Neil. Thanks for covering this important topic. In so many human endeavors, the disappointment of a loss is felt more strongly than the joy of a win. Two of my colleagues (Matt Topley and Glenn Freed, PhD) write about the phenomenon of loss aversion frequently in behavioral economics. Hopefully policy makers won't succumb to "anchoring" and "the fallacy of breakeven"--two other common behavioral finance traps.
For more...
Investing Is a Psychology Game, Not an IQ Game
https://matttopley.com/wp-content/uploads/2018/02/Investing-is-a-Psychol...
and
Is Investor Psychology Shifting?
http://www.cegworldwide.com/resources/expert-team/079-ei-ear-glenn-freed...
The dynamics of loss aversion are indeed real, as Danny Kahneman and Amos Tversky demonstrated many times over.
Is it possible that the psychology of loss aversion might also be an at play for natural born Americans who perceive their culture to be under attack –– for them and their heirs –– and turn to Trump to stop the losses?
No doubt there are numerous nuances at play in the intersection of human psychology, economics and politics, but activists of all stripes would be wise to consult Kahneman and Tversky's insights into the quirky human mind, which does not behave reasonably even as it does its best to use the tools of rationality.
Loss aversion can tip the scales making a good bet seem like a bad one because the pain of loss does not seem worth the risk of statistically preferential course of action.
1
So then, is "loss aversion" [op cit] psychology, the glue that binds Donald Trump's supporters together?
Loss of one's essential self ["I **am** a coal miner/steel worker/blue-collar professional”] is in my opinion, just as devastating as say, the loss of one's spouse, or even the loss of one's life.
So why not cling tenaciously to a "savior," who promises to staunch the flow of life's essential well being, in any time of trouble? I would. "Salvation," is by far, the strongest incentive to act in accordance with any one's self interest.
2
The weakness in Trump's perception of everything is his desire to win at everything, no matter the means or the consequences. This has to be a reflection of his upbringing where only the dollar and personal victory counted. We know his record at Wharton school was miserable, not qualifying for a degree. His transcript has a notation indicating"special circumstances" allowing for a diploma (Thanks Dad) He has failed to grasp that international affairs work on the premise that everyone gains and there are no winners or losers. This man has proven himself unfit to preside.
5
If I put lunch on my credit card, did I get a free lunch? Of course not. The so-called tax cut is being put on the nation's credit card. It's a transfer of wealth from future generations. It's fiscally and morally bankrupt. This is perhaps why so many people oppose it. #MorallyBankrupt
5
The by now shop worn theory of loss aversion seems a pretty lousy explanation for dumb behaviour on a large scale. Garden variety laziness and lack of curiosity on the other hand are truly lamentable human conditions that badly deserve closer study. Maybe Mr Irwin is suffering loss aversion over the possible loss of loss aversion as an explanation for everything and that's why he isn't seeing the bigger picture.
@Leigh
Please read Michael Lewis's book on Hahneman and Tversky, "The Undoing Project."
These guys did detailed experiments on loss aversion, among others, and on average loss aversion greatly affected people's decision making.
Even Hahneman and Tversky made dumb decisions when relying on their immediate reactions if faced with a complex decision.
And they laughed their heads off at their foolishness but were also wise enough to admit their human failings.
1
The tax break was not primarily for citizens, as far as I understand it?
The largest amount of it was given to those who are people too, and the so-called people behind them - an in the larger picture - congress- and senate people with their incentives.
Not to mention the whitehousers.
If you look in the last history of globalization - last few decades, the ones that were most for it, now are the very ones that are more against it, because. Just because. (of electorates intimidated by some not-existing forces of trade).
The groper-in-chief should really shut up, since his wealth has largely relied on cheap illegal workers, globalization, but it seems many, him mostly, have forgotten that.
Oh, and I understand he groped the Russian "president" pretty hard yesterday.
No one saw that coming, at least so openly. Which is now the new definition of irony I would think.
"There will be peace in our lifetime", one guy told Europa some 80 ys ago.
I feel like the wheel has gone full 360, and a new, much more stupid guy even, is saying the same here.
1
There is no such thing as free trade.
I'm no economic or political genius like Trump professes to be, but making healthcare less affordable, gutting the State Department, EPA, FCC, and the consumer financial regulatory agencies , and appointing family members and third rate hacks to run our country can't be good.
5
Loss aversion also explains the problems in western politics right now and the rise of the right wing (as well as the anti-globalism on the left). As more countries, and workers, become part of the global economy the living conditions in developing countries will rise, as will wages and salaries. In the meantime the living conditions and wages and salaries in the already developed countries will decline - until both are in balance at some theoretical equilibrium. For developing countries and their people this is a positive. For developed countries and their workers loss aversion kicks in to make this seem a complete disaster. Globalisation therefore faces a serious problem - itself. As far as I am aware no country, politician, or world body has addressed this problem. And it seems to me that the only way to really address it is to include minimum wage conditions as a key component of international trade deals and as a key condition applying to businesses operating internationally. the problem with that? The USA has been the font of anti-worker policy and would vehemently oppose such international worker protections (even though it would shield American workers from the worst fallout of globalisation). This combination of factors, in my view, explain why the USA has been the hardest hit by the effects of globalisation and also why the resentment and political fallout has been worst in the USA.
11
Re: "Consider, for example, a worker in a B.M.W. factory in South Carolina who told The Wall Street Journal in 2016 that she was skeptical of international trade because her uncles had lost their jobs at a cotton mill 30 years earlier."
Smart lady
Looking ahead, she realized the same might happen to her, should the car industry follow textiles.
Her fears are not unfounded. Ford is shutting down passenger car production in the US, moving it entirely to low wage countries. The
GM already shifted production of Buick Envision (Picked by USA Today as the third hottest new car of 2017) and C its flagship sedan the Cadillac CT6 production entirely to China. As it did with its advanced research (Urban transport, self driving cars, hybrids)
It's just business: GM sold more cars in China in 2017 than in the US.
BMW is a bit more old fashioned, caring more about workers (as the Germans are wont to do) then GM but the business decision would be to follow GM.
I.e. as GM, manufacture its prestige cars entirely in China, and ship them back to the US
3
But that same international trade is what brought her the job at the BMW plant- that plant would not be in the US if not for international trade.
So maybe the added assumptions and considerations you have ascribed to her are correct- who among us can just assume that the industry we work in will provide ample work at good pay for the entirety of our working lives without any bumps?
But you’re also missing the inherent contradiction in her point of view- she sees the loss of her uncles jobs 30 years ago but but the related growth that led to her own job opportunity.
It’s also smart to recognize that reality.
1
@Woof: Nothing lasts forever, especially not under capitalism. The question isn’t how do we keep people in the same jobs and industries forever. It’s how do we organize collectively for change so that working people don’t bear the brunt while capital flits away to the next big thing.
2
A central agency in every country should decide what to buy and what to sell. The agency should keep a balance so that no one accumulate debt. Rich countries should give grants or aid to the poor countries to help in buying if they do not have much to sell.Free trade is not always a good idea as it is also misused .
I've remember reading about this when I was getting my MBA years ago. I agree up to a point. Winning and loosing are outcomes evaluated in risk management. If risk aversion was so powerful in predicting out behavior we would not have these massive contractions that keep on happening over the years.
1
@Mark
Risk management and loss aversion are not the same thing. Risk aversion would conclude placing the world’s largest economy in the hands of someone 6 times bankrupt is not a good idea. Loss aversion is what will happen when the 2018 soybean contracts open 40% lower than the 2017 contracts closed at.
5
There is more to the tax cut complaints. The fact that the 4.8% of taxpayers who were hurt by the SALT limitation were ALL in blue states was no accident was it? No.
It was economic war waged by the Red states against the blue: a new modern low in our democracy IMHO.
22
Democracy? Is that what it’s called?
1
As I recall, Mr. Irwin recently wrote a column about the economy being so wonderful he'd run out of good adjectives to describe it. Of course, those in the real workaday world understand that the majority of jobs being created are poorly paid and/or part-time without benefits. Garbage jobs with no future. Better than no jobs at all but hardly a cause for for unrestrained optimism.
In this current column, he indicates that the recent tax cut was actually beneficial to the majority of citizens & that only a small number are objecting noisily. Mr. Irwin also expresses cynicism about the increased support for the ACA. Mr. Irwin evidently does not have to worry about paying for his health insurance nor does he seem concerned about developing a "preexisting condition". His fellow Republicans are working hard to gut the ACA provision that prevents insurance companies from refusing coverage to the enormous number of Americans who have "preexisting conditions". You know, stuff like pregnancy, childhood cancer, arthritis, heart disease, diabetes. As I said, Mr. Irwin does not live in the same world the rest of us do, so of course he is breathtakingly clueless. Or perhaps he is simply indifferent to everyone else , a trait he shares with his fellow Republicans.
29
Well I certainly hope you are right, Mr. Irwin, and those sectors hurt by tariffs fight back harder than those benefiting from them.
Although there have been costs, the benefits of free trade and "globalization" have vastly outweigh them. And those benefiting from free trade vastly outnumber the losers. While we should attempt to mitigate the costs to those few, reversing course and returning to 18th century approaches is not the solution.
4
Orthodox captalist economists tend t steer theory and analysis in the direction of what they posit as the rationality of profit maximization, "highest and best use", and other forms of seeking gains in income and wealth. But those of us who have worked in the world of development economics, subsistence-oriented communities, and the world of poverty know loss aversion is a core principle of survival. It is not that losing $20 is psychologically more painful than winning $20 is pleasurable but losing $5 can be devastating while gaining $20 is not only remote but unlikely to make a significant difference in your life. Hence risk avoidance guides decision-making, not profit maximization. Few American economists, managers, or workers face life-threatening devasation if an attempt to maximize gain goes wrong, but subsistence farmersmay face starvation and those who eat tomorrow what they earn today face hunger with even a loss of 1 day's income. Those of us who grocery shop once weekly have the financial resources to lock up 6 days of expenditures in the pantry; much of the world does not have that luxury. As American society sees more of us move jn the direction of extreme economic inequality we are likely to see more Americans move in the direction of loss aversion as the likelihood of gain pales before the probability of overwhelming loss. Offer your stockbroker a 10 percent chance of doubling personal wealth vs. a 90 percent chance of death and I suspect loss aversion wins.
8
Risk aversion explains why entitlements are so difficult to repeal/alter. The lobby, formally organized or not, is too great. Even reorganizing entitlements in a different, but Largely better way, will meet resistance.
Loss aversion is also related to the endowment effect.
3
Corrections to my earlier, typed too fast, post:
If the Trump Organization was being negatively impacted the this trade war, it would NOT be happening. As it is, the Trumps laugh all the way to the bank.
16
There is also the consumer who benefits from trade. How much would a smart-phone cost if it was manufactured entirely in the U.S?
And there's the competition that forces even domestic manufacturers to often improve quality while keeping costs down. How much does the average family benefit from the relatively low cost of autos that last more than twice as long as the cars of my youth?
I always found it amusing when Bernie Sanders would get the young crowd so excited by railing against the type of trade deals that have allowed most people not only to be plugged into the internet but to have it right at their fingertips at a price most can afford.
That said, I'm with Bernie that cheap products can't come at the expense of child labor and excessively cheap labor in other countries- the labor movement needs to be strong and global.
8
Does it account for the lack of understanding of what one stands to gain/lose?
1
Buyers are wary. When our salesman tells world markets they must not trust us, yet do our bidding, they understandable shop elsewhere. The free market is not a concept that Trump understands from his experience in lying, bankruptcies, and activities which would seem criminal to most of the world, even if it was argued to be fake by a faker.
1
We wont know the tax implications until early 2019 when people begin doing their taxes. It's going to be ugly in the blue states where people will be double taxed on their income for decent schools and services.
7
I guess you ran out of ideas for an article. The reason the tax cut is not a big success is because for the vast majority of people it is small potatoes. If the tax cut saves you 1500 a year that is less than 150 dollars a month. Gas goes up and you spend 50 dollars a month more, interest rates go up you lose 10 dollars more, rent goes up and it's all gone. However if you a billionaire or corporation the savings is significant. But who is going to pay for 1.5 trillion extra debt? Oh, now we're broke I guess we reduce social security by 300 a month. Loss aversion no, just getting ripped off.
31
@dave
The extra debt can be absorbed by inflation through creating more money (printing bills and making loans without reserves).
@dave
You're actually agreeing with Neil Irwin re the tax cut being small potatoes inasmuch the gains from the tax cut are nothing to shout about but the loss of Obamacare/health insurance is.
You raise a good point about leaders not stopping to think about the effects of globalization except for two key errors: 1) many European leaders (Nordics, Germany) thought about and planned for it, and 2) we oh-so-elite US liberals have known this since the 1980s, but trickle-down, dis-education, and fear-mongering has been much more effective propaganda than “making globalization work means sharing the wealth.”
4
Does this matter? In four months we will have a newly elected congress that may impeach Trump. And in two years we may have a new president that can with a single E.O. overturn every policy under Trump's Administration...
1
@Robert. Here's a question I would never have asked 2 years ago. What makes you so certain there is going to be a Presidential election in 2020?
8
If the Trump Organization was being negatively impacted the this trade war, it would be happening. As it is, they laugh all the way to the bank.
Apply this to environmental regulation and you’ll understand the persistence of the Koch brothers, their collaborators and their minions.
6
The hard working American farmers that fell for the con (don't feel bad ! he's a really, really good con man) and voted for this serial bankrupt (six (6) bankruptcies (!)) ) will experience true loss as a result of DJT's kindergarten attempts at global trade- their crops will rot in silos.
My guess is such "winning" will not be OK.
Hate and resentment, which DJT generates in spades, can't be put on the table, or brought to the bank, and it sure won't cure your angina.
Note to base - you have an opportunity to cut you 'friend' Donald off at the knees in November.
When you pull that lever, put the R and D aside and ask yourself what has he really done for you, and to you.
11
In the last election, people voted selfishly for tax theft. judges, and out of tribe. That's it. (leaving Russian interference aside)
Now people are seeing that the tax bonanza they thought they would be getting is meager and will sunset (loss), will get their judges, but at further cost to liberty (loss) and realize that voting for tribe has made the rest of the world shun the U.S. with devastating consequences. (more loss)
Perhaps, those that did vote and have voted for some time republican have lost enough (voting against themselves) that they will now vote for a Democrat.
(gain)
5
In other words, we have taken our democracy for granted. Trump is a wake-up call. He helped many people to realize how Hitler got power and started destroying the civilized world. We, as a nation, may have to suffer more loss in our democratic order and freedom before taking action to end his presidency.
9
The column is a maze of contradictory comments, without coherence. If loss aversion was shaping reactions to the tax bill then it should have overwhelming support as only a small proportion of tax payers actually lost something!
The reality, though, is that most Americans realize full well that they were given peanuts while the rich and corporate elites made out like bandits! It's the disproportionate benefits and unfairness that’s driving reactions.
Also, as to Trump's trade wars, the discussion was focused. A clear point is that as other countries impose targeted tariffs that hurt export businesses in Republican-Trump strongholds, his supporters will find their hurt increasing. They will face very real losses — of jobs, of income, of security, especially as the social safety net is getting eviscerated that could have helped cushion their losses. Trump’s goi f to wake up to discover that a substantial portion of his base has gotten tired of his false promises and is quite averse to losing their jobs and their communities!
1
The Republicans under Trump have weaponized risk aversion. Their fundamental appeal to voters is that in exchange for larcenous tax cuts for the rich, they will make sure that the only "losers" are the poor and the middle class. It's a lie, of course, but it works wonderfully well at the voting booth. The reasoning goes like this: If I vote Republican, no one will take away my income or way of life, especially to redistribute my hard-earned gains to lowlifes who don't deserve it.
Put another way, Republican propaganda and political speak tells people that they will win from policies like starting trade wars and getting rid of Obamacare, obscuring the fact that they actually are losing.
13
The great 19th century Yale football player Pudge Heffelfinger wrote many decades after he last played, that " ... I find the games you lose are the ones you can't forget. Victories fade but defeats bite their way into your heart and stick there like gum to the floor." American trade under Trump is now gum to the floor. Beat Harvard.
5
Here's three helpful words: Stop Attacking Canada.
It's beyond ridiculous that the US is attacking a part of itself - because that's what the North American economy is in 2018: fully integrated.
Stop it.
8
You didn't mention that a huge tax cut like that translates into losses of services. Those are losses people fight for.
5
Loss Aversion may be "a thing," but it doesn't explain why some Americans appear to obsess over all imagined losses, while others do a tiny bit of calculation and figure out what's actually happening. Unlike Trump's followers, the rest of us understand that Trump's tariffs mean we pay much more for everything, and Trump's tax cuts mean we lose all the money we invested in things like the Social Security Trust fund.
Loss Aversion doesn't really apply as it has been already shown that Trump voters are motivated by bigotry not economics.
Researchers Fowler, Medenica, and Cohen published a study based on surveys of the 41 percent of white millennials who voted for Trump. Contrary to Republican narratives they "were not in more economically precarious situations than non-Trump voters." Nearly 90 percent were employed...and they were 14 percent less likely to be low income than white voters who did not support Trump." Employment and income were unrelated to their "sense of white vulnerability."
So what was? Racial and Ethnic resentment.
"Even when controlling for partisanship, ideology, region and a host of other factors, white millennials fit Michael Tesler's analysis...economic anxiety isn't driving racial resentment; rather, racial resentment is driving economic anxiety. We found, as he has in a larger population, that racial resentment is the biggest predictor of white vulnerability...Economic variables like education, income and employment made a negligible difference."
4
The behavioural science is sound with regard to trade: A fight for survival is always more dramatic than a search for increased prosperity.
However, no fight for survival can defeat technological, demographic and labour trends; and this is precisely what Trump doesn't understand (or does understand but chooses to ignore in a search for votes).
The U.S. has outsourced manufacturing over the years, so U.S. manufacturers must now compete on an uneven playing field, one that has simply been allowed to deteriorate instead of being modified and improved. What chance do workers have, working with obsolete equipment in obsolescent industries sacrificed for cheaper and better quality imports?
So, yes, the trade war is futile, because the U.S. is fighting a war it lost long ago. It should be spending its resources on its own equivalent of the $ 8 trillion Belt and Road plan. There's still time left, but a once dynamic nation has sacrificed its own future to the interests of lobbies.
13
Fully agree with this article - loss aversion is a simple prism within which all sorts of voter preferences can be understood. But specifically with regards to trade I don't think it's the only bias that's involved. Not only are the losses from trade felt more keenly than the benefits (loss aversion) but I would further argue that the losses from trade are more salient than the gains. Essentially the "losers" in a trade agreement are more obvious than the "winners."
Suppose Sue loses her job in an auto plant following Nafta, but John gains a customer service job that was more indirectly made possible by Nafta. And both Sue and John see their purchasing power increase of prices of goods fall. Overall, you could argue there was a net gain to the system, but Sue is far more likely to blame trade for her lost job than John is to credit trade and neither are terribly likely to note the drop in prices as due to trade.
Note that the above is not meant to be a specific defense of Nafta. Rather it is an argument that no matter what the merits and demerits of a trade deal, the demerits will be both more obvious and more keenly felt and the trade deal will subsequently be undervalued by the voting public.
7
One flaw in applying this concept to the tax cuts is that not all of us react out of self interest. I’d rather have a solvent government that addresses environmental, social and other communal needs than a few more dollars in pocket.
40
I agree with you in part. However, I doubt that the average American can see beyond the contents of their pocket to the more complex issues of how government uses the money. The Less Government argument tends to win out over the idea that our pooled resources help all. For many highways just happen, water cleans itself, and Congress is there so unemployed lawyers have jobs.
3
Aren’t tariffs that increase the cost American consumers will pay taxes? In that case, any $60 increase we supposedly gained will disappear quickly.
13
Trump’s fundamental governing philosophy is that others’ loss IS a win. And at the end of the day his loyalty is solely to himself, and everyone is a potential candidate for getting thrown under the bus.
I’m not sure how rational we can be about loss and gain with an administration driven by such base drives.
8
@Mark Holmes
You have defined 'malignant narcissism'. where it is not enough for a person to win, somebody else had to lose.
4
So behavioral economics, and behavioral psychology in general, describe all the irrational components inherent in the way we think and act, from loss aversion, to confirmation bias, availability bias, negativity bias, and just plain inability to deal with quantification, especially when is comes to probability and risk. And given that motivated external agents, from commercial marketers to, well, political marketers, can use expert understanding of these cognitive "flaws" against us, I wonder why we expect rational outcomes from people, whether in the voting booth or the marketplace.
6
@Bob Krantz: Whether people are rational or not, the information about rational versus irrational behavior can be put to use. Those who favor rationality may want to figure out how to use it most effectively. The forces of irrationality have been doing a pretty good job of it so far.
2
Trump may or may not consciously understand this, but his negotiations seem to factor it in. It seems more important to Trump that the other side loses, than that his side wins. Win-lose is ideal, but he has demonstrated preference of lose-lose over win-in.
This may happen in situations where he realizes that he is better able to absorb losses than the "opponent". And of course, when he is using other people's money (e.g., his corporate bankruptcies, and the current trade wars), it is easier for him.
8
Uhm no ... the trade policy example isn’t loss aversion. Loss aversion is a phenomenon that applies at the margin (or mathematically speaking depends on the derivative): the gain or loss of $20 for, say, a well paid professional is a good example. It doesn’t apply with large change (if it did nobody would play the lottery after all). And having the largest employer in your town shut down, and you losing your job is a very large change.
6
@Christian Haesemeyer: Loss aversion in a technical sense may be defined more narrowly than it is used in this article, but Irwin's point about the political phenomenon seems to hold nevertheless. And it seems important.
2
In the unedited version of the musical "1776," Conservative John Dickinson of Pennsylvania says it well: "Most men with nothing would rather protect the possibility of becoming rich than face the reality of being poor."
Still true. That's why #winning, or perhaps "winning," played well in the 2016 election.
41
Two financial experts yesterday on C-Span predicted Trump's explosive expansion of Tariffs (he's just getting started) could permanently END access to a number of our world markets. These experts also contend these tariffs are illegal without consent of Congress because they don't meet ANY standard
of a national security threat, a president alone can then enact.
I'm no finance expert. But I submit if our farmers can't sell their soy beans by Harvest time in September and they're left to rot in the fields it will be the onset of financial hurt in the Mid West supply chains in time for the November Elections.
The Chinese curse arises "May you live in interesting times"
31
The tax cuts overwhelmingly benefited the rich. Republicans cheered that ordinary Americans works see a $76 tax cut, which is chump change.
This is why Dems should call for a repeal of it and replace it with a $1000 tax cut for each family, which would save nearly $1 trillion.
15
@paul
or put that heavy, fatty gravy that DJT, Ryan and McConnell got for over-stuffed plutocrats towards health care, education and infrastructure
(where's the big infrastructure bill anyway? And where are his TAX RETURNS ?)
2
This is not new. "A bird in hand is worth two in the bush", said Ben Franklin and others for centuries before him. People tend to follow that logic. Of course it all depends on the perceived effort and risk of capturing the two (for yourself, not the other guy) rather than just hanging on to the one you have. And humans are notoriously bad at either of those tasks. Look no further than the inability of so many people to grasp the right answer to the Monty Hall paradox, where Monty offers them the deal, a chance to switch their choice of which door will win them the car not the goat: it's far better to switch (your chance of winning doubles), but most people stubbornly stick with what they already have.
1
I think that the concept of loss aversion is new. "A bird in the hand is worth two in the bush" is an entirely different concept, that it's better to really have one thing than to have a chance at having two things (actually, a chance of having one thing - while you try to catch one bird the other escapes). Similarly, we have long known that a small group which is fanatically for a specific law has a better chance of getting it than a majority mildly against that law has of stopping it.
Loss aversion has an excellent feature: it can be quantified. This is useful for extending its applicability.
4
Most of my career was with that of a fortune 500 US multinational, in the energy complex. I always found Governments can often have impact on any given industry when the matter is domestic. When one participates in world trade coined globalization, politicians and Technocrats have far less chance of having influence. Globalization as example open up vast numbers of low wage jurisdictions. Numerous type jobs were simply exported, economist of course sight consumer advantages at Wal Mart. Then there is always lurking in any trade issue manipulated currencies by governments . In the end dealing from a position of strength during formulation of any treaty is key, as sovereignty will always be a strong factor. Few countries can sustain a reasonable standard of living operating domestically. We are fortunate in that regard.
@Dan Green
Thanks to sound, if imperfect, trade deals. The bull never made a china shop better.
The pessimists among us seem to think that the retaliatory tariffs and duties that other nations place on our exports will result in near instantaneous shifting of their imports to other nations. For example, instead of American soybeans, they will buy Brazilian soybeans. This shows an essential misunderstanding of how economies work, especially agricultural economies.
I suppose, if another nation was keeping farm land fallow and unplanted via a farm subsidy program, the following year, the fields could be planted to expand production. But that is not instantaneous, and to do so, there would need to be ironclad assurances that whatever was to be produced would be bought at pre-determined prices in pre-determined volume. Otherwise, its just too risky and expensive.
Similarly, these trade pessimists assume that whatever we import from China, now subject to US tariffs, will forever raise prices to US consumers. Nonsense. There are numerous foreign suppliers capable of making the kinds of goods we get from China. South Korea, Japan, Vietnam, Thailand, Indonesia. Or horrors, we might even start to supply some of our own demand.
The third fallacy is that a 10% tariff will raise retail prices of tariffed items by 10%, Nonsense. The tariff is imposed on the dockside wholesale bulk value. By the time the item gets onto a retail shelf, the tariff component of the cost could be cut in half or more.
4
Your comments about agriculture aren't entirely correct. For example, when it comes to soybeans, there is already something of a surplus that has been forcing prices down already presumably providing excess that can be bought from places like Brazil. And since China is already importing it from overseas it is relatively easy to switch producers. China also has a history of wanting to own the means of production - by buying farms - and if they decide to accelerate that policy, some of our market could disappear permanently.
On the other hand, when it comes to our agricultural trade with a country like Mexico, it is a lot less flexible, in part because of how stuff like grain is transported - via train on established routes. They would have much less leeway to change suppliers because of the cost of changing freight.
7
@RM: Currently there is a world surplus of soybeans - a lot of soybeans reside in silos. China being willing to (and being forced to) pay more for soybeans will mean that in Brazil and other countries they will sell China soybeans that would have gone to domestic uses. Things have explicitly worked that way for hundreds of years - the British "corn (grain) laws" debates throughout the nineteenth century abound with examples. Similarly, have you not read complaints about third world countries where food is exported for profits rather than used to feed the populace? Such complaints are common. Finally, in agriculture there are well developed FUTURES MARKETS, and soybeans have an especially strong one. Before the internet, radio stations in agricultural areas of the USA had readouts of relevant futures prices several times a day.
12
The numerous foreign goods from other countries would require the same start up as the farm goods. That would not be instantaneous either. Further, the same multinational companies would just shift production to other areas. Profits for those companies would be higher since they could charge the same or a marginally lower price as tariffed goods. The consumer will inevitably lose any trade war.
1
We need to make clear that the perceived losses in trade are related to the global distribution of profits. Which by its very nature is a zero sum game despite its unevenenes (which is what Trump emphasizes). What is distributed is the already produced and realized global surplus. Thus the 1% global average in regards to tariffs often quoted in several articles, which reflects the precise nature of globalization.
In regards to the global distribution between total capital and total labor the latter one always losses as evidenced by the concentration of centralization of capital (eg by the so called inequality) and world wages gravitating towards those of China (and relatively decreasing in the US).
What we are witnessing is the deceleration of global surpluses. For instance both Italy and England have experienced decreases in productivity while Turkey, Brazil, Argentina, and other emerging economies are clearly in trouble. Trump and Brexit are thus signs of this process that accelerated after 2008 despite the last 2 years of illusory gains in the stock market (buybacks and speculative financial operations). China is the exception that confirms the rule.
1
“This paper presents a critique of expected utility theory ... Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration... An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains... Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling.”
Apple and other major transnational corporations use profits for buybacks and investment in financial markets as opposed to investing in productive capital. See NYTimes today on this. They know profits are lower in the productive sector than in the financial one. However, the financial profits depend on the productive ones in the last instance. Overvalued capital tends to return to its gravity center (eg crashes).
The above theory goes against all neoclassical assumptions.
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The article seems to be little bit confusing. On the one hand, the author invokes the idea of 'loss aversion' in terms of ACA matters wherein there is a direct 'physical' effect apart from some mental agony, whereas in trade (purely economic?), the impact is felt more seriously.
If we draw a triangle with economics, social and politics at three corners, then the correct model will be to place 'loss aversion' in the middle of this triangle and there is no way out - shifted sideways. Apart from human psychology (as the author claims), the social impact or rather "reactions" from different social groups matter the MOST...
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The Tax Policy Center data is misleading. Most taxpayers will receive a small decrease in the first year, while the 4+ % high income taxpayers did lose a few deductions. they also received permanent income exclusions, automatic deduction amounts on LLC income, among many examples of benefits. Of course, the significant tax rate rate reductions benefit the wealthy also.
Would that info impact the aversion analysis?
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You have to distinguish loss aversion from risk aversion.
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Two very brief points:
1) Probably the increased debt in corporate capital structures of late means larger exposure to financial losses to be averted. But interest due on this increased debt issued to fund stock buybacks, and often to fund private equity cash dividends to financial institutions, must be made or bankruptcy can result.
2) There has been a general, global movement toward more positive correlation between the world's regional economies. Few regional economies of the world today are negatively correlated enough to offer risk aversion via global diversification, as was once the case. Also, almost 50% of demand or sales for the S&P 500 companies is generated from foreign countries. With this greater dependence by many large firms on global demand and the simultaneous increase in correlation among regional economies, past historical lessons from the imposition of tariffs, and protectionism may be less applicable.
[JJL 07/13/2018 F 12:38p Greenville NC]
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Good article. The perception of the Trump economic team concerning trade is that the U.S. has suffered a long series of losses to Europe, China and others in the form of trade deficits.
Since we are(in the current administration's opinion) already in such a large hole economically, the Trump administration is willing to take a very risky gamble to avoid further losses by raising tariffs.
Given their biased assessment of how easy it is to win trade wars, they underestimate the real risk of their gamble.
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I still say the demagogue Trump is a free trader, otherwise he would bring his and Ivanka's trinket factories back from slave labor countries like India.
Soon, he will end the trade war, gets a few bones from China and the west and declare victory and say he is the greatest president since Lincoln.
If I am wrong, he will certainly create a world wide recession with his obsessed total trade war instead of a fair, reasonable, non onerous tariff on some slave labor countries re to help our rust belt compete.
If this comes, worldwide depression, like Sherman said of the burning of Columbia, S.C., I will say I did not order it, I did not want to see it, but I am not losing any sleep over it.
It is the price we would pay for electing an ego maniac demagogue for President.
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Or to quote Joni Mitchell "Don't it always seem to go that you don't know what you've got till it's gone."
The problem with the western world's headlong rush into globalization is that our leaders never stopped to think of what to do with the inevitable losers--particularly the workers whose middle class lives were uprooted when their companies went overseas chasing cheap labor or when they essentially stopped enforcing our laws against hiring illegal immigrants and at the same refused to reform our immigration policies to reflect current needs thereby establishing an entire caste of easily exploited workers who are not subject to our labor laws.
We are seeing the backlash against these policies. It's name is Donald Trump.
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"It is better to have loved and lost, than to never have loved at all." "The only thing to fear is fear itself". "You have to be in the game to win it". "He who hesitates is lost" versus "Look before you leap". Bottom line: we need to move forward despite the risk of painful failure. "The sun is coming out tomorrow, bet your bottom dollar". :-)
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One issue I would like to see The Upshot cover, is the massive amount of US debt that China owns.
The ups and downs re both countries if China starts to cash them in.
I would think it would hurt America much more but would like to see an analysis.
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@Paul
That is the most exaggerated thing ever. First, because they only own about 5% of our debt and we could easily sell that much to other parties at slightly higher interest rates. Second, because if they started getting rid of our debt their currency would appreciate hurting their export reliant economy probably more than the tariffs.
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China holds the top spot among our foreign creditors at $1.17 trillion, followed by Japan, at $1.07 trillion as of January 2018.
If you believe that China could demand immediate re-payment of that $1.17 trillion dollars, which the US would then sell (to whom exactly?) for 'slightly higher interest rates' and that this would have no impact on America's financial stability, you are, I think, quite wrong.
But then perhaps your math works very differently from the one that I use.
As noted by the Tax policy center and elsewhere, the average or median middle income retiree (like us) gets about $30 a month benefit from the tax cut. The 60% of retirees that rely on social security for a majority of their retirement income got a smaller tax cut. Not near enough to meet increased health insurance and health care costs. Loss aversion indeed.
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Excellent analysis. I only wish that the article had referenced Kahneman and prospect theory by name instead of indirectly via hyperlink (though I do appreciate the link to their original paper).
What the trade war promoters (historically unions) want is a level playing field. Their loss is also tied to a time when American steel was "the best in the world" and is strongly tied to WW2 when America's military was great. So not only is the pain of losing great but is emotionally tied to a desired past state of affairs.
The traditional free traders (Republicans) are largely the winners of globalization (agricultural states) and yet have been unable to stop Trump's actions in Congress. Congress abdicated it's trade role years ago and simply has no power / incentive to take it back. Shamefully that is.
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I don't understand how only 4.8% of households got a tax increase as a result of the recent tax bill, unless you're referring to direct weekly or bi-weekly paychecks. Millions lost the ability to deduct more than $10,000 in real estate taxes. That's a tax increase in my book.
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@Jim Tagley
Because the federal income tax scheme gives credits, deductions, subsidies and lower tax rates.
But only for certain industries, transactions, sources of income, business entity structures, contracts and securities favored by lobbyists who buy legislative and executive obedience. If you have no lobbyist then you are on the tax reform menu instead of being a diner.
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@Jim Tagley 4.8% of American households is more than 6 million households.
@Jim Tagley
Have you seen Trump's tax returns?
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