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I was in the courtroom for this morning’s argument in Trump v. Hawaii, otherwise known as the “travel ban” case. Recall that this is Travel Ban 3.0, which is the most detailed executive action regarding entry restrictions yet. Indeed, Solicitor General Noel Francisco called it the most detailed immigration proclamation ever (in contrast to earlier ones by President Carter regarding Iranians and President Reagan regarding Cubans).

It’s an odd case: as Neal Katyal, lawyer for Hawaii and the other state and private challengers, put it, if Donald Trump hadn’t made all his various campaign statements and tweets about Muslim bans, “we wouldn’t be here.” In other words, “no president has ever said anything like this.”

In a normal case involving an executive action over national security, no court would ever second-guess the president. But this isn’t a normal case or a typical president, so the Supreme Court struggled mightily over a travel ban that, all sides seem to agree, wouldn’t be a legal controversy if any other president had implemented it. Indeed, the whole course of the litigation would’ve been different if Travel Ban 1.0—the one President Trump signed his first week in office without interagency process or guidance to the line agents who were supposed to implement it, causing chaos at airports—had been skipped and we’d gone straight to the more fully lawyered 2.0. I doubt there would’ve been quite as much judicial resistance and treatment of this president differently from the president.

But that’s a historical counterfactual, so you go to court with the facts you have.

Of course, it’s not that unusual for a court to apply a law to factual circumstances that were never contemplated. Here, the relevant immigration provision gives the executive wide discretion to deny entry to any type of foreigner when citing great national interest—and it’s not hard to square that with other provisions regarding nondiscrimination in granting visas. Courts don’t get to review that kind of determination.

That really should be the end of it, even if one thinks, as I do, that the travel ban doesn’t do much for national security and has a greater symbolic than practical effect. And it should be the end of it regardless whether one think that in his heart of hearts Donald Trump has anti-Muslim animus.

Chief Justice John Roberts will try mightily to cobble together a coalition to make this case go away on jurisdictional or other narrow grounds. Justice Neil Gorsuch seems ready to join him (presumably Justice Clarence Thomas too), while Justice Samuel Alito was clearly with the government on the merits. Justice Elena Kagan was the only one on the left who raised pointed questions of Katyal; given her views on administrative law and the breadth of the immigration statute here, she’s “gettable” for some sort of technical compromise. To do so, the Court would likely have to finesse Sale v. Haitian Centers Council (1993), in which it found claims against immigration-related executive actions to be justiciable (before recognizing the executive’s broad discretion in this area).

Given that weird cases make for bad law, we can only hope that, however the Court rules, no strong precedent is set.

I wrote last month that new regulations and taxes in California’s legalized marijuana regime are likely to result in a situation in which

a few people are going to get rich in the California marijuana industry, and fewer small growers are going to earn a modest but comfortable income. Just one of the many ways that regulation contributes to inequality.

Now the East Bay Express in Oakland offers a further look at the problem:

Ask the people who grow, manufacture, and sell cannabis about the end of prohibition and you’ll hear two stories. One is that legalization is ushering a multibillion-dollar industry into the light. Opportunities are boundless and green-friendly cities like Oakland are going to benefit enormously. There will be thousands of new jobs, millions in new tax revenue, and a drop in crime and incarceration.

But increasingly you’ll hear another story. The state of California and the city of Oakland blew it. The new state and city cannabis regulations are too complicated, permits are too difficult and time consuming to obtain, taxes are too high, and commercial real estate is scarce and expensive. As a result, many longtime cannabis entrepreneurs are either giving up or they’re burrowing back into the underground economy, out of the taxman’s reach, and unfortunately, further away from the social benefits legal pot was supposed to deliver….

Some longtime farmers, daunted by the regulated market’s heavy expenses, taxes, and low-profit predictions, have shrugged and gone back to the black market where they can continue to grow as they always have: illegally but free of hassle from the state’s new pot bureaucrats armed with pocket protectors and clipboards.

Not all the complaints in the two-part investigation are about taxes and overregulation. Some, especially in part 1, are about “loopholes” in the regulations that allow large corporations to get into the marijuana business and about “dramatic changes to Humboldt County’s cannabis culture, which had an almost pagan worship of a plant that created an alternative lifestyle in the misty hills north of the ‘Redwood Curtain.’”

But there’s plenty of evidence that regulations are more burdensome on newer and smaller companies than on large, established companies. Indeed, regulatory processes are oftencaptured” by the affected interest groups. The Wall Street Journal confirmed this just yesterday, reporting that “some of the restrictions [in Europe’s GDPR online privacy regulations] are having an unintended consequence: reinforcing the duopoly of Facebook Inc. and Alphabet Inc.’s Google.”

Several weeks ago, the United States and Korea reached an “agreement in principle” on an amended Korea-US Free Trade Agreement (KORUS FTA). This amendment process was minor enough that the Trump administration believed it could undertake it without having Congress vote on the changes (there will be a consultation with Congress on some tariff changes, as described here). Congress could object, as it does have the ultimate constitutional power over trade, but so far there are no signs that it plans to do so.

In an op-ed on the new KORUS, we described the result as follows: “the KORUS renegotiation looks like a minor tweak to U.S. trade relationships, rather than the wholesale ‘populist’ revolution that is sometimes indicated by Trump’s tweets.” In this blog post, we offer a more detailed assessment of the KORUS changes that have been reported  so far.

However, keep in mind that there is no final text of the amended agreement yet, so our analysis is necessarily a bit tentative. Specific wording can be important to understanding the implications of a provision, and there may be additional items that have not been reported yet. (In addition, statements by President Trump suggest the deal may be held up by other issues).

The outcomes of KORUS 2.0 can be grouped into two categories: (1) new issues that were not covered by the existing KORUS, and were negotiated as something akin to side deals to the talks, and (2) amendments or modifications to the current text. We examine each in turn.

With regard to the side deals, the biggest (and most negative) economic impact will arise from the export restrictions on steel that Korea agreed to. Pursuant to these restrictions, Korean would cap steel exports to the U.S. at 70 percent of the average volume from the past three years on a product-by-product basis. This was in exchange for a permanent exemption of the Trump administration’s Section 232 “national security” tariffs on steel. The impact of these quotas/tariffs will be some degree of price increase for U.S. consumers, with the amount of the increase depending on exactly how the measures are implemented. In terms of the impact on Korea, Korean producers may actually benefit, now that they have avoided the tariffs. Their sales to the U.S. will now be at higher prices, and they may find other markets for their steel to replace the lost volume in the U.S.

There are also provisions on currency manipulation. Media reporting on the currency provisions suggests they are non-binding. It sounds like the provisions are similar to those agreed to in a side letter to the Trans Pacific Partnership (TPP). Adding these currency provisions is not particularly signficant, as the Trump administration is mostly just carrying over an Obama-era policy. However, the Trump administration may be pushing for binding currency provisions as part of the renegotiated NAFTA. This would be a bigger deal, as there have never been such detailed provisions on this issue in trade agreements, and U.S. attempts to promote such provisions in additional agreements would have significant implications. The specific terms will be important for determining the impact. 

Turning to the amendments and modifications to the existing KORUS, the outcomes on automobile exports and truck imports stand out.

Under the existing KORUS, U.S.-based auto manufacturers can export up to 25,000 vehicles (per manufacturer) to Korea per year that will be deemed compliant with Korean safety standards simply by meeting U.S. standards. Through the renegotiation, this quota has now been increased to 50,000 vehicles per manufacturer. On its face, this is a good market-opening provision, and a positive development for increasing access to the Korean market. However, the real economic value is not clear. In 2017, U.S. passenger vehicle and light truck exports to Korea totalled only 52,607 units. Ford and General Motors shipped fewer than 10,000 vehicles each. Given the low volume of U.S. exports in these products, increasing the quota may not have much impact. (And to put these figures in perspective, Canada leads the way as a destination for U.S. exports with 912,277 units, and China is second at 267,473 units.)

With regard to light trucks, it appears that the administration took a more protectionist tack, extending until 2041 a 25% U.S. tariff that was supposed to be phased out by 2021. While there will be no immediate impact, because Korea does not currently export trucks to the U.S., this change could delay any future export plans. It has been suggested that the reason Korea has not yet sold light trucks on the U.S. market is because the existing tariff has effectively blocked the possibility of exports. In an interview with CNBC, USTR Robert Lighthizer said: “The Koreans don’t ship trucks to the United States right now and the reason they don’t is because of this tariff,” and “They were going to start next year – we would have seen massive truck shipments. So, that’s put off for two decades.” This modification can therefore be seen as an attempt by the Trump administration to prevent trucks produced in Korea from being sold in the United States. However, even if the tariff had been removed as scheduled, any trucks produced for the U.S. market after 2021 may very well have been produced in the Korean companies’ existing North American factories. As a result, the claim that “massive truck shipments” have been blocked is a bit misleading.

Other reported KORUS renegotiation results sound minor, although, again, a full assessment will have to wait for the release of the text. For instance, there appears to be a new agreement on environmental testing standards for autos. This could refer to Korea’s Fuel Economy and Greenhouse Gas Standards, which are updated every five years by the Korean Ministry of Environment. Through the negotiations, Korea has agreed to base the update of these standards for the 2021-2025 period on “global trends, including U.S. standards” and increase the number of eco-innovation credits available for auto imports to meet the fuel economy and greenhouse gas requirements. In addition, there was an agreement on harmonizing the testing requirements on gasoline engine vehicle exports so that these products will not have to be tested twice. As a result, U.S. emissions testing will be seen as equivalent to Korean testing requirements.

And Korea agreed to include American companies in a “national drug reimbursement program,” which offers premium pricing for certain new drugs. This change has been pushed by the Pharmaceutical Research and Manufacturers of America (PhRMA), which has argued that U.S. companies have been negatively affected by Korea’s low drug prices.   In addition to these changes, vague announcements were made with regard to introducing more transparency to certain dispute procedures, and changes to Korean customs inspection procedures.   Overall, from what we know so far, the KORUS renegotiation looks like a minor tweak to U.S. trade relationships, rather than the wholesale revolution that is sometimes indicated by Trump’s tweets. That is probably for the best. However, KORUS has been a somewhat minor point on the Trump administration’s trade agenda, so we should not take too much comfort from this. It may be that the administation simply wanted to focus its more aggressive trade actions on other countries. The U.S. trade relationship with each country is different. The two big items that are coming next on the agenda are the NAFTA renegotiation and the U.S.-China trade relationship. The resolution of these will tell us more about whether the administation can figure out a way to put together a coherent trade strategy that does not unravel decades of trade liberalization.

Last week the White House announced that Richard Clarida will be nominated to become Vice Chair of the Federal Reserve Board. More than a month ago, Clarida became the front-runner for the role. He is widely seen as a centrist and a pragmatist holding mostly conventional views on monetary policy. Mostly.

As Vice Chair, Clarida will be the third pillar of the Fed’s new leadership, joining Chair Jerome Powell and recently announced incoming NY Fed President John Williams. Having been an economics professor at Columbia University since 1988 and a Global Strategic Advisor at Pacific Investment Management Company (PIMCO) since 2006, Clarida provides a complement to both Powell’s largely business background and Williams’ career inside the Fed.

With a couple of mutual research interests, Clarida and Williams will likely work well together. They’ve both explored the natural rate of interest (r*) — Williams is the coauthor of the widely cited r* estimates and Clarida has examined natural rates from an international perspective. Another area of mutual interest is price level targeting. As I have noted previously, Williams is an advocate of the Fed adopting such a target while Clarida has also explored its merits for monetary policy.

At first blush this may be concerning, given the shortcomings of price level targeting. However, the evolution of Clarida’s post-crisis thinking on monetary policy, including towards price level targeting, shows that he may be persuaded by the superior merits of nominal GDP level targeting.

In 2010, Clarida presented a paper at the Boston Fed conference, Revisiting Monetary Policy in a Low Inflation Environment. The paper discussed what economists had learned throughout the 2000s, with a particular focus on what they ought to learn after years of low inflation (a subject with renewed saliency in recent years).

He also discussed the large-scale asset purchases of the Fed’s quantitative easing program, casting doubt on much of the literature of the day — which tended to find positive, but limited effects of such purchases on reducing bond yields. Clarida, on the other hand, thought large-scale asset purchases could be very robust. He had two main points, one flawed and one overlooked.

The first was that a determined central bank, prepared to buy the requisite amount of securities up to the outstanding stock, could always put a ceiling on the yield (or, put another way, a floor underneath the price) of the securities it targeted. Now, this proposal puts the central bank squarely into the credit allocation business, which is a role it ought to avoid.

However, the second, subtle point in his framework that should not be ignored is that Clarida recommends the central bank fully commit to an outcome rather than announce various mechanical steps. This goal-oriented strategy suggests that Clarida may indeed become receptive to the benefits of nominal GDP level targeting — a point to which I will return.

But why did Clarida suggest focusing on securities’ yields at the time, rather than consider changing the central bank’s nominal target?

He explained that adopting a price level target, a possible alternative to the Fed’s then “stable prices” mandate and now 2% inflation growth rate target, was not a time consistent policy. That is to say, a central bank would initially commit to level targeting when its policy was below the trend line but then fail to run an expansionary policy to reacquire that trend line. Clarida believed that, while attractive in theory, a central bank could not credibly commit itself to future actions. Modern Fed parlance would call this forward guidance and, to Clarida, that was not a sufficiently robust strategy because it lacked the “proper commitment technology” to satisfy markets and the public that the central bank would indeed execute its promises in the future.

But by 2016, as the recovery from the Great Recession proved to be weaker than expected, Clarida’s thinking about forward guidance and the viability of a level target had changed.

At a Brookings conference early that year, which focused on whether the US was ready for the next recession, Clarida said that despite the fact that textbooks and economic theory suggest forward guidance should not work in practice, it, in fact, does. He also suggested, or perhaps wondered, if this meant a price level targeting strategy could work (his slides are here).

He rightly pointed out that a price level target would have the advantage of making up for past monetary policy failures that inflation growth rate targeting lacks. Level targeting corrects for the bygones problem in growth rate targeting, making up for past mistakes rather than embedding those errors in current policy.

Incidentally, this was not the first time he had suggested a price level target for the Fed.

In a Global Perspectives note at PIMCO published in 2014, Clarida endorsed a price level target. He believed such a target would be an improvement for the new Yellen Fed over the Evans Rule, which had been in effect for more than two years. Promising to leave rates at the zero lower bound until either inflation was above 2.5% or the unemployment rate was below 6.5% was not enough to guide policy going forward. These thresholds were not goals and therefore were insufficient anchors for monetary policy (indeed the Fed abandoned the Evans Rule the following month).

Clarida saw the weakness in the Fed’s communication strategy of putting thresholds on inflation and unemployment and proposed a price level target as an alternative.

As mentioned, a price level target is not the proper alternative for the Fed’s target because it can make a central bank procyclical and thus amplify, rather than dampen, the business cycle. A price level targeting central bank runs the danger of tightening policy because of an adverse supply shock and over-easing because of a productivity boom. Nevertheless, Clarida was right to criticize the kind of open-ended policy that characterized the Evans Rule and this kind of thinking will be a welcome addition to the Board.

Clarida now seems predisposed to three views about monetary policy that could significantly influence the Fed’s actions going forward:

  1. That a central bank fully committed to reaching a nominal target is superior to one focused on mechanical operations.
  2. That employing forward guidance is indeed an effective tool for conducting monetary policy.
  3. That level targeting can make up for past errors in monetary policy in a way that growth rate targeting cannot.

Combined, I think these views point to Clarida being more amenable to a nominal GDP target than even he may presently admit. After all, nominal GDP level targeting requires two things of a central bank to work in practice: first a central bank must credibly pledge to keep nominal GDP growing along a stable trend line and then it must be prepared to do whatever is necessary to achieve that level of nominal growth.

Clarida has already expressed the importance of both of these elements. In addition, he has repeatedly shown a willingness to let his thinking evolve when presented with new information. Therefore, he may yet be persuaded on the shortcomings of price level targeting in favor of a superior option.

Clarida may have said little about nominal GDP targeting to date — but with his nomination, the Fed may be getting a nominal GDP target advocate for the future.

[Cross-posted from]