The recent announced rates were calculated with the help of a formula that is almost universally seen by economists as no sense:
Now we discover that even if you think this formula is useful, the specific calculations were based on the estimate of the wrong elasticity. The following is of an AEI report by Kevin Corinth and Stan Veuger:
The idea is that as the rates rise, the change in the trade deficit depends on the response capacity of the import demand on rates, what depends on how the import demand reacts to the input prices and how import prices react to rates. The Trump administration assumes an elasticity of the import demand with regard to the input prices of four, and an elasticity of the input prices with regard to rates of 0.25, the product of which is one and the reason that they are canceled in the administration formula.
However, the elasticity of input prices with regard to rates must be about one (actually 0.945), not 0.25 as the Trump administration explains. Their fault is that they base the elasticity on the reaction of retail prices for rates, in contrast to import Prices as they should have done. The article They quote along Alberto Cavallo And his co -authors make this distinction clear. The authors state that ‘rates [are] Almost entirely passed on to the input prices of the US “, while” more mixed evidence with regard to the selling price increases “was found. It is not consistent to multiply the elasticity of import demand with regard to import Prices by the elasticity of retail prices regarding rates.
Correcting the Trump administration’s fault would lower the rates that are applied by each country in the United States at about a fourth of their indicated level, and as a result the rates announced by President Trump on Wednesday reduced the tariff floor of 10 percent. As shown in Table 1, the rate percentage would not exceed 14 percent for each country. For all except a few countries, the rate would be exactly 10 percent, the floor imposed by the Trump government.
The Cavallo study was delighted, but a tweet from Cavallo seems Confirm their interpretation:
Unless I am mistaken, the stock market rose briefly at the start of the rate announcement, because in the beginning it seemed as if there would be a uniform rate of 10% for all countries (what a relief would have been for the markets). Shares then crashed when it became clear that our most important trading partners would get much higher rates. So it seems that $ 5.4 trillion of wealth was destroyed by a mathematical error by a government official at a low level. (To be clear, there are Many other problems With the formula, but this error is especially important.)
Of course it is likely that the administration had already decided for high rates, and this comparison was reversed to offer coverage. Nevertheless, this comparison was used to calculate the specific rates for each country, and therefore probably explains why the EU was hit with a rate of 20%, China with a rate of 34%and Vietnam with a rate of 46%. Errors have consequences!
All this reminds me a bit of the Chinese cultural revolution of 1966-76, when adult experts were exiled to the countryside and important parts of the economy were transferred to students.
You could claim that everyone can make a math error, and that is true. But in an administration that includes skilled economists, it is more likely that someone will catch the mistake, especially when the final results look “fish -like”. To be honest, even the previous administration fell short in this area. Larry Summers warned the Biden people that excessive tax and monetary expansion could lead to high inflation. The current administration seems to be anti-elite than the Biden administration and is particularly hostile to the views of economists. Most talented people have left or lie low to the government to prevent involvement in the current mess.
The administration now has three options:
- They can admit that the wrong figure has been used and correcting the rates.
- They can admit that the wrong figure was used and also admit that the formula was not the actual justification for the rates. In other words, they can admit that they have lied.
- They can deny that the wrong figure was used in the formula.
In the past, choice #3 would have been unthinkable. But we are in a new world. Only a few weeks ago the administration responded to the Signal Chat scandal by claiming that the very specific battle plans leaked to a reporter at The Atlantic Ocean was not a ‘classified information’. Yes, and the sky is green.
My wife lived through the cultural revolution. She hoped she left all that when she moved to America.
Ps. When I think of the Chinese cultural revolution, I often remember this scene from the Chinese film from 1994 To live:
Months later, during the birth of Fengxia, her parents and husband accompany her to the provincial hospital. All doctors were sent to do heavy labor because they are over -trained, and the students are left as the only one who is in charge. Wan Erxi succeeds in finding a doctor to supervise birth, so that he is removed from imprisonment, but he is very weak with hunger. Fugui buys seven steamed sandwiches (Mantou) for him and the family decides to call the son Mantou, after the sandwiches. However, Fengxia starts bleeding and the nurses in panic, and admits that they do not know what to do. The family and nurses ask the doctor’s advice, but believe that he has eaten too much and is semi -conscious. The family is helpless and Fengxia dies of postpartum bleeding (serious blood loss).