ת׳רד לכבוד המונדיאל (תאכלס בשביל להעביר את הלחץ שלי מהטיסה שלא תתבטל):
לפני שנה החלטנו לקחת את הילדים למונדיאל. חשבתי שהחלק הקשה יהיה הטיסות והמלונות, טעינו. מה שהתחיל כניסיון להשיג כמה כרטיסים למשפחה הפך לפרוייקט סופר כיפי וחנוני.
Not enough people are thinking about economic and tax incidence with respect to China competition and tariffs.
Right now, the world is bracing for a sharp rise in solar panel costs as the Chinese government moves to tackle overcapacity it can no longer afford to underwrite. Increasingly, policymakers see the sector as a prime example of “involution” — a phenomenon in which ever more investment, capacity and apparent productivity generate diminishing returns because resources continue to flow into activities that create progressively less value. At the core of this is a confusion between output and productivity: producing more efficiently is not the same thing as increasing welfare. [For example, criminals can be very efficient, but don’t actually add value because their core activity is value destroying.]
This has major implications for the tariff debate because it suggests that what appeared cheap may never have been cheap at all.
Economists call this bigger-picture issue “incidence”. Incidence is simply the question of who ultimately bears the cost of something and who ultimately receives the benefit. The person who appears to pay or benefit at first glance is not always the person who ends up carrying the burden once you trace the entire chain of effects through the economy.
The conventional argument for years was that the world benefited from cheap (subsidised) Chinese solar production, since consumers everywhere could buy solar panels at lower prices. Looking only at the price tag, that seems obviously true. A panel that costs $100 is better for consumers than one that costs $150.
But incidence asks a different question: where did the missing $50 come from?
Part of the answer is that Chinese households have helped pay for it because such a large share of national income is forcefully swept into investment and manufacturing rather than household consumption by the government. Households save heavily, often receive relatively low returns on those savings, and have fewer opportunities to consume imported goods in return. Thus, some of the subsidy embedded in the cheap solar panels is indirectly financed by Chinese households accepting lower living standards than they otherwise might enjoy.
But the story doesn’t end there!
China sells more goods to the rest of the world than it buys. Those export earnings don’t disappear. They have historically been recycled into Western financial assets, including U.S. government bonds. That means that while Westerners receive cheap goods today, the Chinese accumulate claims on future Western income that generate interest payments.
In a growing number of Western countries, the expense of financing such interest obligations increasingly rivals the largest areas of public expenditure. Today’s cheap solar panel becomes tomorrow’s higher tax bill.
In other words, the difference in cost is actually borne by a combination of Chinese households through suppressed consumption and Western taxpayers through the servicing of foreign-held claims. Also, by workers and communities because a lack of reciprocal purchases contributes to the loss of domestic industrial capacity, eroding national security.
In short: the low sticker price is misleading.
When people say “look how cheap the panels are,” they are looking only at the most visible part of the transaction. Incidence analysis asks where the costs were shifted.
This is why someone like Stephen Miran would argue that focusing exclusively on whether tariffs raise consumer prices misses the core issue.
The relevant question is not simply whether a tariff makes a panel more expensive today. The relevant question is whether the pre-tariff price was genuinely cheap once all the hidden transfers, subsidies, financial flows and future obligations required to produce that price are taken into account.
Based on the rising cost of Chinese panels now that involution is being addressed, the answer is probably no. [chart from the FT]
@izakaminska This is actually a great post. It explains something we know and feel in very much detail and with great logic. All while being succinct. Thanks !
@NickTimiraos@LowBeta If I’m getting this right the growth is coming from ai which is doing so by increasing productivity. Without full employment you don’t get inflation regardless of growth. You open the strait, inflation drops quickly imo
@DanNeidle Thanks for the info. I think there’s just been a huge inflow of “other people” in the uk in the last 30 yrs due to stellar banking, education, past colonialism etc but today this population is not attracted anymore.
@ramahluwalia it's already true today... but why the assumption that many people are already getting into that field? I know it's certainly true in the country that I live in...
@aarondmiller2 I'm pretty sure they pushed him to do it in the first place. He would have never done so without their avail and there was no situation where going at it alone, and they were very happy to have someone take the burden
@RafaJBuendia add on top of this all the lost export markets of European cars to Chinese competition (middle east, south america, africa, south asia etc....)
It is like the old joke of someone falling from the roof of a 10-story building and as the person passes the 5th floor,
someone shouts out the window, "How’s it going?" The person yells back, "So far, so good!"
The “crash” was the sunsets and lack of any meaningful inspections of Iran‘s undeclared materials and activities
@DAVIDHALBRIGHT1 could you do a piece in reaction to Obama's comments that everyone agreed that the original JCPOA was working great? I'm always interested in your opinion