Weekend Links (03/15/2025)
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1) Tariffs are not the most radical financial instrument being considered in the Trump Treasury. The following is excerpted from The Financial Times, via Adam Tooze:
Are tariffs on money next?
But some maverick economists, such as Michael Pettis, have long dissented from this orthodox view. Pettis sees these capital inflows as not “just” the inevitable, and beneficial, corollary of America’s trade deficit, but as a debilitating curse. That is because inflows boost the dollar’s value, foster excessive financialisation and hollow out America’s industrial base, he says, meaning that “capital has become the tail that wags the dog of trade”, driving deficits. Pettis wants curbs, like taxes, therefore. And six years ago, Democratic senator Tammy Baldwin and Josh Hawley, her Republican counterpart, issued a congressional bill, the Competitive Dollar for Jobs and Prosperity Act, which called for taxes on capital inflows and a Federal Reserve weak-dollar policy. The bill seemed to die. But last month American Compass, a conservative think-tank close to vice-president JD Vance, declared that taxes on capital inflows could raise $2tn over the next decade. Then the White House issued an “America First Investment Policy” executive order that pledged to “review whether to suspend or terminate” a 1984 treaty that, among other things, removed a prior 30 per cent tax on Chinese capital inflows. This did not grab headlines, since Trump was “flooding the zone” with other distractions, notably on tariffs. But it spooked Asian observers and probably contributed to recent US stock market falls, as some investors preemptively flee. In reality, a tax shift might not happen — or affect anyone other than the Chinese. Trump is (in)famously mercurial, which makes predicting future policy hard, particularly since his entourage is split into at least three warring factions: nationalist populists (such as Stephen Bannon), techno-libertarians (like Musk) and pro-Maga congressional Republicans. The last two factions might fight capital curbs, due to concerns about destabilising Treasury markets. This text has been highlighted 12 times by other subscribers! Add to highlights But Trump is also eager to use all available tools to bolster his leverage on the world stage. And Pettis’s ideas seem to be influential among some advisers, such as Treasury secretary Scott Bessent, Stephen Miran, the chair of the Council of Economic Advisers, and Vance. This trio appears minded to reset global trade and finance, via a putative Mar-a-Lago accord, although their ambitions are on a grander scale than the 1985 Plaza accord. The latter “merely” weakened the dollar via joint currency intervention but Miran’s vision of a Mar-a-Lago accord includes a possible US debt restructuring too, which would force some holders of Treasuries to swap them for perpetual bonds. Some well-connected financial analysts, like Michael McNair, also expect to see a sovereign wealth fund, backed by America’s gold reserves, that would buy non-dollar assets to balance capital inflows (like, say, Greenland’s resources). A third idea is imposing taxes on capital inflows in a wider sense. This might become the preferred approach if the idea of debt swaps leaves rating agencies threatening to downgrade US debt. “[The trio’s] ultimate goal isn’t a series of bilateral [trade] deals but a fundamental restructuring of the rules governing global trade and finance [to remove] distorted capital flows,” says McNair. “Whether this approach succeeds remains to be seen, but the strategy itself is more coherent and far-reaching than most observers recognise.” Let me stress that I am not endorsing this, nor predicting with any confidence it truly will happen. And it must be noted that Pettis’s theories provoke outrage among many mainstream economists. But Pettis is unrepentant. And critics should also note that the 2019 Baldwin-Hawley bill was not only applauded by conservative groups like American Compass, but some union voices too. Since it has populist appeal, it might yet fly.
2) In the first of four foreign policy links, David Friedman discusses the proposed 30-day ceasefire in the Ukraine War, which was negotiated by the US and Ukraine and (very) tentatively accepted by Russia. He presents both optimistic and pessimistic interpretations.
Scott Sumner "revisit(s) a debate from early 2024, when Trump suggested that he would not favor defending NATO members that spent less than 2% of GDP on defense."
https://www.econlib.org/the-nato-debate-one-year-later/
Here's a reminder from Tyler Cowen that another huge possibility is still sitting out there: an Israeli attack on Iran's nuclear facilities.
In an essay that goes to the root of the debate on US foreign policy, Matt Johnson describes the "liberal international order" that was put in place under US leadership after WWII. He then discusses its chief opponents, "anti-imperialists" like Noam Chomsky and "realists" like John Mearsheimer and Stephen Walt. Do these critics, he asks, have any clear, consistent, alternatives in mind?
3) Is a "Trumpcession" coming? Many economists fear the answer is yes, primarily because of the uncertainty caused by Trump's flip-flops on tariffs. Justin Wolfers is not convinced, mainly because the economic numbers still look quite good and also because "the single best determinant of the future health of the economy is its current health. While many factors can buffet the economy, they’re notoriously difficult to forecast. And so in the absence of solid evidence that the future will be worse, it’s usually best to keep predicting more good health."
4) Calling DOGE a "scam," R. Shep Melnick, co-chair of the Harvard program on Constitutional Government, says, "The Trump/Musk administration’s approach to cutting costs makes good political sense in the short-run. But from a longer-run governing perspective, it is a recipe for disaster."
https://quillette.com/2025/03/11/the-political-foundations-of-the-doge-scam-trump-elon-musk/
5) "The Democrats have become and remain today a “Brahmin Left” party," says Ruy Teixeira. They have little chance of restoring their electoral fortunes unless they can shake off their excessive reliance on the educated, upper-middle-class and find a program and a communications strategy that can appeal to more working-class voters.
6) Many observers of the economy and the financial markets are upset by the off-and-on nature of Trump's tariff announcements. "Investors and executives (and Maria Bartiromo) yearn for 'clarity' on tariffs," says Josh Barro, "But withholding that clarity is what gives Trump leverage and attention."
In 1977, Congress passed the International Emergency Economic Powers Act (IEEPA) that "allows the President to exercise broad authorities to regulate commerce after declaring a national emergency:
to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to
the national security, foreign policy, or economy of the United States."
Trump has used his powers under IEEPA to impose tariffs. Eric Boehm explains how Republicans in Congress missed an opportunity to rein in the president.
https://reason.com/2025/03/12/congress-just-made-it-harder-for-congress-to-block-trumps-tariffs/
Economist Marcus Nunes explains that tariffs are not necessarily going to cause a permanent rise in the rate of inflation. That depends on the Fed. But they will cause a one-time increase in the price level, which will be signalled by a transitory rise in the inflation rate. The distinction is tricky but important.
7) Arguments against central planning of the economy -- which extend to arguments against high levels of government regulation -- often rely on Hayek's discussion of how would-be planners are unable to access the detailed, often tacit, knowledge that is summarized in the system of market prices. The blogger called "YK" presents a second argument, derived from the work of another Nobel winner, Ronald Coase.
8) Two new books: First, Russell Shorto, author of 2005's excellent The Island at the Center of the World, continues his history of New York City with Taking Manhattan: The Extraordinary Events that Created New York and Shaped America, which tells the story of the peaceful British capture from the Dutch of Manhattan, Long Island (including the villages that now make up parts of Brooklyn and Queens), and the Hudson Valley. It goes on to describe how the leaders of the opposing forces, Richard Nicholls and Peter Stuyvesant, cooperated to facilitate the creation of a dynamic, hybrid culture city that, combined with a commercial economy, evolved into "The Greatest City in the World."
https://www.amazon.com/Taking-Manhattan-Extraordinary-Created-America-ebook/dp/B0D8RHXBWM
Second, sociologist Dalton Conley is a researcher in the new field of sociogenomics, which claims to make progress in resolving the perennial nature/nurture debate by explaining how "Through this new vantage, nature and nurture are not even entirely distinguishable, because genes and environment don’t operate in isolation; they influence each other and to a very real degree even create each other."
Here is a link to the book, out this coming Tuesday.
https://www.amazon.com/Social-Genome-Science-Nature-Nurture-ebook/dp/B0D94WJXW5