Category: Economics & Business

An Obituary for NAFTA

This week, the North American Free Trade Agreement (NAFTA) will resolve into the new United States-Mexico-Canada Agreement (USMCA), ending a 26-year-old pact that was once the largest free trade agreement of its time. In these 26 years — and in the many years leading up to its formation — it has found few friends willing to defend it by name. Instead, its quarter century has been suffused with vitriol from those who seek to blame it for every adverse economic condition and stuffy academic assertions of its espoused benefits and shortcomings. But as we say farewell to NAFTA this week, we owe it the time to look back and reflect on its origins, and what it has really meant for both the United States and North America at large.

A North American Common Market

The foundation for the NAFTA we know today was best articulated by a presidential candidate in 1979. In the very speech where he announced that he would seek the presidency, Ronald Reagan declared, “A developing closeness among Canada, Mexico and the United States–a North American accord–would permit achievement of that potential in each country beyond that which I believe any of them–strong as they are–could accomplish in the absence of such cooperation. In fact, the key to our own future security may lie in both Mexico and Canada becoming much stronger countries than they are today.” What started as an agreement between the United States and Canada in the late eighties quickly accelerated to include Mexico shortly thereafter when Reagan’s successor, President George H.W. Bush, began negotiations to use the Canada-US Free Trade Agreement as a template for the more inclusive pact. The impetus to include Mexico was driven by American urgency to counterbalance the rising economic heft across the Atlantic. In the early nineties, the European Union’s Maastricht Treaty would be negotiated and then signed, integrating the economies of Europe, establishing a single market with free movement of goods and people, and ultimately resulting in the creation of a single currency: the euro. Having mercilessly competed with Japan economically in the 80s, the prospect of facing a new economic superpower gave the United States newfound interest in expanding its economic opportunities. By providing companies access to new markets, especially in Mexico where the cost of labor was lower than it was in the United States or Canada, American businesses would be more competitive globally. This would create jobs in Mexico, thus improving the economic situation and discouraging migration to the United States, and in turn bring down prices for consumers in the United States, allowing a specialization in more services and higher-paying labor.

President Bush reached an agreement to create the North American Free Trade Agreement in 1992 and signed the presumptive agreement with Mexico and Canada as a lame duck president in December of that year. When President Bill Clinton came into office a month later, he requested two side agreements to allay two prominent concerns: labor rights and environmental standards. The first provided a right to strike, ensured child labor protections, and maintained worker health and safety measures while the second created the first ever trade sanctions based on environmental laws, which earned the pact the endorsement of groups like the Audubon Society and the Natural Resources Defense Council.

In an optimistic moment of solidarity, Clinton signed the side agreements in September of 1993 flanked by former presidents Bush, Carter, and Ford, as they all advocated Congress’ passage of the final implementation act in the months to come. Clinton spoke of a middle class increasingly working harder for less, of the challenges of global competition, and the need to adapt and change ahead of the new century. “In a fundamental sense, this debate about NAFTA is a debate about whether we will embrace these changes and create the jobs of tomorrow, or try to resist these changes, hoping we can preserve the economic structures of yesterday,” Clinton conceded. But his challenge to America was bold and admirable. “Are we going to compete and win, or are we going to withdraw? Are we going to face the future with confidence that we can create tomorrow’s jobs, or are we going to try against all the evidence of the last 20 years to hold on to yesterday’s?”

After signing the side agreements, the former presidents spoke in turn. Bush expressed his gratitude to the team who negotiated the original agreement and a deep appreciation for having had the opportunity to lay the groundwork for what he felt was a bipartisan accomplishment. “Now I understand why he’s inside looking out and I’m outside looking in,” he humored at Clinton in a way no president who had lost reelection to another would ever be expected to do. Carter spoke of NAFTA as a step towards securing democracy in Latin America and against those who were attempting to stoke the public’s trepidations regarding the agreement. He spoke of “a demagogue who has unlimited financial resources and who is extremely careless with the truth, who is preying on the fears and the uncertainties of the American public,” evoking, in all but name, ardent NAFTA critic Ross Perot. Ford cautioned his former colleagues in the Congress against voting against the agreement, equating it to, in effect, a vote for illegal immigration and admiring that “world trade has been the real engine that has given the free Western industrial nations the capacity to have prosperity and growth” and that there is now “opportunity for future prosperity and good living for people in this entire hemisphere.”

The comradery of presidents from every party, who had defeated or been defeated by one another, envisioning a better world, not just for themselves or their nation, but for all mankind, tugs at the heart a little here in 2020. And it worked. Congress — with bipartisan majorities in each chamber, fervently opposed by bipartisan minorities all the while — passed the North American Free Trade Agreement Implementation Act in November of 1993, and it was signed by President Clinton on December 8. “There is no turning back from the world of today and tomorrow, we must face the challenges, embrace them with confidence, deal with the problems honestly and openly, and make this world work for all of us,” observed Clinton. Ending his remarks in palpable contrast with the modern day, conjuring American exceptionalism as an ideal to aspire to and a force for good rather than a nationalistic cry for the past, Clinton affirmed, “America is where it should be, in the lead, setting the pace, showing the confidence that all of us need to face tomorrow. We are ready to compete, and we can win.” 

NAFTA went into effect January 1 of 1994, and over the course of the next 25 years, trade between the US and Mexico more than doubled, from 1.3% to 2.7% of combined GDP. Trilateral trade between the three nations increased three-fold. Mexico’s GDP per capita at purchasing power parity also more than doubled; as did the United States’. Net migration from Mexico to the United States fell below zero, Canada and Mexico now buy more American exports than the United States buys Chinese imports, and the world’s largest land border between two countries remained open up until COVID-19 resulted in its closure for the first time since Canada became a nation. 

“A Giant Sucking Sound”?

The trade pact was never for want of controversy. On the day of NAFTA’s enactment in 1994, the Zapatista Army of National Liberation, a Mexican guerilla group, staged the Zapatista uprising, seizing towns in the Mexican state of Chiapas in response to the pact. In 1999, domestic opposition to free trade climaxed with the Battle of Seattle, which led to violent conflict between police and protestors and the deployment of troops in Seattle. In 2014, the AFL-CIO critiqued “the legacy of NAFTA and the flawed U.S. trade policy it both shaped and reflects has been stagnant wages, declining social standards and increased inequality.” Vermont Senator Bernie Sanders spent years thereafter condemning the deal and, of course, Donald Trump spent the height of the 2016 presidential campaign calling NAFTA “the worst trade deal maybe ever.” 

Ross Perot argued in 1992 that NAFTA would result in a “giant sucking sound” as jobs moved from the United States to Mexico. Thousands of US jobs did disappear, especially in manufacturing — estimates vary, but tend to put the number at around 600,000 jobsAny fair economic analysis would concede some jobs shifted and were lost in this period following the enactment of the pact, though whether NAFTA is to blame for the loss, or whether it simply accelerated this trend, is up for debate. 87% of the decline in manufacturing jobs is accounted for by automation, not trade, and manufacturing jobs have been in decline as a proportion of overall employment since the 1950s even though American manufacturing output has actually increased overall

The often overlooked reality is that NAFTA supports 4.9 million jobs in the United States and 34 million private sector jobs were gained over the 25 years since its enactment, at a rate of about 1.3 million jobs per year, well surpassing the 600,000 that may have been lost. The Peterson Institute’s Gary Fubauer and Cathleen Cimino-Isaacs found that, in fact, “Since NAFTA’s enactment, fewer than 5 percent of US workers who have lost jobs from sizable layoffs (such as when large plants close down) can be attributed to rising imports from Mexico” and that “for every net job lost in this definition, the gains to the US economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.” NAFTA contributed to lower food, oil, and other import prices and may have been the prevailing factor saving the American automobile industry from tenacious Asian and European competition. As of 2014, it was estimated that the United States is $127 billion richer every year because of the additional trade courtesy of NAFTA, equivalent to $400 per American. Canada has also benefited from the deal, seeing a decline in unemployment and an increase in productivity. Its government’s factsheet on NAFTA paints a positive picture of “economic growth and middle class job creation… unprecedented economic integration between partners, creating a platform where companies from Canada, the U.S. and Mexico make things together rather than simply sell to each other.” 

The situation, contrary to American critics’ claims, is actually less clear in Mexico. Some studies have found “relatively large positive effects” but others have found effects that are — to say the least — underwhelming. Omitted from many of these depictions of depreciated wages in Mexico is the Tequila crisis, a currency crisis that pushed Mexico into a severe recession in 1994, causing a 20% decline in wages that took years to recover from, giving the appearance of economic failure in the early NAFTA years. In reality, Mexico’s new relationship with its northern neighbors, who were anxious “not to let [their] new partner go under”, encouraged an American-led bailout that made for a more expedient recovery than Mexico had seen in similar crises before NAFTA’s implementation.

The most accurate critique of NAFTA may be that it did not go far enough, and its benefits have had a comparatively small impact compared to what they could have been. Had Mexico’s economy grown more rapidly and seen a diversification in jobs, they’d be better positioned to buy more American goods and services. Plans to expand NAFTA, or at least the scope of cooperation between the nations, may have reached their peak in 2001, as then-president George W. Bush and Mexican President Vicente Fox met to discuss immigration and Fox addressed a joint meeting of Congress. With border control on the mind, Bush remarked, “The best way to take pressure off our borders is for Mexico to grow a middle class, and the avenue for Mexico to grow a middle class is trade.” Of course, history got in the way, and only a few days later on September 11th, the Bush administration would be deviated from the pursuit of an expanded relationship with its southern neighbor. 

Most studies have found a relatively modest but nonetheless positive impact on GDP thanks to NAFTA. Not the great boon to economic growth nor responsible for perceived economic stresses of the 21st century that various sides have hailed. But the aim of free trade between nations is not a zero sum game. It speaks to the virtues they espouse, whether they will work together or separately, and whether making a neighbor better off is worth it. It demonstrated how nations come together to forge a common future for all of their people and for the world, and how benevolent leaders can work with each other to try and make things better for the next generation. The real tragedy of the USMCA is that these high-minded ideals of progress and North American cooperation did not drive it as they did its predecessor, and it instead represents a retreat from those ideas entirely.

NAFTA 2020

It’s unfair to really call this the death of NAFTA. The USMCA has been characterized as more of a revision, or a “NAFTA 2.0” than President Trump and his cries of “ending the NAFTA nightmare and signing into law the brand-new U.S.-Mexico-Canada Agreement,“ seem to imply. The USMCA makes a series of tweaks like increasing intellectual property protections, slight opening up the Canadian dairy market, beefing up labor and environmental protections in Mexico, and an increase of the percentage of a car that must be made in North America from 62.5% to 75% for it to qualify for zero tariffs provided that at least 30% of work done on vehicles is by workers earning $16 per hour. If that seems fiddly and minute, that’s because it largely is. The Economist noted that “this victory of governmental micromanagement comes with costs,” emphasizing that the United States’ most-favored nation tariff on non-USMCA imports of passenger vehicles are a mere 2.5%, so “car manufacturers could [opt] to ignore the deal, pay the 2.5% tariff for non-USMCA imports and source parts wherever made business sense.” This means car prices would rise for American consumers and, if automakers find it more cost-efficient to produce cars outside of the now higher-cost North America, it would lead to a further decline in manufacturing and employment at home.

This comes after years of threats and insinuations by Trump that he would completely withdraw from NAFTA,1Withdrawal from NAFTA would have caused an economic crisis resulting in price spikes across the bloc, would have put exorbitant pressure on supply chains, and reduced competitiveness with major manufacturing powers in Europe and Asia. This makes the allegation that White House economic advisor Gary Cohn single-handedly stopped this by simply taking the piece of paper off of Trump’s desk somewhat concerning, to say the least. the assumption of negotiations without a common understanding for the need for an agreement at all, demands for a sunset clause and other non-starters, moving ahead with Canada out of it entirely if they didn’t get on board with Trump’s demands, a capitulation from Canada and Mexico so as to avoid a painful withdrawal, and a spate of domestic politics in which Trump again threatened to terminate NAFTA so that Congress would move on his new deal quickly. All of this resistance and uncertainty, spitefully manufactured by America, just to get perfunctory adjustments that add little to the grand aspirations for the region.

The Trump administration’s approach to the treaty was mercantilist, short-sighted, self-interested, and inconsistent with the ideals for North American partnership that began the march towards NAFTA. It is a far cry from Reagan’s — and his preceding and succeeding presidents — vision of “looking outward… confident of our future; that together we are going to create jobs, to generate new fortunes of wealth for many, and provide a legacy for the children of each of our countries.”

Trade deals have always been easy targets; their defenders are quiet technocrats and academics, and politicians like Barack Obama and Hillary Clinton, both of whom came to govern as staunch free trade advocates, have railed against them for electoral reasons. Making a compelling case to spread prosperity outside one’s own borders and compete openly in the global economy at the expense of fading jobs at home is a cause few politicians are brave enough to champion. But the world should remember NAFTA fondly, and recall the enlightened aims it sought — not as an end, but as one step towards something even better. 

NAFTA was never perfect. No agreement framed by governments with varying interests ever is. But it was characteristic of an era of American foreign and domestic policy where its leaders did not promise the bygone past at the expense of opportunity in the future. Instead, NAFTA was about three nations coming together because they knew they were stronger together rather than apart. That’s something worth celebrating, and something to mourn the loss of in 2020. 

The Economics of the COVID-19 Rebate

You will probably be receiving a check from the federal government in the next few months. If you are a single filer and make under $75,000, you will receive the maximum rebate of $1,200. If you make over $75,000, this amount  will be cut by 5% per dollar for every dollar over $75,000, before hitting zero at $99,000.1If you make over $75,000 you can see exactly how much you’ll receive by taking your income above $75,000 subtracted from $24,000 and multiply it by 0.05. For example, if you make $80,000: (24,000-5000)*0.05 = $950. Or you can just use this calculator, I guess. Each dependent child will add $500 as well. If you file jointly the income level rises to $150,000 and if you file as a head of household it rises to $112,500. This rebate is one of the results of the “Phase 3” COVID-19 response package that Congress passed on Friday and President Trump signed later that afternoon.2Phase 1” was the immediate response passed at the beginning of March providing just over $8 billion to health agencies. “Phase 2” was a more thorough piece of legislation addressing sick leave and testing for the uninsured. The goal is to provide immediate aid to Americans who need it and inject a massive stimulus into the economy to counter a rapidly deteriorating economic situation.

You’re probably going to start seeing and reading a lot of articles with advice on what to do with with this money; and while I would love it if the world came to me for their personal financial advice, that is not what I want to do here. Instead I want to lay out the economics of why this rebate is being issued, and why you shouldn’t feel guilty about this money if you receive it but don’t think you need it as much as others might. 

First and foremost, this money is intended to support those who need it, many people are finding themselves temporarily out of work and it goes without saying that if you need to pay rent, buy food, cover expenses, or support yourself and your loved ones, you should use the rebate for that. Please, take care of yourself, take care of your family, be responsible, and don’t think that this means you should not continue to heed the CDC guidance and continue social distancing to the extent you are able. This is not just about you, it’s about hundreds of thousands of Americans who could die or become seriously ill if you and your 300 million compatriots do not keep to yourself. 

Now that the heavy stuff is over, if you are still employed and your life is carrying on more or less financially stable despite your wistful leering out your window at the forbidden out-of-doors, you may feel a little guilty about the check you’re about to receive. There’s a compelling argument to be made that money should only have gone to those who need it: the unemployed or underemployed, especially in the services industry. I have unwittingly made this argument myself, and while the intention is correct, the economics are not.

Spend, Baby, Spend

With little traditional monetary policy action available (the Federal Reserve has already slashed interest rates to near zero and the required reserve ratio, down to 10% since the Great Recession, was slashed to 0% this month for all depository institutions) and an incredibly unorthodox and indeterminate economic slowdown — the signs of which are emerging rapidly — a massive fiscal response or unconventional monetary policy option is necessary. Former Federal Reserve Chairs Ben Bernanke and Janet Yellen have historically endorsed the prospect of “helicopter money”, Federal Reserve-financed drops of money on the American public to encourage spending and break away from a contraction verging on a deflationary spiral. And current Federal Reserve Chairman Jerome Powell has noted the high possibility of the economy currently being in recession and promised potentially unlimited lending to keep financial markets operating, though he concedes the Fed’s abilities will be limited while the economy is tempered and will be most impactful “when the recovery does come, to make that recovery as strong as possible.” In the immediate term, however, fiscal stimulus is needed. And the Phase 3 COVID-19 legislation is the first major step to assure temporary financial survival and cash to the millions of Americans increasingly finding themselves out of work. So why? Why pay out billions of dollars to give all Americans, even those who don’t need it as much as others, a cash influx?

Because the more anyone spends money, the better off everyone will be. In economics, there is a metric called the marginal propensity to consume (MPC), which is a number between 0 and 1 that reflects what portion of additional disposable income will be spent. For example, if the marginal propensity to consume is 0.4, for every additional dollar you received, you’d spend $0.40 of it and save $0.60. It is the inverse of the marginal propensity to save (MPS).3There is also MPM, the marginal propensity to import, which is not negligible, though it is likely less pervasive in covering immediate costs such as housing, healthcare, and food, so for simplicity’s sake, I will leave it off. You’re welcome. It’s calculated as a derivative of the consumption function (C) over disposable income (Y), given that the change in C over the change in Y is equal to the MPC. The MPC plus the MPS (a derivative of the savings function (S)) is equal to 1:

The marginal propensity to consume is important because of an economic concept called the fiscal multiplier, a larger part of multiplier theory, which notes that when the government spends a sum of money, the national net income may increase by more than the increase in spending. This was first conceptualized in the early 1930s by a student of John Maynard Keynes named Richard Kahn, is a key component in Keynesian economics and many of its subschools, and was at the heart of many New Deal policies. You can think of it this way: if the US government were to spend $10 billion to build a brand new spaceship for NASA, GDP increases by $10 billion right off the bat in the production of a new creation; but consider the vast majority of that $10 billion is likely going to labor costs, who then pass much of  that money in the form of buying new things: a new home, new car, or cups of coffee; then those homebuilders, carmakers, and baristas receive a portion of that money that they would not otherwise have received and go on to buy their own new homes, cars, and cups of coffee, and this multiplies out to actually increase GDP by way more than $10 billion even though only $10 billion was initially spent, possibly two, three, five, or ten times as much.

The MPC is how you calculate the multiplier, K, which is equal to one over one minus the MPC, or, effectively, one over the MPS:

The share of labor compensation in GDP has been around 60% since the Great Recession and it’s been estimated that the marginal propensity to consume is around 0.10 (meaning K = 1.11), so let’s assume that in the example above $6 billion goes to the initial labor, who then spend 10% of their additional income, and so on, increasing GDP by $6 billion * 1.11, or $6.66 billion. That’s an additional $660 million in value purely by virtue of having spent money to begin with. And this is not just wishful thinking, this is really how it works, if to a lesser degree than what the traditional economics textbook might imply.4On another note, there’s also an inverse of this, which is the money multiplier, which reflects how banks perpetually lend given deposits. This creates a massive amount of cash in the process as determined by one over the reserve requirement. Recall that the reserve requirement during the Great Recession was 10%, meaning that for every $100 deposited in a bank, a maximum amount of $1000 would be created in a perfectly functioning financial and economic system. The multiplier did not perform at this level due to banks holding reserves over the required ratio (excess reserves). Since banks are not required to lend out cash, the money multiplier is actually closer to 1.2, falling far short of the economic estimate of 100, even if it could be that high in rough practice. Now that the Federal Reserve has dropped the reserve requirements to 0, an infinite amount of money can be created. How exciting! Of course, the marginal propensity to consume is greater at lower income levels, as consumption increases until all needs are met, which is a good argument for some fiscal restraint in capping the income level that receives the cash rebate. Different degrees of and targets for spending will have different multipliers based on who they impact and their mechanisms. Increasing food stamp benefits is estimated to have a multiplier around 1.73, whereas more regressive tax cuts or policies that crowd out more efficient spending like building sports stadiums are often thought and estimated to have multipliers lower than one, resulting in getting less economic gain than what was spent.5Thank you for clicking me and wanting to know more. Crowding out describes a situation wherein the government, due to spending more, “crowds out” investment because it needs to soak up funds via debt, thus cutting off private investment’s access to capital, or at least making capital more expensive. The crowding out phenomenon is a frequent argument against publicly-funded economic growth and Keynesianism as a long term solution. As for taxes, Ricardian equivalence assumes rational consumers who are aware taxation will be required to finance any such spending either now (so less money to them) or later (paid via bonds, the interest on which must also be paid at a later date, so ultimately also less money to them), so saving would increase, thus reducing the multiplier. Empirical modern research on this theory has refuted it, and many of the assumptions behind it are no longer widely held in all but the most basic economic models. But there is still something to be said for consumers at a certain range of income realizing that this will have to be paid for and being more thrifty, expecting a tax increase or inflationary pressure in the future — the bill comes due.

Nonetheless, because this payout is a no-strings-attached rebate, consumers are empowered to spend it on whatever they’d like, and the government is not spending it on what might be a less productive endeavor, the multiplier will almost certainly be positive. People still have to buy food, pay their rent, and take care of their day-to-day needs, and it’s likely those at the lower end of the income scale (who will benefit the most from this bill) will spend more of it on immediate necessities than those who need it less, multiplying out cash and spending power as this inflates earnings from spender to spender. 

There is even precedent for a similar kind of cash handout from not that long ago which gives us an idea of what we can expect. At the onset of the Great Recession, President Bush signed the Economic Stimulus Act of 2008, which gave many Americans between $300-$600 with the aim of encouraging spending so as to provide a floor to the weak economy. These types of refundable lump-sum tax rebates were estimated to have a multiplier of about 1.26, comparatively higher than most other tax cut options, though not as high as various types of spending increases. Though the rebate did boost spending to a degree, it was not as much as expected since most Americans saved the money in lieu of spending it and the checks arrived too late to stave off the recession, which was already well underway by the time they arrived in the later half of the year. Nonetheless, it certainly did not hurt the economy, and the cash injection was valuable towards paying off debts, increasing savings (even if this didn’t effectively improve investment, as banks weren’t loaning much out in these times anyway), and providing some cash to many who may have desperately needed it. The situation in the US was also only getting started: Fannie Mae and Freddie Mac were taken over by the federal government in September, Lehman Brothers went bankrupt only days later, the Troubled Asset Relief Program would be authorized in October and the Federal Reserve didn’t even drop interest rates to zero until December. And that was all before President Obama was sworn in in January of 2009 and had to address the back half of the crisis, managing the automotive industry bailouts and officially exiting the recession in June of 2009, though of course economic malaise would be persistent for the next several years. Though this initial stimulus was only about $152 billion, successive fiscal support such as the Troubled Asset Relief Program (which authorized $700 billion, of which only about $440 billion was used), and the Recovery Act (which cost $831 billion) made up most of the federal government’s fiscal response to the recession.6To say nothing of the $4.5 trillion dollars the Federal Reserve provided in quantitative easing to inject additional funds into the financial system and lower long-term interest rates. And while history indicates this was probably not enough and the government should have spent more to mitigate the persistent economic torpidity that would follow, you might note all of these successive bills are already dwarfed by the $2.2 trillion spent on the Phase 3 COVID-19 response legislation alone.

A Recession Unlike Any Other

Despite its size, the Phase 3 COVID-19 response legislation will not be enough. The contraction at hand is not because of the traditional reasons economies fall into recession, such as burst asset bubbles, supply shocks (i.e., a sudden increase in energy prices), financial crises, and the like, wherein there is a decrease in aggregate demand. In recessions like these, the federal government often cuts taxes and increases spending, while central banks increase the money supply to lower interest rates. This encourages businesses to take out cheap loans, new public works projects to provide jobs, and consumers to run out and buy things with all that new cash. This recession is different because we don’t want these things to happen, at least not like that. We want businesses to keep their doors closed, schools to stay shuttered, and the last thing we want is consumers running around outside within six feet of each other waving their $1200 checks. Some have argued that the aim of a COVID-19 response should be to “actually decrease demand; a kind of anti-stimulus.” Tax cuts, more spending, and lower interest rates will not help the economy to the degree they historically have, and may even make the economic scenario worse if things abruptly turned around for folks and they started traveling, going back to work, and shopping around only to spread the virus further. Yes, the economy is in trouble because people aren’t spending — but not because they don’t want to or because they had to cut back. Instead it’s a self-imposed slowdown where governments are begging people to stay inside and requiring businesses to close. No matter how much money you have right now, you’re not going to go on that big vacation to Europe you had planned, nor should you. But it’s worth saying, and now saying again, how weird it is for such behavior to be discouraged in the context of your average recession. 

While discussing the psychology of markets, Keynes once famously remarked that “animal spirits” encouraged consumption and people would spend when these spirits were lifted, as opposed to precisely calculating exactly when their personal budgetary situation would improve. He wrote, “If the animal spirits are dimmed and spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.” And though Keynes’ General Theory of Employment, Interest and Money came out in 1936 in response to the non-pandemic but still extraordinary economic foibles of its time, it is these insights on human behavior and psychology that have made his work so pervasive and applicable even in times like our own. The peoples’ outlook has to be a positive one and government is the only institution that can provide both the hope and support that the economy will need to improve.

Survival, Not Stimulus

The goal of the Phase 3 legislation is to survive. Send out some cash to help get you through a week or two, massively expand unemployment insurance in both its length and magnitude (the bill provides nearly 100% wage replacement for the average worker, which some might argue is the most important part of the law), freeze federal student loan payments until October, and provide loans to small businesses that will not cripple them for months once the economy rebounds. And it does many of these things very well. But if the goal is to do more than just survive and in fact prevent what could become the worst recession of our lifetimes from getting worse, this will not do the job. There are already voices calling for more nuanced and specific ways to trigger direct economic activity like online-only purchase vouchers, provisions for further payments if the crisis lasts longer than a month, and the digitization of or creating contingencies for essential services like education, mental health, and even elections.

Some of these items may come in a Phase 4 bill, but given Congress’ deteriorating ability to convene, the Senate’s announcement that it will not return until April 20, and the House’s indefinite recess, by the time such a bill even gets moving it will likely be overdue. This brings us back to what we can do now and what those Americans who are still employed and collecting a paycheck but will also be receiving rebates can do. If you really want to help, do not feel guilty about spending it: buy goods online for delivery, support local restaurants even if you can’t go to them by buying gift cards, subscribe to online fitness courses or support artists by buying digital media. Your spending will have a multiplicative effect on the economy to a larger degree than its surface value, and even spending it on something you may think is frivolous or unessential given all that is at stake can have positive effects for those who may need a source of income right now more than you do. Stay safe, take care of yourself, take care of those near you, stay inside to the degree you can, and if you want to buy that new album, that fancy new blender, or a new board game to help get you through these times — don’t feel guilty about it. You have an opportunity to help out a lot of people by helping yourself.

Christine Lagarde is a Good Pick to Run the ECB, and Mark Carney Should Get Her Current Job

Christine Lagarde is to head the European Central Bank


In the last few weeks, a consensus finally emerged over who will head perhaps the second-most-important financial institution in the world, the European Central Bank. Though her name was not prominent in the list of initial candidates for the job, after some lengthy negotiating and horse-trading between French President Emmanuel Macron and German Chancellor Angela Merkel, the leading forces in European politics settled on Christine Lagarde as their choice for the ECB presidency. The French Lagarde, currently head of the International Monetary Fund, is a unique but deeply-qualified choice to head the ECB, and will become the first woman to helm the institution on November 1 of this year.

Lagarde is a major name and player in international economics, despite having – in an odd similarity to America’s central bank chair, Jerome Powell – no traditional or technical economics schooling, instead bringing a legal background to the central bank. Nonetheless, she served as France’s Minister of Commerce; Minister of Agriculture; and Minister of the Economy, Finance, and Industry before being named IMF director in 2011. As IMF director, she presided over much of the extended IMF bailout for Greece during their sovereign debt crisis – an already rocky situation that was further complicated by the need to work in tandem with European institutions to handle the crisis. This supranational approach — which required delicate negotiation and consensus-building between the austere European North, international backers, and a debt-laden Greece — marks exactly the kind of leadership that is necessary as president of the ECB. In this episode, during which Greece became the first developed country to fail to repay an IMF loan in time, Lagarde was forced to buck pressure from key creditors, most notably Germany, and displayed the independence needed from a central banker in a Europe that is currently so politically and economically sensitive. 

Lagarde lacks a scholarly economic background and technocratic experience helming a monetary policy body, which makes her unique for a central bank head. This is unfortunate but does not disqualify her, if only because she has acted as a major figure in international economics for nearly a decade and should still bring credibility to the bank’s independence and stability. She is largely expected to carry on the policies of the Italian Mario Draghi, who has served as the bank’s president since 2011 and worked extensively alongside the IMF and European leaders to deal with the fallout of the Greek sovereign debt crisis and the extended Eurozone crisis. Draghi’s tenure has been marked by bold and proactive monetary management of the Eurozone that owes much to his academic, political, practical, and technical understanding of economics. While there is no doubt that Lagarde has political and practical experience in economic management, she would be well advised to lean on the ECB’s executive board and on the governors of the European countries’ national central banks for the technical economic analysis that made Draghi’s term so effective. If she can manage to work closely with Phillip Lane, the chief economist of the ECB, and rely on other technocrats at the bank, her political and supranational leadership will make for a strong tenure, and she will be prepared to whether the storms Europe is sure to face in the next eight years.

But who should take her current job?


Lagarde’s track record at the IMF has covered two major sagas in the fund’s history: the Greek crisis and the Argentinian bail-out, the results of the latter of which remain to be seen.1And, as the largest loan in the history of the IMF, will be a major validator for the successes (or failures) of the institution and of Lagarde’s leadership. Maintaining the continuation of the Argentinian program will require navigating through tricky waters there, soon to get trickier if Argentina’s current president, Mauricio Macri (who has been willing to work with the IMF and impose reforms needed to straighten out the domestic peso), loses reelection to Alberto Fernández in October.2Alberto Fernández’s running mate is Cristina Fernández de Kirchner, Macri’s predecessor, whose policies, along with those of her predecessor (and husband) Nestor Kirchner, are to blame for many of Argentina’s current economic ailments. Other than Argentina, the IMF faces some daunting challenges to come: Turkey is undergoing its own rapidly deteriorating currency crisis, with the lira down over 30% against the dollar since the start of 2018 (though Turkey’s President Recep Tayyip Erdogan currently seems unlikely to seek IMF aide); resistance from the United States to raising IMF members’ quotas (financial commitments which also translate to votes within the institution) which has required the IMF itself to rely on borrowing to fund its loans; and a new loan to the persistently reform-hesitant Pakistan (it is now on its 13th IMF program in the last 30 years). Lagarde’s steady hand and ability to assuage concerns across the spectrum of contributors, while boldly embracing new goals such as income inequality and climate change, will be missed, and leaves the IMF in desperate need of a strong successor.

Due to a long-standing (despite recent hesitation with David Malpass’ nomination and subsequent approval to head the World Bank, what with him being nominated by acclaimed anti-internationalist Donald Trump) understanding between the United States and Europe wherein America selects the World Bank president and Europe selects the IMF Director, there is one European name that stands out above the others as the most qualified (and likely) choice to replace Lagarde. That is Mark Carney, the current Governor of the Bank of England, also formerly the Governor of the Bank of Canada. A British, Canadian, and Irish citizen with a wealth of experience guiding Canada through the financial crisis (he boldly slashed rates in 2008, even while the ECB raised them), Carney was later named to the Bank of England, where he has been an avid realist about the economic threats Brexit will pose on the United Kingdom.  He’s worked diligently to guide a drop in the pound since the Brexit referendum, steer through fears of currency and trade-induced inflation, and attempted to provide forward guidance on the implications of Brexit’s uncertainty. His background also includes a lengthy stint as chair of the international Financial Stability Board, serving within the Bank of International Settlements, and work for Goldman Sachs on South African bond markets and on the Russian financial crisis of 1998. 

Carney (and his Irish citizenship) will no doubt garner him support within  “The Hanseatic League”, a group of Northern EU states that were unable to secure any of the big EU jobs, as they may feel they’re due some representation in international institutions. His cross-Atlantic experience, enviable resume, and internationally-renowned record despite his ostensibly domestic roles should more than make up for whatever he lacks in worldwide institutional management experience.

This is to say, Carney is a highly technically proficient central banker, which makes him a nice complement to Christine Lagarde. One will move from a key international role to a technocratic central bank, while the other might move from a technocratic central bank to a key international role. Both will be trading out of their traditional comfort zones, but in an era soon to be marked by new and increasingly interconnected global economic conditions, their experience and disparate backgrounds may be immensely useful when it comes to working together to build a cross-Europe and global consensus, and finding new solutions to the next economic crises they each may face.

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Assuming the incumbent president runs for reelection, roughly every eight years there is an election in the United States that pits an incumbent president against the other party. In the upcoming 2020 election, that other party will be the Democrats, who are seeking to unseat President Donald Trump. Donald Trump is a historically unpopular president and the economy may be lessthanstellar come 2020, two factors that should indicate a competitive race. But there’s a problem – there could be around 15-20 candidates competing for the Democratic nomination to run against the incumbent president.1For the sake of this exercise, we are ignoring Bill Weld’s Republican primary challenge against Donald Trump, which seems unlikely to turn into much. An incumbent president has not lost renomination since Chester A. Arthur lost to James G. Blaine in 1884, but incumbent presidents have faced significant primary challenges that may have lead to their downfall, which I’ll discuss later.

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