Who's Afraid of Foreign Trade?

Both Presidential candidates seem to have their apprehensions. I'm sure the upcoming foreign policy debate will feature the familiar boogie monster of cheap overseas workers, malicious central banks "manipulating" their currencies to boost exports, yadda yadda. I'm going to wait for the debate to debunk the specific claims made. But as a prelude, keep the below graph in mind. Its economic openness (Import+Exports)/GDP run against the total manufacturing index for the United States.

The First Obama-Romney Debate: Watch It Here Live (as far as you know)

Teams with Plans, not Men with Cred

As with any presidential election, the decision between President Obama and Mitt Romney ultimately comes down not to which man is more suited to the office but to what team they will bring in to conduct policy. And the spoils of the general election go to the candidate who convinces the American electorate that their team will deliver them the goods. Obama's message in 2008 that he would make Americans richer with infastructure spending, education support and more progressive taxation trumped John McCain's attempt to run on his military and service credentials. In 2000, Bush's calls to redistribute the budget surplus in the form of tax cuts overcame Gore's message of... okay, bad example.

Americans in 2012 must evaluate the different promises made by the Obama and Romney team, not just the personal gravitas or experience each man may or may not have. We have a rather clear idea of what Obama's plan will entail; thats the benefit of being the incumbant. We can expect continued investments in public infrastructure, an open but cautious stance toward international trade, and perhaps increased spending on scientific research and subsidies for new engery industries. If Obama moves on taxes at all, we can expect him to allow the Bush tax cuts to expire, which would boost top marginal rates slightly. As far as the Federal Reserve, Bernanke and Co. are likely to stay in place, and that crowd seems to be moving in the direction of NGDP targeting, or at least likely to remain sympathetic to accomodative monetary policy as labor and capital markets stay slack. 

We have to distill Team Romney's plan from what he has claimed on the campaign trail, the history of his running mate's plans, and the opinions of his closest economic advisors. From that, we can predict reduced spending on infrastructure, reduced spending on scientific research and alternative energy subsidies, and a combative stance on international trade. In tandem, Romney would slash taxes by reducing capital taxes and marginal tax rates across the spectrum. As far as monetary policy, its widley expected that Romney would replace Bernanke with advisor John Taylor at the first chance. This would mean a change in the stance of monetary policy away from NGDP targeting and expansion and toward a tightening intended to raise the Fed funds rate to the level determined by Taylor's own Taylor Rule. 

As a caveat applied to both teams, I highly doubt either approach will be successful in closing the long-term budget deficit. I say that because despite the posturing, neither side has given a comprehensive or coherent plan for dealing with the driver of those deficits, Medicare.

Observations on Tampa...

A few things I noticed from the RNC, before we get into the DNC this week.

1. There seems to be a definite trend toward protectionsim in the Republican party; both Sen. Rob Portman and Romney made strong allusions toward starting a trade war with China. Its important to remember that the Federal government can't tax or penalize Chinese producers, only American consumers.

2. It remains unclear what exactly the Obama Administration has done to supposedly hurt the economy in the eyes of Republicans. The Feds bailed out the auto-industry, which plays well in swing states like Michigan and Ohio. All the money given out to banks in TARP and successive give aways has been paid back with interest. The Bush taxcuts have been extended. Obama lifted the ban on offshore oil drilling put in place by Bush 41. So where is the impetus for this rhetoric about killing business initiative or driving gas prices higher?

Meanwhile, Obamacare doesn't go into effect until 2014, and the deficits we've run haven't driving up the cost of borrowing for investment; real interest rates, both short-term and long, remain at historic lows.

So at the end of the day, with regard to most Republican complaints, there's no "there" there.

Where does Federal Spending Go?

An illuminating chart I've had packed away that I've been meaning to share. It shows real per-capita Federal spending by sector over time, with interesting implications.

Basically, Federal spending has been steady in all discretiony sectors, while the cost of entitlements has gone through the proverbial roof. And on a positive note, I am at least glad that the national political discourse seems to be centered on this fact and the debate of the Presidential election framed around its  implications. 

Two Shades of Gray, and the Man Who Would be King

A modern art collage.

As the election season continues, we're going to be inundated with arguments from both sides claiming their public finance regimes will lead to faster job growth. But stand by to not hear about the importance of the third man in the room in determining nominal GDP.