Beyond the Quotidian: The Real-World Impact of Economic Analysis

 Individuals or small teams can move markets or persuade policymakers with incisive economic analysis.

Economic analysis melds models, data, and experience to prognosticate broad market movements or to steer policy discussions. It is empirical but not exclusively quantitative, giving both numbers and words their due weight. It synthesizes large swathes of information while searching for big picture patterns that can help businesses, investors, or policymakers to foresee the next big crisis or innovation before it overwhelms positions outflanked by an inherently volatile world.

Economic analysis differs from financial price data dissemination and post-market narration, which date from the 16^th century. It offers less precise predictions than forecasting, which in modern form began in the 1920s, because it tries to capture sea changes, not middle run trends or short-term fluctuations. Its scope far exceeds that of securities or even industry analysis.

Warren Buffett and Alan Greenspan both exemplify the power of economic analysis. The former made billions for stockholders through extensive reading and contemplation rather than relying on technical signals or trading hunches. The latter’s understanding of macroeconomy conditions proved largely ineffable but almost infallible as he guided U.S. monetary policy for the almost two decades now called The Great Moderation.

This post surveys three older but no less important economic analyses, Economist editor Walter Bagehot’s (1826-1877) lender of last resort rule, Brian Anderson’s (1886-1949) case for free trade in the Chase Economic Bulletin at the apex of American protectionism, and Wilma Soss’s (1900-1986) empirically based campaign to put women on the board of directors of America’s largest corporations.

Bagehot (pronounced badge ut), longtime editor of The Economist, explicated the lender of last resort trigger rule employed by the Bank of England during the periodic financial crises that struck the City of London in the Victorian Age. Sometimes called Bagehot’s Dictum, the rule, laid bare by Bagehot in his 1873 book Lombard Street, stated that to stave off panic and contagion central banks should lend freely to all borrowers with sufficient collateral at a rate of interest high relative to pre-panic levels.

Implemented but left unarticulated by U.S. Treasury Secretary Alexander Hamilton (1757? - 1804) during financial panics in 1791 and 1792, Bagehot’s Rule ensured that solvent firms could borrow from the central bank when needed but had incentive to do so only when no private lender would provide better terms. The collateral requirements minimized moral hazard while also protecting the central bank from losses. In the aftermath of the 2008 global financial crisis, central bankers, including the Fed’s Brian F. Madigan, pointed to the continued overall usefulness of Bagehot’s Rule when “interpreted in the context of the modern structure of financial markets and institutions.”

A Ph.D. economist, Anderson wrote economic analyses for the Chase Economic Bulletin for much of the 1920s and 1930s. One of his themes was that America thrived due to trade, not tariffs. Policymakers ignored his analysis until America’s high tariff regime exacerbated the Great Depression and helped foment the Second World War. As nineteenth century French political economist Frederic Bastiat (1801-1850) put it, “Barriers result in isolation; isolation gives rise to hatred; hatred, to war; war, to invasion.”

Especially relevant for policy discussions today, Anderson warned against what he termed “the balance of trade bogey.” Americans fetishized a “favorable balance of trade,” but “the fear” of imports, he explained, “is an idle one” because “Europe will not merely send us goods, but will also provide us with funds with which to pay for them.” “A rich capitalist country,” he concluded, “can afford to import more than it exports.”

Financial journalist and notorious corporate gadfly Soss used her weekly NBC radio show, Pocketbook News, to push for corporate governance reforms like cumulative voting and independent audits.

Importantly, Soss leveraged her empirical studies of widespread female stockownership to induce many major U.S. corporations in the 1950s, 60s and 70s to put qualified women, like Alice E. Crawford of the Corn Exchange Bank, on their boards. Women remain underrepresented in C-suites but, thanks in large part to Soss’s trenchant analysis and promotional efforts, female directors are no longer anomalies.   

Economic analyses require information acquisition but also the ability to process data and news as rationally as possible given the natural constraints of the human brain. Many of the best models are mental, incapable of being explicitly shared because they form from embodied human capital, or what was once known as wisdom.

To gain an edge over competitors, economic analysts think opportunistically and flexibly, like a fox, hunter, or natural intelligence, not in well-worn rows, like a hedgehog, farmer, or artificial intelligence. Like Anderson, Bagehot, Buffett, Greenspan, and Soss, the best economic analysts read widely and critically, selecting readings based on their perspicacity rather than reputation or popularity. Then, they write.

There’s a Long, Unsuccessful History of Presidential Trade Power

 NB: This should have gone up a week ago. Each part has subsequently been scooped. But I think it still offers a unique perspective overall.

There’s a Long, Unsuccessful History of Presidential Trade Power

by Robert E. Wright

Trump isn’t the first president to test the limits of the post-war free trade consensus.

Presidents Nixon, Carter, Reagan, and others also fiddled with U.S. trade policy even though Article I, Section 8 of the U.S. Constitution clearly vests Congress, not the president, with the power to “regulate commerce with foreign nations” and to “lay and collect taxes, duties, imposts and excises.”

We’re going to tell you when and why presidents received limited but unilateral authority to impose tariffs, quotas, and non-tariff barriers (NTBs) and show that their efforts have proven of limited duration and effect, at most slowing inevitable shifts in international commerce rooted in comparative advantage and relative factor prices, especially labor and other input costs.

In 1934, Congress temporarily delegated President Franklin Roosevelt limited authority to negotiate bilateral tariff reductions – which were sky high due to the Fordney-McCumber and Smoot-Hawley tariffs of 1922 and 1930 -- in the Reciprocal Trade Agreements Act (RTAA). From its passage until 1939, the RTAA led to trade agreements with 19 countries. Although World War II muted the effects of those agreements, the claim of some political scientists that presidents would prove more amenable to free trade than Congress seemed empirically vindicated.

It turns out, though, that presidents, like Congress, will respond to political pressures to try to save industries and jobs from international competition.

President Richard Nixon’s (R, 1969-1974) 1971 use of the Emergency Banking Act of 1933 to impose short-lived 10% tariffs as part of his New Economic Policy provides our first example of the limited and short-lived effects of presidential trade tinkering.

Fearful that his decision to end dollar convertibility -- the lynchpin of the Bretton Woods fixed exchange rate regime -- to protect the government’s dwindling gold reserves amid a growing trade deficit would spur yet higher levels of unemployment and inflation, Nixon tried to bolster the falling dollar, discourage imports, and encourage exports and domestic production by imposing tariffs and implementing domestic rent, wage, and product price controls.

The Nixon Shock triggered shortages and, as the accompanying chart shows, did not reverse the long-term decline in the country’s trade balance, a largely meaningless national accounting construct in any event.

Legislators and other policymakers, though, remained confident that presidents would use their power to reduce trade barriers rather than increase them, except in times of crisis or war. The 1962 Trade Expansion Act, the Trade Act of 1974, and the 1977 International Emergency Economic Powers Act (IEEPA, 91 Stat. 1625) resulted.

In 1977, President Jimmy Carter (D, 1977-81), pressured by labor unions, used the 1974 act to negotiate Orderly Marketing Arrangements designed to protect American shoe and color TV manufacturing jobs from lower wage east Asian competitors.

To cover himself politically with free traders, Carter labeled those de facto quotas “free but fair trade.” President Trump has used similar phrases. The measures failed to re-elect Carter or to protect those industries, domestic production in which has been nearly nil since the 1990s, from the long-term effects of foreign competition.

Due to a big drop in domestic steel production in 1977, Carter also imposed a reference price system or “trigger price mechanism” on Japanese steel producers, effectively putting a floor on the import price of many steel products from 1978 until 1982.

As the accompanying chart shows, U.S. raw steel production indeed rebounded under Carter’s order but never again reached its historical highs because American steel producers continued to face higher input costs than foreign competitors.

In his first term (2017-21), President Donald Trump (R) leveraged provisions of the 1962 and 1974 trade acts to impose tariffs on solar panels, washing machines, steel, and aluminum. Their prices increased but domestic production hardly soared. Steel production has been below its 2017 level since January 2022 and Nippon Steel just bought US Steel.

As the chart below shows, domestic aluminum production is also lower today than in 2017.

 

Trump’s tinkering may have slowed the decline of protected industries but it certainly did not transform the U.S. economy or overcome the logic of comparative advantage and mutually beneficial trade. Even his tariff on Chinese imports had less effect than reported as workarounds like the de minimis customs exception were exploited.

In his second term, therefore, Trump declared an emergency to invoke IEEPA, which grants considerably more policy power. Unless Congress intercedes, ongoing court battles will determine just how much trade power Trump and future presidents will possess.