Politics

Trump’s National Sales Tax

James Bailey1 Comment

Tariffs are going up to levels last seen in the 1930 Smoot-Hawley tariffs that helped kick off the Great Depression:

Tariffs are taxes- roughly, a national sales tax with an exemption for domestically-produced goods and services. I think the words make a difference here- “raising tariffs on countries who we run a trade deficit with” just sounds abstruse to most people, while “raising taxes on goods bought from firms in net-seller countries” sounds negative, but they are the same thing.

Of course, in this case the plan is to raise taxes to at least 10% on goods from all other countries even if they aren’t net-sellers, and raise taxes up to 49% on those that are. This is not a negotiating tactic. We know this from the math- the new tax formula uses net imports from a country rather than a country’s tariff rates, so a country could cut their tariffs on US goods to zero today and it wouldn’t necessarily reduce our “reciprocal” tariffs at all; at best it would reduce them to 10%. We also know it isn’t about negotiating because the administration says it isn’t. Their goal, obviously, is to reduce trade, not to free it.

They say they are doing this to bring manufacturing back to America and to promote national defense. But American manufacturers don’t seem happy. Even before the latest huge tax increase, trade war was their biggest concern:

The National Association of Manufacturers Q1 2025 Manufacturers’ Outlook Survey reveals growing concerns over trade uncertainties and increased raw material costs. Trade uncertainties surged to the top of manufacturers’ challenges, cited by 76.2% of respondents, jumping 20 percentage points from Q4 2024 and 40 percentage points from Q3 of last year.

The National Association of Manufacturers responded to the latest tax increase with a negative statement; so even the one major group that might have benefitted from tariffs is unhappy. Foreign producers and US consumers will of course be very unhappy. I think Trump is making a huge political blunder alongside the economic one- he got elected largely because Biden allowed inflation to get noticeably high, but now Trump is about to do the same thing.

I also see this as a huge national security blunder. For tariffs on China, I at least see their argument- we should take an economic hit today in order to become less reliant on our peer-competitor and potential adversary. But the tariffs on allies make no sense- they are hitting the very countries that are most valuable as economic and/or military partners in a conflict with China, like Canada, Mexico, Japan, South Korea, Vietnam, India, and Taiwan (!!!). One of our biggest advantages vs. China has been that we have many allies and they have few, and we appear to be throwing away this advantage for nothing.

What can you or I do about this? Stock up on durable goods before the price increases hit. Picking investment winners is always hard, but things this makes me consider are gold, stocks in foreign countries that trade little with the US, and companies whose stocks took a big hit today despite not actually being importers. Finally, we can try nudging Congress to do something. The Constitution gives the power to levy taxes to the legislative branch, but in the 20th century they voted to delegate some of this power to the executive. Any time they want, Congress could repeal these tariffs and take back the power to set rates. I have some hope they actually will- just yesterday the Senate voted to repeal some tariffs on Canada, and more votes are planned. The alternative is to risk a recession and a wipeout in the midterms:

Information Regarding Russian Voting

Joy BuchananLeave a comment

Grok 3 beta (paid version) says this:

The Reality

  • Opposition: Genuine opposition is stifled. Prominent critics like Alexei Navalny (who died in prison in 2024) are barred from running, imprisoned, or sidelined. Parties like the Communist Party or LDPR exist but are often seen as “systemic opposition”—allowed to operate but not to seriously challenge the regime.
  • Media and Campaigning: State-controlled media heavily favors United Russia and Putin. Independent outlets face censorship, shutdowns, or exile (e.g., Meduza, TV Rain). Campaigning for opposition is restricted, with candidates disqualified on technicalities or facing harassment.
  • Voting Process: Reports of irregularities are common—ballot stuffing, coerced voting (especially among public sector workers), and inflated turnout figures. The Central Election Commission oversees it all, but it’s widely viewed as Kremlin-aligned. Electronic voting, introduced in recent years, has raised further transparency concerns.
  • Turnout and Results: Official turnout often hovers around 50-70%, though skepticism about these numbers persists. Putin’s 2024 victory, with 87% of the vote, came amid the Ukraine war and suppression of dissent, with no credible challengers.

Public Perception

Many Russians see elections as a formality—Putin’s approval, while fluctuating (per Levada Center polls, it dipped to 59% in 2018 but spiked to 80%+ after Crimea’s annexation), reflects a mix of genuine support, apathy, and resignation. Critics argue the system prioritizes stability over democracy; supporters say it’s what Russia needs given its history and external pressures.

Recent Example

The 2024 presidential election (March 15-17) was a case study: held over three days, including in occupied Ukrainian territories, with Navalny’s death fresh in memory. Three token candidates ran against Putin, none polling above single digits. Protests like “Noon Against Putin” (voters showing up at noon to signal dissent) were symbolic but powerless against the machine.

In short, Russian elections are predictable, heavily managed spectacles—less about choice, more about reinforcing the status quo. If you want specifics on a particular election or X posts about it, I can dig deeper. What angle are you curious about?

Click Read More to see the answer to my follow-up question “Explain coerced voting for public sector employees?”

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US Federal Government Spending Hasn’t Decreased (Yet)

Jeremy Horpedahl1 Comment

Despite DOGE and the President partially stopping some payments for some federal agencies, the changes so far aren’t visible at all in federal payments data. The Brookings Institution has put together a new tool that tracks daily spending data from the US Treasury. (My co-blogger Zach wrote about this tool last week too.) Here’s a chart from that tool showing total federal outlays by calendar year. Notice that 2025 is right on track with the past two years, or just slightly above (dollars are in nominal terms):

Of course, given the massive amount of US federal spending and the large number of agencies, we might expect it to take more than a few months to get spending under control or significantly alter its course. But this way of tracking the data is definitely picking up any changes made so far. For example, notice the flat lining of USAID funding after Trump comes into office at the end of January:

So while we don’t see any big changes yet in the aggregate spending, the few small agencies that DOGE has frozen are showing up in this data. That tells this will be a useful tool to follow going forward.

Europe Doesn’t Have to Be A Defenseless Museum

James Bailey2 Comments

America has withdrawn aid from Ukraine. Contra the Vice-President, we could easily afford to reverse this, and I hope we will. I know we could afford it because even the much poorer Europeans can, and I think they might finally be ready to try.

Until now, Europe has been fighting with both hands tied behind their back- letting their economic growth fall far behind America’s due to poor policy, and committing only a tiny share of that economy to defense. Here’s how Polish Prime Minister Donald Tusk put it:

500 million Europeans are asking 300 million Americans to defend them against 140 million Russians.

Europe may be significantly poorer than the US on a per-capita basis, but it has significantly more people, so the total size of their economy is almost as large as the US and over 4 times larger than Russia:

Source: my graph of World Bank data

But Europe has put only a small fraction of their economy toward defense for a long time. Russia alone spends more on their military than the rest of Europe combined despite their much smaller economy, by putting a much larger fraction of their GDP toward the military:

When European countries spend so little on their own defense, they have little to share with Ukraine. Many leaders complaining about the end of US support have contributed much less themselves, even as a share of their smaller economies:

Europe can be much stronger than Russia, but only if they start trying at least half as hard as Russia. Yes, Europe has poor demographics, but Russia’s are worse; Europe has many more military-age men:

Yes, Russia has nukes, but so do Britain and France, and France might actually take advantage of this.

Economically speaking, is this a good time for Europe to rearm? To me it looks fine. The best time would have been the late 2000s to early 2010s, both because it could have been in time to dissuade Russia from starting this war, and because their economic problems then were much more about a lack of aggregate demand. But right now inflation is fine at 2.4%, NGDP growth is fine at 4.3%, and 10-year bond yields the major countries are around 3-4%. Overall this looks like AD is currently about right, but markets expected that economic growth could turn negative this year, and a burst of defense spending could head that off:

This would be especially valuable if it can be paired with the supply-side reforms that European leaders know they should to do anyway, and that would allow for more growth without pushing up inflation. Europe has fallen far behind the US in productivity, to the point that it is now a bigger issue than their higher unemployment and lower hours worked in explaining why the US is much richer:

The silver lining here is that the further behind the US they fall, the faster they could potentially grow- catchup growth is easier than frontier growth, you just need to copy the technologies and implement the strategies already figured out by the frontier economies. Europe easily has the human capital to do this, they just haven’t had the will- have preferred to regulate new technologies like fracking and AI into oblivion, along with older technologies like nuclear power. They won’t drill for oil and gas themselves in the name of decarbonization but have spent hundreds of billions on Russian oil and gas just since the war began. But if they ever decided to change their policy, their economy could rapidly improve- like letting go of the rubber band you’ve been pulling back.

European leaders appear to finally be realizing this. The European Commission just proposed a 150 billion Euro joint defense fund. This week Germany proposed spending half a trillion on infrastructure and defense, sending European stocks above their previous all-time high set in the year 2000 (!).

The EU always used to be able to excuse their economic failings by saying “at least we brought peace to a continent formerly full of war.” But this is no longer the case. If they cannot settle the war on good terms, they have no excuse. The good news is that European decline has been a choice, and it is a choice they could decide to change at any moment. Victory awaits those who will it.

What does the Department of Education even do?

Zachary Bartsch4 Comments

If you follow libertarian media such as Reason Magazine or its ancillaries, then you are well acquainted with the humdrum of “it goes without saying that most US programs should be ended“. They kind of just say this and then continue with their news. One of the favorites is to say that we should get rid of the Department of Education (ED). After all, 90% of K-12 education is paid for by states and localities. Here I was thinking “what does the Department of Education even do”?

Agreement is different from trust. I trust the Brookings Institute. They have a nice explainer on what ED does. It’s a quick overview and has plenty of the appropriate citations. I learned that most of what ED does concerns K-12 and is achieved through grants that have strings attached. Funding primarily goes to serving “educationally disadvantaged” communities (that have a high poverty rate). Funding also goes to programs for disabled children, minority education programs (like Howard University), and Indian tribes. They also administer Pell Grants and fund & regulate college loans (which are privately administered).

ED’s appropriated budget is online for anyone to see and includes pretty good detail about costs. The total discretionary cost of FY 2024 was $79 billion. The “mandatory” spending, which does not need to be voted on by congress every year, was $45 billion. For context, the entire federal FY 2024 expenditure was $6.75 trillion. So, eliminating the department of education *and* it’s responsibilities (an unpopular position) would reduce federal expenditures by 1.8%. For even more context, the budget deficit is $1.83 trillion or 27.1% of total federal expenditures. Eliminating ED and consolidating its responsibilities to other departments would save $0.6 billion. That assumes eliminating program administration, the ED office of civil rights, and the ED office of the inspector general.

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Trump’s Economic Policy Uncertainty

Zachary Bartsch3 Comments

I was on a panel of economists last night at an event titled “The Economic Consequences of President Trump”. We each gave a 5-minute summary from our area of expertise and then opened up the floor for questions.  This is a truncated summary of my talk. Since the panel included an investor, two industry economists, and another macro economist, I wanted to discuss something that was distinct from their topics. I’ve published a paper and refereed many articles concerning economic policy uncertainty (EPU) and asset volatility. I wanted to look at the data concerning President Trump – especially in contrast to Presidents Obama and Biden.

EPU matters because uncertainty can cause firms and individuals to delay investment and hiring decisions. Greater uncertainty can also cause divergent views concerning forecasted firm profitability. The result is that asset prices tend to become more volatile when EPU rises. One difficulty is that uncertainty occurs in our heads and concerns our beliefs, making it hard to measure. We try to get at it by measuring how often news media articles include the terms related to uncertainty, policy, and the economy. Since news content tends to report what is interesting, relevant, or salient to customers, there’s good reason to think that the EPU index is a decent proxy.

Using the Obama years as a baseline, the figure below simply charts out EPU. It was relatively low during Trump’s first term and then it was higher during Biden’s term – even after accounting for the Covid spike. The sharp increase toward the end is after Trump won the 2024 election. The EPU series conflicts with my perception of social media and media generally. My experience was that the media was far more attentive to the uncertainty that Trump caused. But, it may just be that the media outlets had plenty to report on rather than it being particularly indicative of EPU. After all, if the president exercises his power, then there is a certain swift decisiveness to it.

But if we look at a couple of particular policy areas, Trump’s administration faired worse. Specifically, Trump caused a ruckus concerning trade policy and immigration. Remember when Biden continued the aggressive trade policy that Trump had adopted? That’s consistent with lower EPU. Similarly, Biden made the immigration process much easier and faster while Trump’s deportation haranguing results in a somewhat stochastic means by which people are deported.  Again, that spike at the end is after Trump won the 2024 election.

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Telling Stories at the Campfire

Joy BuchananLeave a comment

This week has been busy with the enjoyable task of hosting a distinguished economist in Alabama. I can only briefly follow up on my campfire post. (Yes, this is apropos of everything.)

I do not usually use LLMs to write even part of my posts but since I am pressed for time, I will just take this as a chance to assess Claude. I pay for Claude and Grok, currently. Both of those subscriptions resulted from a particular moment when I thought I could get a particular task done with them and was in a hurry. If I could do it all over again, I would undo those subs, I think, and go more in on the OpenAI Pro products.

Prompt: Finger wagging is surprisingly ineffective; telling a compelling story is surprisingly effective. Can you expand that out into a paragraph for a blog?

Claude response: The art of persuasion often defies our intuitive assumptions. While many of us default to stern lectures and admonishing fingers when trying to change minds, research consistently shows this approach tends to backfire, causing people to become defensive and dig deeper into their existing beliefs. What proves remarkably more effective is the simple act of storytelling. When we encounter a compelling narrative, our brains react differently than they do to facts and figures alone – we become emotionally invested, our neural patterns sync with the story’s flow, and we naturally lower our defensive barriers. Stories create a shared experience that bridges ideological divides, allowing new ideas to take root not through force, but through the gentle power of narrative empathy. This explains why parables and fables have been humanity’s preferred teaching tools for millennia, while memories of being lectured rarely inspire lasting change.

Claude is always a little too verbose, in my opinion. Still, the logic and grammar are good. The machines can write.

I might write more soon about how AI’s used narrative to influence humans in the novel The Diamond Age.

WSJ: Nothing Important Happened in China, India, or AI This Year

James Bailey3 Comments

I normally like the Wall Street Journal; it is the only news page I check directly on a regular basis, rather than just following links from social media. But their “Biggest News Stories of 2024” roundup makes me wonder if they are overly parochial. When I try to zoom out and think of the very biggest stories of the past five to ten years, three of the absolute top would be the rapid rise of China and India, together with the astonishing growth in artificial intelligence capabilities.

All three of those major stories continued to play out this year, along with all sorts of other things happening in the two most populous countries in the world, and all the ways existing AI capabilities are beginning to be integrated into our businesses, research, and lives. But the Wall Street Journal thinks that none of this is important enough to be mentioned in their 100+ “Biggest Stories”.

To be fair, China and AI do show up indirectly. AI is driving the 4 (!) stories on NVIDIA’s soaring stock price, and China shows up in stories about spying on the US, hacking the US, and the US potentially forcing a sale of TikTok. But there are zero stories regarding anything that happened within the borders of China, and zero that let you know that AI is good for anything besides NVIDIA’s stock price.

Plus of course, zero stories that let you know that India- now the world’s most populous country, where over one out of every six people alive resides- even exists.

AI’s take on India’s Prime Minister using AI

This isn’t just an America-centric bias on WSJ’s part, since there is lots of foreign coverage in their roundup; indeed the Middle East probably gets more than its fair share thanks to “if it bleeds, it leads”. For some reason they just missed the biggest countries. They also seem to have a blind spot for science and technology; they don’t mention a single scientific discovery, and only had two technology stories, on SpaceX catching a rocket and doing the first private spacewalk.

The SpaceX stories at least are genuinely important- the sort of thing that might show up in a history book in 50+ years, along with some of the stories on U.S. politics and the Russia-Ukraine war, but unlike most of the trivialities reported.

I welcome your pointers to better takes on what was important in 2024, or on what you consider to be the best news source today.

The Laboratory of the States: Regulatory Reform Edition

James BaileyLeave a comment

The US Federal government has been considering major reforms like the REINS Act, which would require Congressional approval of major regulations proposed by executive branch agencies, or bringing back the “two in one out” rule from the first Trump administration. What would these do?

Right now it’s hard to say much for sure. But similar reforms have already been implemented in the states; as usual, the states provide a laboratory for investigating how policies work and whether they deserve broader adoption. It’s especially valuable to inform the debate over reforms like the REINS act that are still being considered at the federal level. Even for federal reforms that have already happened, it can be easier to evaluate the state version, since states make better control groups for each other than other countries do for the US.

But so far we’ve mostly been ignoring our laboratory results from recent state regulatory reforms. For instance, Broughel, Baugus, and Bose (2022) released a dataset that could be used to evaluate state regulatory reforms, but it has only been cited 3 times. This is why I’m adding this to my ideas page as a good subject for future academic research.  Do state REINS or Red Tape Reduction Acts actually reduce either the stock or flow of regulation? If so, which types of regulations are affected, and does this have any effect on downstream measures like economic growth or new business formation?

Any research along these lines could help inform policy debates in the states, as well as for a new Presidential administration coming in with hopes of boosting economic growth through deregulation.

HT: Adam Millsap

I Give Up, Standard & Poor’s Wins

James Bailey9 Comments

I thought this was going to be another election post, but it didn’t turn out that way.

My plan was to do another annual portfolio review, with a focus on changes I’ll make to my portfolio as a result of how the election impacts various market themes, and how my take on the election differs from the market’s take. But as I looked at my portfolio, what struck me wasn’t how the election changes things, but instead how severely my stock picks underperformed the incredible 26% return the S&P has posted so far this year.

My first couple years of stock picking tended to match the S&P, roughly what you’d expect if markets are efficient and I’m just throwing darts. But more recently so much of the overall return of the market has been driven by just 7 mega-cap stocks, the “Magnificent 7”, that if you don’t own them you are probably underperforming big time.

Of course buying a broad index, especially a market-cap-weighted one like the S&P, is a way to ensure you own at least a piece of the big winners, which is one reason economists usually recommend buying the broad index. And I did this with 80% of my portfolio, to match my 80% belief in the efficient markets hypothesis. But I’m now back up to 90% belief in efficient markets, at least for stocks.

This efficiency seems to change a lot over time. Probably fewer than 10% of US stocks have obvious mis-pricings right now; really none stand out as super mispriced to a casual observer like me. Instead, it seems like every 10 years or so a broad swathe of the market is driven crazy by a bubble or a crash, and you get lots of mispricing- like tech in 2000, forced/panic selling at the bottom in 2009, or meme stocks in 2021. The rest of the time, the stock market is quite efficient. So, in typical times, just be boring and buy and hold a broad index fund.

Of course, you might think that AI is a bubble now. I certainly don’t love the 68 P/E on NVIDIA, but this doesn’t strike me as a true bubble driven by irrational hope- peoples’ hopes have proven well justified so far, with AI performing miracles and the Mag 7 delivering huge profits. So like Scott, I’m finally giving up on being overweight value stocks. Perhaps our capitulation is the sign that growth’s decade-plus run is finally about to reverse; but if so, I’ll try not to regret it. After all, the S&P has plenty of value stocks too.

So here’s what I’m doing:

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