaginians never touch the gold until it equals in value what they have offered for sale, and the natives never touch the goods until the gold has been taken away.

The Romans in Briton

Compare that to the way the Romans treated their “allies” in Briton.  King Prasutagus chose to become a “friend of Rome” and at first the Romans left him largely at peace, though they raided his neighbors for slaves.  He wanted to preserve this peace, and so on his death his will left his kingdom to “joint rule” between his heirs and the Roman Emperor.  The Roman tax authority Catus concluded this meant Rome owned the kingdom.  He had Prasutagus’ queen Bodica flogged and his two daughters raped to make the point.

Implications for today

  1. A lot of our laws, customs and ideas of trade or cooperation are still based on Roman ideas.  The government of the U.S. was deliberately modeled on Rome.  Our ideas of justice might be more like those of Catus than either Prasutagus or Hannibal.
  2. Our social activists today are either like Prasutagus or Hannibal.  They appease, or they think winning a few points and making alliances in the present will secure the future.
  3. We do not systematically study the evolution of the future because the past has been so horrific, we, like the ostrich, want to pretend that it doesn’t matter, that who we are was not shaped by it, and the future will not inevitably be shaped by “unwelcome consequences” of our actions.  We think the future is shaped by the “intent” of our actions.

We can sum these ideas up more succinctly:

  1. The inertial continuation of aggressive law and trade in the race of corporate dominance.
  2. The strategies by progressive factions of appeasement, alliance and one-day victories vs. consolidation of power over time.
  3. The belief that it is intent that counts, and that good outcomes engineered today will spontaneously persist without future consequence.

History seems to suggest that none of these three ideas leads to desirable outcomes.  We seem to be just a bunch of running ostriches, not looking where we are going.

Case for/against impeachment of Trump

brusa flag
Flag of the Banana Republic of the United States

During Christmas my brother-in-law asked if I thought Trump would still be in office at the end of 2018.  What do you think?

The standard for impeachment is “Treason, Bribery, or other High Crimes and Misdemeanors.”  Let’s take those one at a time:

Treason – People may seriously think Trump’s policies are mistaken, but there is no plausible “motive” for the leader of the most powerful nation on earth, or a man already a multi-billionaire, to decrease the power of the nation he leads.

Bribery – in the ordinary sense of regulatory or judicial favors in exchange for money, this is equally implausible.  If you want to include the trade of foreign policy favors for fake news, you have to produce a conversation along the lines of “Would you like us to produce some fake news for you in exchange for lifting sanctions?  Yes, that would be nice, by all means do so.” The Russians pulled their shenanigans all around the world but did not engage with any other nation’s political party in this manner.  It is unlikely they did so here.  They did not need to ask or offer favors.  Trump stated during the campaign he wanted to have improved relations with Russia, strongly suggesting that meant lifting sanctions.  It was said in front of everyone.  Do you suppose in private someone told the Russians “If you don’t help us, we won’t be lifting sanctions?”  Highly improbable.

Other High Crimes – Trump is as likely as anyone to have committed unrelated high crimes in the past.  I assume they would have come out by now.  That leaves only the Nixonian crime of obstruction.  Where there is fire there must be smoke.  People are looking at the firing of Comey and thinking that is smoke.  I see that as Trump’s insistence on loyalty – an insistence of every strong leader in human history.  There is an ambiguity here.  The definition of obstruction is “corruptly or by threats or force, or by any threatening letter or communication, influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice.”

Any threatening letter or communication would be out in the open by now.  Comey would have said so immediately.  Nixon paid hush money.  That leaves a trail.  There is no suspicion of hush money here.  The thing is, the obstruction has to be done “corruptly or by threats …”  It is not sufficient to qualify as obstruction of justice for an officer of the government to exercise legitimate discretionary authority over an investigation, making a trade off with broader goals, such as foreign policy.  Happens all the time.  I think it is likely that is all Trump did.  Did he attempt to impede (stop) the investigation?  Yes, plainly he has stated that he wishes it would go away, and plainly he asked Comey to drop it, but that was done openly, not corruptly (acting dishonestly in return for money or personal gain).  Anything that Trump is likely to have done he has already openly declared, and so not dishonest. If it were for personal gain, he would have blocked or fired the special prosecutor also.  (There is no issue of loyalty in regard to the special prosecutor, who is not appointed by Trump and does not work for Trump.)  If Trump fires Mueller, we can revisit this.  But if the Senate gets rid of him, there is no implication.

And Misdemeanors – If the president of the United States is removed for a misdemeanor, then we need to change our flag to the design at the top of this article.  It seems to have become the policy of the United States, both under Bush and Obama, to advocate the overthrow of any government we don’t like either by street protest or revolution or invasion rather an election.  Not one such government (Ukraine, Libya, Afthanistan, Iraq, Syria, etc.) is now stable.  This is what throwing the president out for a misdemeanor amounts to.  The US won’t be stable if we do that.  There has already been a special election that limits Republican control of the senate.  There is another coming up in just 10 months, and a presidential election in 34 months.  It isn’t clear Pence would be a better leader for anyone but die-hard republicans (anti-gay, walked out on anthem protesters, not one to be loved by the left).

Interest Rates & Recessions

Fed Funds w Recessions
Fed Funds rates last 62 years from with my annotations

After the longest “recovery” in over half a century (see yellow lines above), and the Fed finally confident to raise interest rates, and yield curves inverting, some people are beginning to ask if that forecasts a recession?  Look at the history above and see for yourself.  In 9 out of 12 cases following interest rate increase campaigns, recession has followed, though in three cases there were periods of level rates of 3 months to 18 months (only one case of the latter, most around 3-6 months) of stability.

It appears a rise of at least 2% is necessary to trigger a recession.  We haven’t got there yet, with rates rising only 1% in the last 7 years.  Most of that is recent, but even so, you can see it is the slowest, most cautious rate increase since the 1950s.  Therefore I do not expect a recession in 2018.  Since it is unlikely rates would rise another full percent in 2018, and even if so it is unlikely their effect would be felt as soon as 2019, I do not expect a recession in 2019 either, and probably not in 2020.  The soonest we might see a recession is 2021, which is also a post-election year in which a new administration might increase taxes or otherwise institute reforms that might pile on top of Fed policy to trigger recession in 2021 or 2022.

The economy will get some boost from the various corporate tax breaks just enacted.  However these might be canceled by aggressive Fed policy.  That, however, would only add up to “neutral” and would not trigger a recession, now or in the future.  In other words, we might be able to absorb an additional 1% Fed increase to around 2.25% without triggering recession.  Only one recession in this chart was triggered by such a mild increase, and that was long ago after a lengthy post-war boom which is before the start time of the chart.

Some new conflict in Korea or Ukraine seems likely.  Unless it is nuclear (not out of the question), it seems unlikely to have a big effect on the world economy.  Those places are insignificant in the world economy, and we already have a sanctions regime on North Korea and Russia.  Military damage to South Korea would trigger a boom from reconstruction aid.  Conflict in Ukraine, if the US continues and extends the new policy of providing offensive armament, might actually result in the lifting of sanctions on Russia, as part of a negotiated settlement to end hostilities.

Most likely the market will be driven by corporate profits, and moves will be less than 20% on the downside.  I won’t make any prediction about upside, but I think the pace of 2018 will be less, with perhaps modest gains in 2019.  The market is still more or less correlated with recovery in the oil industry, and the inability of the US to cooperate in restraining supply to maximize profits continues to threaten the global climate as well as limit market upside.  The US should adopt a temporary cooperative posture with OPEC, not reducing production but limiting upside and apportioning it among suppliers, like the Russians do.  However, this is not politically popular with our naive population and pseudo-populist politicians.


Which presidents benefited which races?

US fertility rates 1980-2013

The only meaningful long-term criteria for success of any category of people, especially in a democracy, is their numbers.  They can always vote themselves more economic opportunity.  So which groups really benefit from various presidents?

From the above figure, not the ones you might guess by a long shot:

  • Regan gave blacks a huge boost.  No one did especially poorly.
  • GHW Bush was bad for everyone.  American Indians went into a long slide.
  • Clinton was good for whites.  Everyone else went down, especially blacks and Hispanics.  Though most stabilized in the middle of his period, so maybe he was just fixing problems caused by the first Bush.  American Indian slide was not arrested though.
  • GW Bush was uneven.  But his apparent favorites, the Hispanics, took a big dive late in his administration, along with everyone else, just bigger.  No data in this chart on Muslim immigrants from the Middle East, which appeared in large numbers for the first time.
  • Obama was not able to arrest any of the slides, though they moderated.  However, blacks and Hispanics lost the most.

For a STABLE democracy, birth rates should be nearly the same.  Over time they have to be exactly the same, or races start going extinct.  During this period, not counting the American Indians, the spread in birth rates declined from 1.2 to .47, on a base (lowest) of 1.68 which was whites.  Oddly, whites were the only ones increasing since 1980, contrary to what you might thing.

If birth rates were frozen at 2013 rates blacks and Hispanics have about a 20% relative advantage.  If a generation is 30 years, and the total population growth of the USA is around 2%/generation, then in 150 years the black-Hispanic population will achieve an absolute majority:

US demographic trends extrapolated

Of course the birth rates won’t be the same, generational time may vary, blacks and Hispanics may neither share a political agenda or be able to maintain an integrated policy approach if this happens, and other immigrants are moving in with very high birth rates initially, so this is a hypothetical exercise.  But it shows the power of relative reproductive advantage.

Under this simple projection (which does not account for trends up or down, some of which are quite strong at the moment), there will be absolutely zero whites in the USA in 4500 years.

Trends do not remain over that kind of time frame.  However, in the remote past, human population trends were relatively stable over 1.2 million years, and a very, very small relative advantage of one group or another would have completely wiped out all other groups.  Given a typical population during that time of 26,000 only a relative advantage of 0.035% would have promoted a single new human to exclusive domination as of 20,000 or so years ago, and extincted all others:

human evolution 1.2M years

The surprising thing is, no great or even small conflict is implied by this, which is quite a slow rate of change.  In the middle period of fastest change about 6 million years ago, the population changes would be about 2 people per generation (the chart assumes 20 year generations, which is probably long … if 15 years, the relative advantage may have been much lower).

Humans like drama and imagine their past full of it.  But it simply may not have been so.  Even the asteroid that supposedly killed the dinosaurs took at least 33,000 years to do so, more than 6 times longer than recorded human history.


USA to emulate Iraq mob governance

statue pulldown
see BBC video article

The statue pull down in North Caroline today (8/15/2017) was eerily reminiscent of the Saddam statue pull down after the initial invasion of Iraq.  George Bush shortly declared victory.  That was, um, 15 or so years ago.  A couple trillion and a lot of legs lost later we are still fighting there.  Apparently these idiots pulling down this statue think we should emulate the behavior of Iraqis, and make decisions through mob action in the same way that gave rise to ISIS.  Apparently the idiots in charge of the government in North Carolina are going to let them.  And you wonder why half the country cannot tolerate the other half?  It’s obvious.

Is the Equity Premium only in the USA?

Long term small cap US vs bonds vs World
data from Yahoo Finance, 5/3/2017

The “Equity Premium” was discovered by my associate Rajnish Mehra, together with Edward Prescott, in the late 1970s, though only published in 1985.  See Wiki article, original paper, and Mehra’s 2008 review.  The finding was a “surprise” because finance theory suggests if one investment consistently gives higher returns, investors or arbitrageurs will bid up the price of it.  From a higher price base, the return is lower assuming the same final price.

Thousands of papers were published proposing solutions to the problem, many mentioned in Mehra’s review.  Mehra also states in the review that the premium “is observed  in  every  country with a significant capital market.”  However, he also states “The United States together with the United Kingdom, Japan, Germany, and France accounts for more than 85 percent of the capitalized global equity value.

Two of those countries, Japan and Germany, were forbidden from funding large military forces after WWII, and most of their defense funded by the U.S.  They also benefited from postwar reconstruction assistance and planning.  Two of the most advanced industrial economics, both space and nuclear powers, did not have capital markets at all for most of the 20th century, Russia and China.  China now is the world’s second largest economy, making even Mehra’s recent 2008 assessment obsolete.

Japan’s markets fell after the peak of the late 1980s.  Since the Equity Premium is observed at 20+ year time horizons, it was the late 2000s before it could be evaluated whether Japan’s market still had a premium.  Currently it appears that after 35 years, it has not yielded a premium over bonds for investors who bought after 1982, and has presented a loss for many of them:

Nikkei 225
data from Yahoo Finance, 5/6/2017

Russia’s market begin in the early 1990s, only beginning to give valid Equity Premium data on the first few years of operation in the middle 2010s, i.e. just recently.  In 2011 when Putin was re-elected Russia’s market crashed badly, and in 2014 the twin disasters of the Ukraine war and the sanctions it entailed, and the fall of oil prices.  Still it does have a premium due to early gains from low value in the 1990s, but there is not enough data to assess whether it will continue.

China’s market since 1990 shows steady gains – IF you didn’t buy during one of the two large peaks.  See chart:


The peaks are when most people bought, and when you would have bought if you were permitted.  But of course, this wasn’t a free market at all.  Holdings by outsiders were strictly limited during this time frame, and still have serious limits.  China is still a tightly controlled and planned economy.  Perhaps it is no longer socialist enough to be called communist, but the ruling Communist Party has given up neither planning nor control.

In fairness, the U.S. economy is planned too, with growth targets set by the Federal Reserve, which “prints” money (actually electronically, buying bonds and mortgages and lending to banks) to meet those targets, balancing inflation and unemployment.  In my book The Equity Premium Puzzle, I argue this is the real reason for the equity premium.  By printing money to lend, the Fed suppresses interest rates, and no arbitrageur has deep enough pockets to fight a printing press.  The European Central Bank is charged only with preventing inflation, due to Germany’s fears from the 1930s.

Looking at the chart at the top of the page, with one bond fund and the rest small cap ETFs, which I deem to be more indicative of a particular country’s economy, and which usually perform as well or better than large caps, it appears only the U.S. market over the last 15 years has a clear premium over bonds.  Note that these are price plots, not total returns.  You have to add about 32% to the end of the bond plot for comparison, giving it a total return since 2010 (starting date for the bond ETF chosen) of 51% or about 5.2% per year.  But the U.S. small caps have a return over the same period, not even counting dividends, of 163%, or 12.8% per year.  That is not a long range return, as it was recovering from a market crisis.  From 2004, a 14 year period and as far back as that ETF goes, the return, sans dividends, is is 7.4%.  Add about 1% for dividends making it 8.4%, for a 3% advantage over bonds.

The only other countries on the chart showing a premium over the bonds are Britain and Canada.  Britain’s premium is small, and Canada has a premium only if one ignores the early data, the inclusion of which actually gives a negative premium.

I think it is time to admit that the Equity Premium is only striking in the U.S., and only exists in “planned” economies in which a central bank suppresses interest rates and prints money to fund growth.  Britain essentially “invented” the concept of the central bank, and the modern version of the stock corporation by which borrowed money is leveraged against equity to create excess growth (see book for details).

Britain probably suffered from membership in the EU with its paranoid banking policies.  The bank chief Mario Draghi “gets it,” but his German “overlords” do not.  They are punishing Greece and Spain, et. al., for their borrowing immorality (deserved) instead of funding growth and insisting the debtor countries use the funds for growth rather than welfare (pragmatic).  Yes it is warmed over Reaganomics, but the data show it works regardless of what one thinks of it morally, whereas welfare does not.

Japan’s central bank is waking up recently, but for decades was widely thought to be too tight, explaining their lack of premium.  China has a chance of holding its course, but its population has a great tendency to invest in bubbles.  Russia has a surprisingly strong central bank, and I expect if they ever get their politics straightened out they will have a strong equity premium.  But the U.S. is a much safer bet.

What if the U.S. is the only country with a really noticeable Equity Premium (3% or more), and we really don’t know why?  Then invest in the U.S. and don’t break it.  Globalization is a kind of unremitting equalization that will eventually break every equity premium on the planet unless all nations have one.  We’ve seen how well that works with currency policy in the EU, and it won’t work even that well with the EP.  If you invest, invest in the U.S.  If you invest in the U.S., oppose globalization.  It boils down to your pocket book, and whether central bankers and their overlords invest in growth.

I am not, by the way, saying unlimited growth is good.  But if it exists and you do not invest in it, then you are giving up your say in the world by falling behind in economic power.