Friday, June 22, 2018

Postscript to OPEC’s Disastrous Price War: The Cartel Hosts U.S. Producers Over Houston Dinner to Encourage New Cooperation

Click here to read the original Cautious Optimism Facebook post with comments

2 MIN READ - An "OPEC licks its wounds all the way to Houston" update from the Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff.

After a failed multi-year predatory pricing campaign to bankrupt U.S. shale producers, OPEC hosted an extravagant dinner in Houston for their still-here and still-vibrant American competitors in March. 

Although U.S. antitrust and collusion laws prohibit explicit discussion of price-fixing, the wink-and-nod message over steak and wine to U.S. producers was “Why don’t you play along and cut production too and we can all enjoy higher prices?”

Effectively OPEC’s old story and new strategy have become:

1) We couldn’t beat you (U.S. shale oil)

2) We lost hundreds of billions of dollars trying, pumping oil at full capacity even as prices fell to $50, $40, $30, and even $26 as our government budgets rely on $45+ oil simply to run the county (Saudi Arabia)

3) We need to get oil prices back up to $100+ to recoup our staggering losses

4) So how about informally joining the cartel and restraining output?

5) Because every time we cut production you guys step in to pump more oil, frustrating our efforts to raise prices to over $100.

Considering that OPEC was trying to destroy the very same firms as recently as a year ago, U.S. producers weren’t too keen on cooperating. Although many pleasantries were exchanged at the dinner, the message from shale oil exploration and production CEO’s to the press afterwards was “nothing has changed.”

Good for them.

In other news, Citigroup predicted earlier this month that the USA will become the world’s largest petroleum exporter next year (defined as crude oil + refined petroleum product exports).

(read here:

Didn’t President Obama famously contend in 2012 that...

“We can't just drill our way to lower gas prices?” 

OK if he's right, then ask yourself where would the price of oil and gasoline be  today if the U.S. wasn't adding 10.4 million barrels-per-day of supply to the world market to counter OPEC’s recent and very aggressive production cuts?

Very easily over $100 a barrelagain, $5+ a gallonagain.

Sunday, June 17, 2018

Lessons from the Great Depression: Trade, Protectionism, and The Smoot-Hawley Tariff (Part 3 of 3)

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff's "Long Read" wraps up his analysis of the Smoot-Hawley Tariff by examining the how the disastrous tariff was finally unwound, and asks what if any comparisons can be drawn between the 1930 tariff and the Trump administration’s proposed tariffs. Be sure to have your coffee handy while you enjoy.

Two presidents who preferred bilateral trade negotiations


The GOP barely lost its House of Representatives majority in the late 1930 election, and Herbert Hoover and the GOP were famously crushed by Franklin Roosevelt and the Democrats in 1932. In previous articles we’ve covered the tax, spending, wage, pricing, and labor policies of the FDR administration, and most of his New Deal remedies only prolonged the Great Depression with theories based in quackery and incessant interference with market price-clearing mechanisms.

However one bright spot in the Roosevelt platform was trade. From day one FDR had been against protective tariffs and made free trade and tearing down trade barriers a major policy goal. Once urgent priorities of stabilizing the financial system were settled, Roosevelt successfully convinced Congress to pass the 1934 Reciprocal Trade Agreements Act (RTAA). The RTAA not only served as the legal basis for systematically eliminating or lowering the Hoover and Harding-era tariffs, it also fundamentally changed the bureaucratic structure for conducting American trade negotiations. 

Prior to the RTAA tariffs were the exclusive domain of Congress, with the President either signing or vetoing the final Congressional bill. But the RTAA gave the President executive power to negotiate bilateral agreements with countries on a one-by-one basis. 

Whether or not it was wise to hand the White House constitutional powers originally enumerated to Congress (Article 1, Section 8) is debatable. On the one hand the President is more likely to negotiate in the interests of the United States as a whole instead of Senators and Congressmen logrolling to secure terms that serve only their local constituents’ interests. 

Also Senators and Congressmen are more vulnerable to the influence of lobbyists with consolidated power in their districts whereas the President once again has to be more concerned with the national interest. On the other hand the RTAA represented a further consolidation of executive power—an ongoing controversy throughout the New Deal and a structural transfiguration the founders always feared.

But as far as 1930’s trade policy is concerned, the RTAA was the beginning of a slow but steady end to the fiasco of the Hoover Smoot-Hawley tariff. By allowing FDR to negotiate bilateral reciprocal agreements with individual nations, the act resolved the major roadblock to removing barriers: the fear that a unilateral tariff reduction would result in a flood of cheap imports from countries with their own protective tariffs in place. Senator Arthur Clapper (R-KS, no relation to James Clapper) put it best when he said:

“If the United States reduces its tariff walls on its own, our markets will be swamped with a devastating flood of foreign goods, without any compensating foreign markets for any of our own products on equitable tariff terms. It seems fairly obvious, then, that if world trade is to be stimulated and our own export trade is to be revived by means of changes in tariff schedules, reciprocal action by ourselves and other countries is absolutely necessary.”

Secretary of State Cordell Hull began working on bilateral trade agreements and signed the first in 1935 with America’s most important trading partner: Canada. By 1937 Hull had worked out eliminations or sharp reductions in tariffs with a dozen major trading partners. 

By the outbreak of World War II U.S. trade with virtually all of its meaningful partners was taking place under sharply reduced or duty-free reciprocal tariff agreements. 

After World War II the rest of the industrial world (outside the communist nations) signed on in multiple rounds of General Agreement on Trade and Tariffs conventions (GATT) to ensure no repeat of the Smoot-Hawley debacle could ever occur again. 

GATT eventually morphed into the World Trade Organization (WTO), a modern-day institution that carries its share of controversy. But no matter how one might feel about the WTO today, GATT was absolutely necessary in its day to prevent the disastrous trade war of the early 1930’s from repeating. GATT was also a major reason why nearly two decades of depression and world war were followed by a surprisingly sustained, multi-decade global economic boom.

The little-known RTAA was in hindsight a watershed event that fundamentally changed the American political framework for negotiating tariffs and trade deals. By shifting negotiating power to the White House and promoting bilateral agreements, Washington DC also paved the way to make future protectionist policies less likely since individual members of Congress could no longer be pressured by powerful lobbies that dominated their districts. The President was more likely to consider not only the entire nation’s domestic interests as a whole, but also a trade agreement’s alignment with US foreign policy. The power to negotiate tariffs and duties still resides with the President to this day.


With President Trump now proposing targeted retaliatory tariffs against trading partners that he considers guilty of protectionist and mercantilist policies, the press and general public will undoubtedly begin resurrecting the ghost of Smoot-Hawley to make predictions of impending doom. However, lessons from Smoot-Hawley are difficult to draw in 2018. There are many different circumstances in play today from 1930, some of which suggest it makes less sense for the U.S. to launch tariffs now, some of which suggest the result would not be as bad as it was in the past.

1) Some of the 2018 circumstances that suggest tariffs are either not as bad an idea or would not have as negative effects as in 1930 include:

-The United States and the entire world were entering a Great Depression in 1930. That is not the case (at least at the time of this writing) in 2018.

-The United States was running a trade surplus in 1930. It’s running a trade deficit in 2018.

-The United States was the leading creditor nation of the world in 1930. Today it’s a debtor nation.

-The United States instigated most of the tariffs that sparked the trade war in 1930. Today the United States is responding to tariffs, import quotas, and subsidies that were previously invoked by its trading partners.

-The Smoot-Hawley tariff covered thousands of imported products in a broad stroke of protectionism. The Trump administration is proposing narrow tariffs on just a handful of imports (for now) like steel, aluminum, solar panels, and washing machines although it has recently started whispering about automobiles.

-The world employs a flexible exchange rate regime of fiat currencies that makes it very easy for central banks to manipulate their currencies downward or maintain artificial pegs in foreign exchange markets—which several do. In 1930 nearly all countries were on the international gold standard and unable to easily undervalue their currencies (although one year later they began ending gold convertibility to do precisely that).

-Today’s world governments have additional tools for adjusting trade levels and softening the blow for adversely-affected industries such as fiscal policy, social safety nets, and of course monetary policy. Although such economic interventions can be controversial, they nevertheless exist and were mostly unavailable to policymakers in the 1930’s, forcing them to resort to direct tariffs.

2) Some of the circumstances that suggest tariffs could have worse implications today than in 1930 include:

-International trade represents a much larger share of U.S. GDP than in 1930 (12% vs 7%) therefore increasing the domestic ramifications of a trade war scenario.

-Proposed tariffs on 10% and 25% in 2018 are higher than the average Smoot-Hawley average tariff of 7-8% in 1930. Although the combined Fordney-McCumber/Smoot-Hawley tariff levels were higher, it was the incremental augmentation of Smoot-Hawley itself that set off harmful retaliations in 1930, and the proposed incremental increase in 2018 is greater than that of 1930.

-The United States dollar enjoys world reserve currency status. Therefore it can run larger trade deficits without consequence since its trading partners must hold dollars in reserve to facilitate international transactions (up to a limit). Overseas corporations must pony up tens of billions of dollars in real goods and services annually to acquire dollars that will never be used to purchase reciprocal American products, effectively subsidizing a marginally higher standard of living for Americans at the expense of foreigners. Thus some degree of US trade deficits is not only warranted, but actually necessary for the world to maintain its stock of US dollar reserves (the so-called “Triffin Dilemma”).

-The United States dollar’s reserve currency status also subsidizes U.S trade deficits in other ways. U.S. banks don’t incur foreign exchange costs that foreign banks do. U.S. banks that both accept deposits and make loans don’t worry about loan losses due to foreign exchange depreciation. By contrast foreign banks must hedge to protect themselves against losses due to exchange movements which carries additional cost. Dollar-denominated assets, being in such high international demand, command lower interest rates than their foreign counterparts. The interest rate spread alone finances a great deal of the U.S. trade deficit at no cost.

-All these reserve currency privileges bestow a hidden trade benefit to the US estimated at approximately $250 billion annually (Eichengreen: $225 billion in 2011 dollars), paid for by the citizens, banks, and governments of foreign countries. The finance ministers and governments of the world are more than aware of the financial benefit the U.S. receives from what French Finance Minister Valery d’Estaing famously called its “exorbitant privilege” in 1965. The United States dollar enjoyed virtually none of these reserve-status advantages in the 1930’s.

Note: The Economic Affairs correspondent drew heavily from material in Doug Irwin’s “Peddling Prosperity: Smoot-Hawley and The Great Depression” along with various articles from The Economist,, and Wikipedia. For those interested in learning more about Smoot-Hawley in detail, he recommends Irwin’s compact and very readable book.

Sunday, June 3, 2018

Fake News Winner: Poverty Gets Worse Under Trump (in 2016)

From the Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff.

Oh boy, very top headline ("America's Poor Becoming More Destitute Under Trump: U.N. Expert") on Yahoo!

It's only Sunday but this is already this week's "fake news" contest winner.

"The data from the U.S. Census Bureau he cited covers only the period through 2016, and he gave no comparative figures for before and after Trump came into office in January 2017. Alston, a veteran U.N. rights expert and New York University law professor, will present his report to the United Nations Human Rights Council later this month."

Are they hoping enough thousands will just look at and believe the headline without reading that the figures come from Obama's presidency?

Read the story here: