Tag Archives: Peter Coy

Throwing the baby out with …

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Are our economic problems matters of bad theory or bad practice?

David Ricardo, source: The History of Economic Thought

More than two centuries ago, British economist and Parliament member David Ricardo laid siege to the longstanding notion that nations were better off exporting more than they imported, classical mercantilism. His theory of comparative advantage, instead, became the reigning view. The result: enormous growth in trade and globe-wide enrichment.

Now, some on the right want to scrap that theory. Donald J. Trump would bludgeon trade with tariffs and attempt to boost domestic production by pushing other countries to set up factories in the U.S. And well-schooled critics such as Oren Cass would toss out the Ricardo model altogether.

“The theory works great in the classroom, but in reality it wasn’t just T-shirts that ended up going overseas,” Cass says of the notion that countries should specialize in what they do best, thus enriching us all. “The most sophisticated industries have left too. The United States ran consistent trade surpluses in advanced technology products until China joined the World Trade Organization. In 2002, that surplus flipped to a deficit that in 2023 exceeded $200 billion, with the nation importing more than $3 of advanced tech products for every $2 it exported.”

Let’s kill the old order and bring in the new, as the French once said and he seems to be saying. Then we’ll wind up with, what, a new Napoleon? Perhaps more Napoleons (or Trumps) across the globe?

Yes, China – practicing a form of mercantilism – has enriched itself enormously since the 1980s. Its exports have far exceeded its imports, as it has bested much of the world, first in low-price production and, more recently, in many areas of high-tech. There is good reason now that Elon Musk wants to build an AI center in the country — the country’s brainpower is immense.

And it’s clear that much of U.S. manufacturing has suffered as production of everything from Cass’s T-shirts to cars has grown overseas and in neighboring Mexico and Canada. Jobs in the sector peaked at 19.6 million in mid-1979. They now stand at below 12.9 million. (Is it any wonder that Trump, slamming global trade, won so many votes in dead-factory communities, even if his tariffs are likely to deal another blow to such supporters?)

Source: The Economist

So, comparative advantage brings curses as well as blessings. Well, duh.

Lots of stuff is cheaper worldwide – and there is much more of it – but there’s no doubt that some countries and sectors pay the cost. Indeed, for all the benefits Chinese mercantilism has brought much of the country – and for all the impoverished Chinese villagers who have been helped – China has penalized millions of its citizens by failing to develop a more import-welcoming consumer economy. Yes, the Chinese approach has eliminated extreme poverty, but per capita GDP there at less than $13,000 remains a far cry from the U.S. level of $86,600. China has also developed exceptional income inequality, even as relative poverty hasn’t disappeared.

Cass, in his early 40s, may not recall that we’ve seen parts of this mercantilist movie before. Free-trade advocate Clayton Yeutter, a Republican who opened world markets for Presidents Reagan and Bush, contended with Japanese trade barriers in the 1980s and ‘90s. Protectionism was rife in the U.S. at the time and the great fear was that Japanese tech would hobble us (and well-heeled Japanese would buy up all our real estate). In fact, our trade deficit with Japan has shrunk and Silicon Valley seems to be keeping us pretty competitive in tech.

So, should the U.S. follow the Chinese model? Should it make more T-shirts, as well as cars, solar panels, etc? Would making iPhones in California (or Michigan) really help us overall? And will the self-styled “tariff man’s” threatened 25 percent tariffs on Canada and Mexico help us and them?

To be sure, Cass has a point that the real-world operation of comparative advantage has problems. But that’s because governments, such as that of China (or as that of tariff-happy Trump) don’t want to let free trade flourish. Instead, they meddle with it, creating all sorts of imbalances. Recall the huge farmer bailouts of Trump’s first term, a consequence of his trade war battles.

But does meddling mean that the theory is off? Does it not, in fact, make the theory of frictionless trade even more useful, more compelling? Is it not the proof that we’re better off overall when comparative advantage is our north star and that most of us suffer when it’s tampered with? Indeed, the problem seems to be less one of economics and more one of politics.

Peter Coy, Source: LinkedIn

Yes, such trade brings costs – often searing human ones — to high production-cost countries, as they see competitors rise. A friend, Peter Coy of The New York Times, bemoans the withering of trade adjustment assistance in the U.S. , which may in part account for the Trumpian successes. We need a robust system of such aid, he argues, because it “compensates workers, firms, farmers and communities for damages related to trade, such as job losses caused by offshoring or competition from cheap imports. Workers, for example, get supplemental unemployment insurance benefits, job training and help with job search and relocation.”

One could argue that such aid to those displaced by trade is meddling of a different sort. But is aid to one’s citizens in need not one of the more useful functions of government? Has that not been a value since at least the New Deal, the program that saved American capitalism?

Indeed, capitalism by its nature creates winners and losers. Outdated technology goes the way of the buggy whip. That’s the nature of a competitive and innovative system in which all players can leap ahead of others, given capital and brainpower. And countries, including the U.S., need to work hard to keep up.

In his New York Times opinion piece, “What Economists Could Learn From George Costanza,” Cass argues that rigidity in economic circles is what is keeping theorists from developing a successor to Ricardo’s views. “Few things are harder to change than the minds of experts who have staked their reputations on a particular theory,” he holds. And it’s no doubt true, as my old economics prof observed, that economics advances from funeral to funeral.

Still, Ricardo’s revolutionary idea has endured for good reason. One has only to look around the globe and see how billions have been helped by trade to find proof of that. For all his criticisms, Cass doesn’t seem to be offering an alternative explanation for such successes. Perhaps that will come in a forthcoming commentary. Or, perhaps there is none.

Luddites revisited — attacking high-frequency traders, speculators and assorted other market “vipers”

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Andrew Jackson, the country’s seventh president, was famous for railing against the financiers of the early 1800s. They speculated on “the breadstuffs of the country,” he warned. “Should I let you go on, you will ruin 50,000 families and that will be my sin! You are a den of vipers and thieves. I intend to rout you out and by the eternal God, I will rout you out.”

The quote, a favorite of bloggers who fret about plots to establish a new world order and such, would be at home today in the superheated arguments over high-frequency trading. The latest diatribe, I’m sad to say, comes from a dear friend and former colleague at Bloomberg Businessweek. Peter Coy writes, “The bigger the financial sector, the more dangerous it becomes.” He bemoans the flood of smart people going into the business, noting that a quarter of Harvard’s brainiacs in the early 2000s were drawn into investment banking and like fields. And he complains about banks “cranking up their trading operations in a way that imperils the financial system once again.”

His indictment, based on the May 6 flash crash, is headlined “What’s the Rush?” And his subhed warns “The American financial system is erratic and voracious, and keeps score in milliseconds. Here’s how to rein in the beast.” Among his prescriptions: a transactions tax of a few cents per $100 to “throw sand into the gears of high-frequency trading,” higher margin and collateral requirements, and steps such as new taxes to reduce corporate debt (on the idea that we’re being assailed by waves of “debt-fueled speculation.”)

Oh, come now, Peter. Let’s dial it down a bit. First, while the Great Recession was in part the fault of Wall Street, it was not a high-frequency phenomenon. Rather, we can blame bad securitization practices, flawed housing policies in Washington, poor market oversight and a raft of other well-documented problems. Superfast trading may have helped stocks crater, but it was not the force that drove them down.

Yes, one must admit that May 6 was not a good day for the high-frequency set. No matter how short-lived, the $800 billion plunge in the value of U.S. stocks that day was worrisome. Stocks such as Accenture slipped to a penny from $40 (before bouncing back) in trading patches as short as eight seconds. Clearly, something was amiss in the superfast computers at the likes of Getco.

But let’s keep a few things in perspective. First, after going haywire the market did correct itself. Prices came back, in most cases rapidly. The Dow lost 1,138.69 points from its high in crazed intraday trading on May 6, but closed just 341.9 points down, and regained all that and then some by May 10. Erratic? No doubt. Voracious. Okay, but when have traders been anything but?

Let’s concede that there’s something bizarre about high-frequency trading. Its relationship to real value in stocks is remote at best. So, too, is its connection to fundamentals such as corporate strategy, earnings power, savvy management. All that good stuff that financial journalists, MBAs and CEOs – and maybe even the odd stockbroker — prize is a few solar systems away from the zippy stock-swapping at Hard Eight Futures, Quantlab Financial and such. Those guys, snapping to the beat of their own algorithms, don’t give a hoot about such things. It’s all numbers, bro.

Let’s concede, too, that the liquidity the HFT pack supposedly brings is an illusion. It is most likely gone when most needed. The simile Peter uses – “like a swimming pool that dries up just as you jump off the high dive” – is apt (hat’s off to his wordsmithing). It’s hard to see just what value the high-freqs bring to anyone but themselves.

But, so what? Speculators, those oft-reviled folks who put the zing in stock markets, have always been in the game for the gamble. They see Wall Street as a massive roulette wheel and believe that any way they can tilt the spin to their favor – legally – is fair play. In an odd way, they are cousins to technical analysts who have long played markets free of the burden of fundamentals. Are we to ban the technical folk because their charts are more like astrology than investment? They, too, are an odd subculture of market players whose powers over stock movements one could decry.

Surely, there needs to be policing to make sure high-freqs don’t misuse the power they have to move markets. They do swap millions of shares in ridiculously short periods of times, all but blind to fundamental values. At times, they account for disturbingly high amounts of volume. If they intentionally – or through glitches – knock stocks down to absurd levels to profiteer in some market-cornering way, they need to be rapped hard for that. Fines, perhaps, or suspensions of trading privileges could be used to rein them in.

But imposing transactions taxes or worse seems like overkill. Such steps would penalize all players for the perfidy of a few. Let’s use the scalpel instead of the meat-axe and target the bad boys, not just the folks looking for an edge of a few milliseconds on the next guy.

By the way, it’s passably ironic that Peter’s employer, Bloomberg, as well as Dow Jones and other data-providers are tripping over themselves to serve up market data ever more quickly to the high-freq bunch. Some go so far as to rent space to traders — at premium prices — so they can house their computers cheek-by-jowl with providers’ machines and save milliseconds of transmission time. What these providers know, just as traders do, is that timely information is still everything in this game.

Every technological advance that changes the playing field makes folks nervous. Luddism is a natural reaction. Moreover, the markets have long been the playground of innovators and, as a consequence, the targets of critics. In 1887 the head of the Chicago Board of Trade forcibly removed telegraph gear from the floor of the CBOT because he couldn’t abide the electronic links to notorious Chicago bucket shops, as recounted by Rutgers historian David Hochfelder. One NYSE broker in 1889 complained that the “indiscriminate distribution of stock quotations to every liquor-saloon and other places has done much to interfere with business.”

We may not like the high-speed folks. We may deride them as little more than turbocharged gamblers, as Rain Man-like idiot savants unfairly using their powers to enrich themselves while adding nothing to the game. But they will be players so long as there’s money to be made. We can take the profit out if they don’t play by the rules (and, by the way, maybe some of those smart Harvard types in finance can cook up better rules to keep market ripples from becoming tsunamis). Let’s not, however, make life onerous for everyone in the process.