President Trump and manufacturing jobs

President Trump intends to bring back manufacturing jobs. How might he do that and what would it mean for our economy and our workers?

Keeping in mind that our manufacturing output has steadily increased over the years and is now at an all time high, though the number of manufacturing jobs has steadily declined. Bringing back manufacturing jobs means rolling back and undoing the technical advances that made manufacturing workings more productive. But if we increase the number of workers in manufacturing by making each worker less productive (shelving some of the productivity enhancing technical advances), where will these workers come from? Presumably not from Mexico. They will have to give up what they were producing before in order to take the new manufacturing jobs.

Looking more carefully at such a policy reveals that it would make us poorer. Without Trump’s arm twisting (carrots and sticks—tax breaks, i.e., bribes, and/or tax or other penalties), the workers in question would be employed doing things that were more profitable (i.e. more productive and contributed more to our income) than in manufacturing. Trump would have those workers move from where they are more productive to where they would be less productive. I assume that such a policy reflects ignorance rather than malice, but what ever his motivation, the result of Trump’s protectionist threats would be to lower our standard of living.

If President Trump intends to return power from the government to the people, as he claimed in his inauguration speech, he will have to stop threatening companies to produce things in the U.S. when they would otherwise find it more profitable (cheaper) to produce them abroad and import them. Anything and everything that adds to our economy’s productivity (specializing in what we are best at and exporting it to pay for imports that other countries are better at making) increases our incomes. Trump should stop interfering with our private economic decisions and get on with the other aspects of his promises (tax and regulatory reform) that will increase our well-being.

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Econ 101 – Jobs and Income Growth

At long last the economy has more or less reached full employment. The December 2016 unemployment rate was 4.7 percent while the Federal Reserve’s assessment of normal full employment (NAIRU—non-accelerating inflation rate of unemployment) is 4.8 percent. More over, wage growth has picked up, increasing 2.9 percent over a year earlier. The producer price index increased 0.3 percent in December (4.3% annualized). The economy is heating up. The Federal Reserve raised its overnight interbank interest rate target (Fed Funds rate) from 0.5 to 0.75 percent in December.

What does this mean for PEOTUS Trump’s goal to create jobs and increase the economy’s growth rate? At his press conference January 11, 2017 he claimed to be: “The greatest jobs producer God ever created.”

A new job is created when a company demands an additional worker for some reason or other and the desired worker is supplied. More jobs (by which I mean more new ones than the loss of old ones, i.e., a net increase in jobs) can come from any of three sources: a) an increase in the labor participation rate (more people looking for work from those of working age who are physically able to work); b) more young people entering the labor force than retiring old people leaving it; and c) a net immigration of working age foreigners. An increase in the demand for workers that cannot be filled will put upward pressure on wages and ultimately on prices.

In December the labor participation rate rose to 62.7 percent from its low in November of 62.6. It had been around 66 percent in the years just before the great recession of 2008. While we don’t really understand why so many people have dropped out of the labor force, there is scope to increase employment if some of them return. Some of the new jobs are filled by immigrants, especially those jobs requiring information technology skills, which creates additional jobs to feed, cloth, and entertain the new residents. http://wapo.st/2irYDYW. While 7.4 million people were looking for work in November 2016 (latest available), there were 5.5 million unfilled vacancies. If you like data: 5.1 million were hired in October while 4.9 million left their jobs for a net increase in employment of 0.225 million. Of those leaving their jobs 0.372 retired or died.

In short, the economy does not lack jobs and the number of jobs is growing at about the rate of growth of the working age population. If the government increases employment for infrastructure projects, those workers must be attracted away from their existing jobs, which will require higher wages. Increasing employment at much faster rates would be inflationary. Higher inflation would undermine the real value of excessive nominal wage increases.

The problem—issue or challenge—is that the new jobs offered often require skills that do not match those of the workers looking for work. Most layoffs and discharges result from automation and other productivity improvements (not from trade), which increases the wages offered for the new jobs needed as a result. This process—increased worker productivity—is the source of per capita income growth, i.e. of our increasing standard of living. However, the benefits of increased productivity will only be broadly shared if workers are trained (or retrained) in the new jobs needed. In addition, the increased income inequality in the U.S. since the 1970s is largely the result of increased rent seeking from government as government regulations have expanded to protect the established companies from outside competition.

Faster income growth, therefore, will depend on improving productivity and its rate of growth over time (not creating more jobs). Improved and simplified regulations will free up some of the large armies of compliance officers to work in jobs that actually produce things we want. It will also increase market competition by reducing regulatory capture and related rent seeking. The same is true for any reforms in the provision of medical services that lower their cost (e.g. from greater transparency of costs of treatment options and patient responsibility for and interest in those costs). This is a different issue than who pays for medical care (insurance) but the nature and structure of medical insurance profoundly influences the incentives patients and doctors have to choose cost effective medical services. Tax reforms that lower the cost of investing in the U.S. will also increase productivity and income growth.

Investments in plant and equipment and new technology increase labor productivity and income in the future but require workers and materials to build them in the present. In an already more or less fully employed economy the resources used for investments must come from giving up other uses, primarily from producing consumption goods and services. To finance investment people will need to consume less and save more.

If none of the resources and their financing come from the government (and Trump plans the opposite), interest rates will need to rise in order to encourage more savings and to moderate the increase in investment. The Federal Reserve will have to raise its interest rate targets just to stay neutral (i.e. to keep inflation rates near their 2% per year target) as the tightening labor market puts upward pressure on wages and equilibrium interest rates. Thus interest rates will need to increase even more to encourage the additional savings needed to finance additional investment.

The new government has yet to propose its budget for the coming year, but Trump cannot simultaneously increase military spending and infrastructure spending and leave entitlement commitments unchanged (which imply significant increases in actual social security and medical outlays because of an ageing population and increased retirements relative to new entrants into the labor force) even if his tax reforms are revenue neutral (which current proposals are not). We don’t know yet which of his plans will have to give and to what extent. None of this takes into account the large impact not so far down the road of unfunded fiscal liabilities (unfunded social security, Medicare, and Medicaid obligations). https://wcoats.wordpress.com/2013/03/16/the-sequester/ https://wcoats.wordpress.com/2011/04/23/thinking-about-the-public-debt/ http://tinyurl.com/yjos2ed. Thus it is difficult to forecast how much interest rates will need to rise in order to keep inflation in check while crowding out private investment to finance the growing public debt.

Higher interest rates will also tend to strengthen (appreciate) the dollars’ exchange rate, which will increase our trade deficit unless Trump totally destroys our trade flows in a misguided effort to balance our trade account (balance imports and exports). A larger trade deficit would result in some of the increased investment being financed by foreign saving (capital inflow) and to that extent would reduce the upward pressure on interest rates. So far I have not taken account of possible changes in the economic conditions of the rest of the world. However, an appreciated dollar would improve the exports and thus economic activity of other trading partners but would increase their local currency cost of any borrowing their firms and citizens have done in dollars.

The bottom line is that any increase in economic growth in our fully employed economy will come from increases in productivity not increases in employment. Tax and regulatory reform should improve the allocation of our labor and capital resources to more productive uses. They should also lead to increased investment, which will enhance future productivity. Jawboning or pressuring the allocation of these resources into less productive uses (e.g. domestic production of goods that could be more cheaply imported) will reduce economic growth. Increased investment will require higher interest rates in order to generate the savings needed (reduction in consumption) to finance the additional investment. However, continued fiscal deficits will divert that amount of savings away from investment. Without significant cuts in future entitlement commitments (and/or defense spending) these deficits will grow larger at the expense of economic growth. New trade tariffs threatened by Trump or other new impediments to trade will also reduce our productivity and growth. While the Trump administration could increase our economic growth rate in the coming years, this outcome depends on it resolving existing internal contradictions in its proposed policies.

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The Liberal International Order

A monopolist enjoys a bigger profit than would a competitive supplier of the same items by restricting the supply in order to charge a higher price. This assumes that he can increase the price by more than the reduction in his sales, but I will skip these economic details in order to get to my point.

Monopoly is good for the producer and bad for the consumer. Monopoly is generally impossible without help from government to restrict competition. The United States has flourished economically, in part, because we have chosen the competitive model—the level playing field of commerce—as the social and economic model we aim for domestically and promote internationally. Many other nations have also embraced this model and our leadership in promoting it. We extend and promote the rule of law on which a level playing field is built through the Bretton Woods Institutions created after World War II (the IMF, World Bank and World Trade Organization) and other international bodies and agreements. Our leadership in promoting these values is now in jeopardy for a variety of reasons that include our aggressive use (and misuse) of our military power and our unilateralism.

Chas Freedman is the most articulate champion I know of, of the wise use of American diplomacy to promote the above and other values that have characterized our country’s governance. Chas was Nixon’s interpreter during the President’s first trip to China in 1972. His three decades as a U.S. diplomat included Ambassadorship to Saudi Arabia during Operations Desert Shield and Desert Storm and a term as Assistant Secretary of Defense for International Security Affairs. The following challenge to the United States is taken from his latest book American’s Continuing Misadventures in the Middle East and was contained in his August 29, 2012 address to the American Foreign Service Association’s Adair Memorial Lecture at the American University School of International Service, Washington D. C. He enumerates the conditions for our continued (or restored) leadership of the liberal international order that has served us and the world so well. Chas concentrates more wisdom into fewer words than anyone I know:

“Americans believe that societies that respect the rule of law and rely upon democratic debate to make decisions are more prosperous, successful, and stable than those that do not. Recent efforts to impose our freedoms on others by force have reminded us that they can be spread only by our setting an example that others see as worthy of emulation. Freedom cannot be sustained if we ourselves violate its principles. This means that we must respect the right of others to make their own choices as long as these do not harm us. It also presupposes a contest of ideas. Our ideas will not prosper unless we maintain solidarity with others who value and also practice them.

“That is why a first priority of American diplomacy must now be to re-forge the unity of the Atlantic community behind the concept of the rule of law. This cannot be done unless we confront and correct our own lapses from the great traditions of our republic. To re-empower our diplomacy by inspiring others to look to our leadership, we much restore our respect for our Bill of Rights as well as our deference to the dignity of the individual both at home and abroad. Let me be specific.

“We must revive the Fourth Amendment’s ban of search and seizures of persons, houses, papers, and other personal effects without probable cause. No more ‘extraordinary rendition.’ No more universal electronic eavesdropping, warrantless seizure of paper and electronic records at the border, and intrusive inspection of anything and everything in the possession of passengers using public transportation.

“We must reinstate the Fifth Amendment’s protections against deprivation ‘of life, liberty, or property, without due process of law.’ No more suspension of habeas corpus or executive branch assertions of a right to detain or even kill people, including American citizens, without charge or trail.

“We must return to respect for the Sixth Amendment’s guarantee of the right of anyone accused of a crime to be informed of the charges and confronted with the witnesses against him and to be represented by a lawyer. No more ‘secret evidence.’

“We must reinstate the Eighth Amendment’s prohibition of ‘cruel and unusual punishments,’ including torture, and we must reaffirm our adherence to the several Geneva Conventions. We Americans can have no credibility as advocates for human rights if we do not practice what we preach.

“In short, the path to renewed effectiveness in American diplomacy lies not just in wise and dexterous statecraft and the professionalization of those who implement it abroad. It rests on the rebuilding of credibility through the rediscovery of the values that made our country great.”

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My Political Platform for the Nation – 2017

For me, the ideal American government would deliver its important but limited functions efficiently and effectively and would raise the money to pay for these activities with efficient, minimally distorting (neutral), and fair taxes following a principle of maximum subsidiarity (decisions made and services performed at the most local levels possible). The government should do fewer things than it does now but should do them better and should fully pay for them with taxes and fees (cyclically balanced budgets).

My unrestrained, radical platform will be presented here at a high level of general principles. Details need to be refined by a political process involving public discussion and are likely to evolve somewhat over time. Links to earlier articles provide additional details. In the very broadest terms Americans should be self reliant and free to work and play as hard as they choose with the government supporting their choices by providing security, the legal foundation and framework of private property and contracts, and an efficient safety net when individual undertakings are not feasible or fail.

The limited functions of the Federal government are enumerated in Article 1 section 8 of the U.S. Constitution. Broadly these are to:

  1. Develop and maintain our relations with other countries and international bodies and to maintain an Army, Navy and Air Force for the purposes of defending and promoting the security of the United States;
  2. Establish and enforce the rights to property and contracts and to adjudicate related disputes;
  3. Provide for public safety;
  4. Provide an efficient and effective social safety net (welfare);
  5. “Regulate commerce with foreign Nations, and among the several States;”
  6. “Coin money, regulate the value thereof, and of foreign coin, and fix the Standard of Weights and Measures;”
  7. Arrange for the provision of roads and essential infrastructure; and
  8. Tax, borrow, and levy fees and tariffs to pay for these activities.

Our Social Contract

Sovereignty resides with each individual, who have collectively ceded limited powers to government for the general welfare. Each of us is free, within legal limits on doing harm to others, to lead our own lives and build or work at whatever we choose. Thus the government’s laws apply equally to each of us without regard to our race, religion, sex, or sexual orientation. From this environment of freedom and innovation, America has built the most successful economy in the world.

When building companies or developing products, many will fail and try again. The government provides the legal framework (bankruptcy) for resolving such failures. The implicit agreement between citizens and their government is that government will provide a floor—a safety net—whenever a person’s efforts fail or when, e.g., for health reasons, a person is unable to provide for him or herself. The level of the safety net should reflect the level of the country’s income and social consensus and should be designed to achieve its objective as efficiently as possible with careful consideration of the incentives it creates.

Income redistribution: taxation and a guaranteed minimum income

All income (personal and corporate) taxes should be replaced with a comprehensive, flat, consumption tax (Value Added Tax—VAT) and limited progressivity introduced by paying every legal man, woman and child resident a guaranteed minimum income. US federal tax policy, Cayman Financial Review July 2009 Each recipient of these monthly guaranteed income payments would be required to set aside a minimum amount for health insurance (chosen by each person or family in the competitive market place) and a minimum amount for retirement (invested in qualifying retirement funds in the competitive market place). Saving social security

As the guaranteed minimum income should be at a level sufficient to minimally support life’s basic needs, supplements such as unemployment or disability insurance would not be needed or provided. However, disabilities acquired from military or public safety service should receive additional income support.

Health care

Each person will be responsible for paying for at least part of routine medical care (the copay required by the insurance they have chosen) and will thus care about its cost. The cheapest insurance policies will be limited to major medical expenses (catastrophic health insurance). As everyone will be required to contribute monthly to a health savings account from their guaranteed minimum income, most people will chose to use such funds to buy health insurance, which would not be tied to employment or an employer.

Doctors and hospitals will be required to make medical service costs transparent. On that basis, patients, in consultation with their doctors, will decide the level of care and treatments to receive. These measures will introduce normal market competition into the provision of medical care that is currently absent, which will improve its quality and lower its cost.

Education

Equal access to quality education is a critical element in maximizing opportunity for all and the wealth of our society and each person in it. The public school system has often failed in this objective. While the wealthy can afford to put their children in private schools when the neighborhood school is of poor quality, lower income families generally cannot. Every K-12 aged child will receive a tuition voucher that covers the cost of state provided education. The amount will generally vary from state to state (or school district to school district). The voucher can be used to attend the local neighborhood public school with no additional cost, or any private school the family chooses, which might incur additional costs. Schools eligible to receive such vouchers must meet minimum education standards set by the state and must disclose the performance of their students on state administered achievement tests. This information must be available to the public. The learning progress of each child is more important than the average level of achievement of each school’s students as some schools might well specialize in slow or problem learners and performance data should reflect this distinction. The neighborhood school has the advantage of being easier to get to every day and will normally be chosen by families if it provides a good education. The argument for universal tuition vouchers goes beyond providing a level playing field to all. It also introduces the competition for students that is the basis for good quality, low cost goods and services in every other area of our economy.

Access to higher education raises different issues. Those with the aptitude and desire for a college or postgraduate degree can significantly increase their lifetime incomes as a result. It would hardly be fair to tax the general public to subsidize the higher education of those who will become wealthier as a result. However, the tuition loans that may be needed by those from lower income families to make this investment would be hard to get without insurance against default. Many states also provide community (or Jr.) colleges at public expense that provide training in various trade skills as well as four year college preparatory courses. These seem to have often been successful in leveling the playing field. The optimal structuring of higher education subsidies (e.g. between insurance guarantees and tuition subsidies) needs further examination.

Monetary and Financial Policies

Government policies that affect business should be as rule based and transparent as possible. Monetary policy stands out as a particularly important area in which clearer rules are needed. A currency with stable real value (purchasing power) is an important part of the foundation of efficient free markets. At the very minimum the Federal Reserve’s mandate should be tightened as provided in the very pragmatic Federal Reserve Accountability and Transparency Act of 2014. This act would require the Fed to chose an operational rule, from which it could depart only with an explanation to Congress of its reasons. A deeper review of options is proposed by the Centennial Monetary Commission Act of 2015. I have proposed a more radical reform in the spirit of the gold standard but with tighter rules and an anchor of a large number of goods rather than just gold. The supply of this currency, which ideally would become the global currency, would be regulated by the market using currency board rules and “indirect redeemability.” A hard anchor for the dollar.

The banking and financial sector are currently smothered with detailed regulations the compliance cost of which are driving smaller banks out of business. Under the Dodd Frank law adopted after the financial crisis of 2008, the largest five American banks have grown even larger (in absolute terms and as a share of the banking sector) than they were in 2008. Regulators, despite (or because of) their detailed banking regulations have failed to make banks safer and have slowed the competitive process of producing better and cheaper services. Bank owners and market preferences should regulate risk taking by banks.

Bank regulation by the government should focus on broad principles with strong owner accountability. Bank capital requirements should be raised and the no bail out rules strengthened. Bank owners and investors should absorb any bank losses. The payment services of banks should be isolated from the rest of its lending and investing business by adopting the Chicago Plan of one hundred percent reserve requirements against current account deposits, and virtually all other regulations (other than accounting and reporting standards) should be dropped. Larger banks will develop their own risk weighted capital requirements for their internal use, but the government’s capital requirements should state the minimum required leverage ratio (ratio of core capital to total assets) and set it at a high level. Changing direction on bank regulation, Cayman Financial Review April 2015. A bill now in congress moves in this direction: The Financial Choice Act

Business activities and regulation

The government should only provide services that that private sector can’t. It should provide the legal and regulatory framework for the private economy rather than compete with it. Though the approaches to providing “public goods” such as police, courts, prisons, firemen, parks, highways, airports, etc. have varied over time, they are almost always paid for by the government (i.e. collectively by tax payers) and should be provided efficiently at the level expected by the public. Publicly funded and privately produced goods and services are often sources of hard or soft corruption. Rather than over charging for services or paying bribes to win contracts (hard corruption), soft corruption exploits influence on government to obtain contract terms or regulations favorable to particular firms (“rent seeking”). The government’s purchases of goods and services from the private sector should be governed by transparent rules that promote competition among suppliers. This is easier said than done. Open the Books

While the government is involved in and trying to do far too many things, it doesn’t do many of them very well. Of those services the government needs to provide, states generally perform better than the federal government though performance varies across states. In Maryland, where I live, I was able to register my Limited Liability Company on line in about 30 minutes start to finish. Registering my car and updating my driver’s license is quick and easy. However, it took me months to obtain a statement of my residency from the U.S. Treasury and a personal trip to the State Department to have it certified to provide to the National Bank of Kazakhstan before they could pay me for my services. Getting a passport or green card is more complicated and takes longer than they should. The government should do much less and do it much better.

Those in the government who believe they can judge better than competitive private markets how best to allocate resources (what to invest in and produce) are generally wrong. Moreover, they establish an opportunity and thus incentive for corruption.

The government’s regulation of private businesses in the interest of public safety, environmental protection, and market competition should be limited and subject to very serious cost/benefit tests. Cost/benefit analysis unavoidably reflects subjective judgments but their role should be limited to the extent possible by full transparency of the basis of any assessment. Competitive capitalism vs. the other kinds.

Foreign policy and national security

The purpose of our foreign policy is to serve American security interests and the international rule of law under which American’s can explore the world and American businesses can compete globally on a level playing field. Our security requires a strong military, but it also requires the skillful use of diplomacy. Our military must be structured for defense, not offensive wars of our choosing. Our 2003 war in Iraq and subsequent developments in the Middle East have cost many lives (some American) and treasure, undermined our moral authority, and seriously damaged our security. Our foreign policy should be one of “restraint.”

Our relations with other countries should be based on shared interests consistent with our respect for individual dignity and the rule of law. We should support and, where appropriate, lead international bodies dedicated to developing, promoting, and overseeing compliance with the rule of law internationally. Our international leadership should rest, in addition to our economic and military strength, on our commitment to broadly shared values and standards of behavior. Just as we give up limited amounts of our individual sovereignty to our own government when it serves our individual and collective interests, so should we give up limited amounts of our national sovereignty to international bodies when it serves our national and international interests.

Our economic strength depends in part on providing for a sufficiently strong military in the most economical way possible. Money spent on tanks can be spent on building other businesses and producing goods that we enjoy. The very nature of the relationship between our military and the industries that supply it, what President Eisenhower called “the military industrial complex,” makes achieving this objective very difficult. As argued above, clear rules and transparency are important tools. Our unsupportable empire

Trade

Next to the right to personal property, nothing is as central to our liberty and well being as the right to trade. It is the basis of virtually all of our enormous increase in productivity and thus our standard of living. The government impedes our right to trade with a wide range of often unnecessary or excessive regulations. Restricting our freedom to trade across national borders is also a mistake that reduces our standard of living from its potential.

Trade has destroyed some jobs while creating others. “Since 1900, the portion of the U.S. workforce in agriculture has declined from 41 percent to less than 2 percent. Output per remaining farmer and per acre has soared since millions of agricultural workers made the modernization trek from farms to more productive employment in city factories…. Manufacturing’s postwar share of the labor force peaked at about 30 percent” in 1953 and has since declined to less than 9 percent while manufacturing output continued to climb. “Of the 5.6 million manufacturing jobs lost between 2000 and 2010, trade accounted for 13 percent of job losses and productivity improvements accounted for more than 85 percent.” George Will, Washington Post.

As with domestic, competitive trade, those out-performed in competitive markets suffer, at least temporarily. The safety net for “losers” in the competitive process discussed above is an important feature in our willingness to unleash the benefits of free trade. We must insure that they are adequate. We should support the World Trade Organization (WTO) as well as regional and bilateral agreements that reduce the barriers to trade and promote freer trade. Save trade. Globalization and nationalism-good and/or bad?. Trade and globalization

Conclusion

Our government should assume that each of us is capable of and has the right to make our own decisions and lead our own lives as we see fit. Its role is to protect those rights, in part by protecting us from others, foreign and domestic, who would violate them. We are, however, part of and best flourish within broader communities. Our government should develop legal frameworks to facilitate our interactions and relationships within and across societies both business and personal. Our successful flourishing will also depend greatly on a shared culture of mutual respect and comity.

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Our Risks from Terrorists

“’The free movement of good people also means the free movement of bad people. Expect Schengen to dominate the EU debate next year,’ Nigel Farage, a leading British anti-E.U. campaigner, wrote on Twitter, referring to the area that allows for border-free travel in most of the European Union.” Washington Post /2016/12/23/

Fear of terrorists may destroy the EU or limit some of its finer features. In addition, government measures to protect us from terrorists often restrict our privacy and potentially our freedom from government interference with our lives. How should we determine the best balance between freedom and security when confronting terrorist threats? Answering that important question should start with putting the risk of death from terrorist attacks in broader perspective.

From 2001 to 2014, 3,043 people were killed on U.S. soil as the result of acts of terrorism. Almost all of them (2,990) died on 9/11/2001. An additional 369 Americans have died from terrorist acts abroad (excluding Afghanistan and Iraq) for a total of 3,412 souls. This is a terrible loss but should be seen in the perspective of other risks we face and accept.

Over this same period 440,095 died on American soil from guns. Put differently, for every person killed on American soil by terrorists, 1,049 were killed with guns.

Over the same period 534,137 people died in car accidents in the U.S. The good news is that deaths from car accidents have been steadily declining over this period, falling by 22%. Since its peak of 53,543 in 1969 deaths on American highways have falling by 39% . Given that automobile accidents are caused almost totally by human error, the expanding use of driverless cars will cause this figure to plummet.

Poisoning (drug overdoses) comes in second as the cause of deaths in the U.S. with around 39,000 deaths annually in recent years.

Falling kills around 25,000 people annually in the U.S. Most of these falls occur in the home. Two thousand seven hundred people die in fires annually and 2,500 choke to death per year while eating.

We rightly take practical measures to reduce all of these sources of unnatural death. Measures that pass the cost/benefit ratio test differ for each cause of death. In the case of guns, the right to bear arms is balanced with various approaches to regulating that right. Taking account of the use of guns for self-defense (as opposed to hunting), it is not obvious whether wider gun ownership increases or reduces public safety. No one has proposed outlawing cars.

Preventing terrorist attacks is devilishly hard. Attempting to guess who might commit a terrorist act (particularly in cases of isolated individuals who perform these acts alone – so called lone wolfs) aside from being basically impossible, can be extremely expensive with significant risks to our privacy and freedom as we have seen. I will not attempt to advise on how best to deal with the threat of terrorism. Rather, I want to stress how tiny the risk of a terrorist death is in both absolute terms and relative to all of the other accidental deaths we face. You are more than 100 times as likely to choke to death as to be killed by a terrorist and no one is proposing that we stop eating (which would also be fatal). Nor should we significantly restrict the freedom of movement in the world. We should not overly put our privacy at risk or significantly change our life styles and public policies in order to try to reduce the risks of terrorist attacks.

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Save Trade

I have written about the importance of trade to our standard of living many times because it seems to be under attack. The graph below, which reflects Angus Maddison’s data showing a massive increase in income throughout the world over the last two centuries and which is reproduced, courtesy of Human Progress, provides a dramatic visual depiction of the impact of Trade.

Once households were able to trade what they produced for what they needed, the increase in their output as they specialized in what they were best at was truly staggering. But it is not surprising when you reflect on how limiting it would be if you had to be self sufficient in everything.

Following the disastrous imposition of high tariffs by the U.S. in 1930 (Smoot-Hawley Tariff Act) to save American jobs and the great depression and world war that followed, representatives of all 44 Allied nations came together under U.S. leadership at Bretton Woods in 1944 anticipating the end of World War II. They established the International Monetary Fund (IMF), the World Bank, and what is now the World Trade Organization (WTO) in order to establish, protect, and further a liberal international economic order (i.e., to protect and promote free markets globally).  Trade again flourished, as it had previously at the end of the nineteenth century, leading a resumption of dramatic growth in wealth and income across the globe.

The United States was the natural (indispensable) leader in promoting this liberal order for several reasons. By the end of WWII the U.S. was the largest economy in the world. And while the size of the United States and the guarantee of free trade within its boarders provided in the U.S. Constitution assured substantial trade within the U.S., opening the rest of the world to trade was very beneficial to all countries (win-win). The Boeing Company, for example, sells more of its planes abroad than domestically because the world market is larger than the U.S. market. So the U.S. is the natural leader because it is the largest trader. But more than that, most other countries respect the commitment of the U.S. to the rule of law and a level playing field for commerce. Thus they gladly accept our leadership.

The world is far from the ideal level playing field for trade but is much closer to that model than it was at the end of WWII. The WTO (the successor of the General Agreement on Trade and Tariffs – GATT) and regional and bilateral trade agreements keep moving us closer and closer to such a world. It is a very desirable goal for the United States and for the rest of the world (look at the above graph again). As with technical progress and the increasing productivity it brings, some capital and labor (workers) will need to move to new activities and we need to insure that displaced workers do not suffer in the process (we seem to care less about the displaced capitalists assuming, I guess, that they can take care of themselves).

While it is still early, President-elect Trump seems uncommitted to the U.S. leadership of our increasingly liberal (freer) international economic order. In fact, he is threatening to throw it away by unilaterally imposing tariffs on imports and behaving like a bully internationally. We need to recall the terrible consequences of the Smoot-Hawley tariffs and resist any moves in that direction.

It is true that following WWII the U.S. often gave favorable terms to Europe (the Marshall Plan) and less developed countries in order to promote their reconstruction and development (“Trade not Aid” we used to say). The world’s economies are now growing into better balance and the U.S. is no longer as dominant as it once was. The international rules of the game (trade agreements) can and should seek a better balance of mutual benefits. But we would be making a very serious mistake to give up our leadership of the world order and abandon our commitment to free and fair global commerce.

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David M Friedman

PEOTUS Trump’s nomination of David M. Friedman as his ambassador to Israel is a very bad choice. It will perpetuate Israel’s refusal to take the steps it needs to take to be a secure and prosperous member of its neighborhood and will further discredit the U.S.’s reputation and influence in the Middle East.

If you are not familiar with the basic details of what is now generally referred to as the Israeli Palestinian conflict I urge you to read my summary of it written 11 years ago: https://works.bepress.com/warren_coats/26/ and take a look (it has pictures) of my blog from Jerusalem exactly five years ago today. https://wcoats.wordpress.com/2011/12/16/the-invented-palestinians/

Israel drove Palestinians from their homes in several wars decades ago because they wanted to establish a homeland for Jews that was both democratic and Jewish. After the horrors of the Holocaust, most of the world was sympathetic. But to be democratic and Jewish, the new occupants of Palestine needed to drive out most of the existing residents (Palestinians) in order to insure a Jewish majority. Fast forward to recent decades, most of the world has settled on a two state solution by which the exiled Palestinians would be given the West Bank and Gaze to rule but the several details requiring agreement were never fully worked out. Under the Oslo Accords, which provided a step-by-step process for implementing a two state solution, I led the IMF teams that set up the Palestine Monetary Authority.

The UN, U.S. and most of the world designated Israeli settlements in the West Bank by those Israelis wanting to take still more land from the Palestinians as illegal and urged the Israeli government to stop supporting them. They continue to expand.

“Friedman has been outspoken in describing as ‘legal’ Jewish settlements in the West Bank, which every U.S. administration since 1967 has considered illegitimate.”

“Trump-picks-a-supporter-of-west-bank-settlements-for-ambassador-to-Israel”/2016/12/15/ Washington Post. Israel itself is strongly divided on the issue. Many support a two state solution and making peace with their neighbors (giving up land for peace). Others want to expand Israel’s borders to encompass all of Palestine, relying on America’s military protection for its security.

“J Street, the Washington-based [Jewish] organization that supports a two-state solution, said it was ‘vehemently opposed’ to the nomination. ‘As someone who has been a leading American friend of the settlement movement, who lacks any diplomatic or policy credentials . . . Friedman should be beyond the pale for Senators considering who should represent the United States in Israel,’ J Street President Jeremy Ben-Ami said in a statement.

“Calling the proposed nomination ‘reckless,’ Ben-Ami said it puts ‘America’s reputation in the region and credibility around the world at risk. Senators should know that the majority of Jewish Americans oppose the views and the values this nominee represents….’”

“In a column for the Jerusalem Post before the election, Friedman wrote that…under president Trump, Israel will feel no pressure to make self-defeating concessions, America and Israel will enjoy unprecedented military and strategic cooperation, and there will be no daylight between the two countries.” [All quotes are from the same Post article linked above.]

This is just the sad point. Our blanket guarantee of military support for any policy (including illegal settlements, bombing Iran, etc.) that Israel might pursue has removed the incentive for Israel to make genuine peace with its neighbors and do right by the Palestinians (peace for land). The U.S. Senate should reject the Friedman nomination.

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