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Penn State University Economics Association Optimal Bundle Editor: Patrick Reilly Associates: Holden Sabato, Jared Anderson, Zachary Shick. October 23rd 2018 Optimalbundle.org

Expected Casualties in the Trump-China Trade War

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he Trump Administration imposed a new set of tariffs against China on September 24th, with this round being a 10% tax encompassing around $200 billion worth of Chinese imported goods. On top of these, earlier this year the President placed 10% and 25% tariffs respectively on imported steel and aluminum from countries such as Canada and Mexico. While the Administration believes that impacts will be minimal, the U.S. automobile industry is already being hit with the initial effects. Companies like BMW, Ford, and Honda have already spoken out on how these tariffs will affect their industries in the future. Ford CEO Jim Hackett has had a lot to say about the matter at hand, saying “From Ford’s perspective the metal tariffs took about $1 billion in profit from us.” 2018 has also been a bad year all around for Ford’s Chinese market, reporting a 30% fall in sales for the first three quarters of the year when compared to the same timeframe in 2017. Ford has already come forward to discuss plans to cut into these new costs, which includes a large employee lay off to start sometime soon. BMW and Honda have made similar claims this year and are taking financial damage themselves as this trade war rolls on. These damages derive from the retaliatory tariffs from China, which are affecting many U.S. exports. While Ford and

Honda mostly use domestic steel in their production, these taxes are not just hitting imported metals. Suppliers across the country are responding with price increases of their own as their supplies become more expensive to maintain and distribute. This is only the tip of the economic iceberg, as this round of tariffs will increase to a 25% tax early in 2019, and even more adverse effects will be seen by both U.S. producers and consumers in the coming months. Many will concede to the inherent negative effects that trade restrictions initially bring, but it is the ripple effect that a lot of people also forget to criticize. This country had a similar problem in 2002, when President Bush placed a 30% tariff on imported steel in March of that year. The impact was massive, including the loss of an estimated 200,000 U.S. jobs and around $4 billion lost in wage payments. This policy did not last, and the tariff was lifted in December of 2003, but the damage had already been done in less than two years’ time. If the Trump Administration really wants to put “America First,” they should consider doing the same before we see more consumers and firms put in danger.—ZS

Sources: https://www.wsj.com/articles/SB1046138047996402463 https://goo.gl/zwFDxp; https://goo.gl/nmk8Bs


The Public Battle of Uber and Lyft:

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t has finally come time for the two popular ride hailing services to take on the public markets. Both Uber and Lyft have announced that they are going through the processes of issuing their IPO’s as early as next year. The two companies are both relatively new, with Uber debuting in March of 2009 and Lyft following three years later, launching in June of 2012. Despite their youth, both Uber and Lyft have grown to be immensely popular and are still rapidly expanding. As their companies grow larger, so do their expenses and so it should come at no surprise that the two services are finally looking to go public to support their developments. Uber may be seen as the more prominent of the two, as their company’s name has become quite a popular verb. This dominance has been reflected in the valuation that major banks are proposing for the service’s initial public offering. The number reached a whopping $120 Billion, an incredibly high valuation especially for such a young company and one that will certainly send investment banks in a frenzy to become the underwriter for the stock offering. However, there are some future concerns with the possible stock offering. For one, services like Uber are popping up often and so the market is becoming more competitive. This could put some fear in investors and prevent them from going in on Uber. The IPO market also tends to be either hot or cold and while this past year has been good to newly public companies, when Uber finally decides to go public the market may not be as supportive. Further concerns include the fact that Uber may not be profitable for another three years, an obvious problem for potential investors. While we do not know an exact date for the potential offering, The CEO, Dara Khosrowshahi, has said that they are aiming for the second half of 2019 if conditions look right. As that time approaches there is bound to be plenty of news and rumors for the IPO that everyone in the financial world has their eyes on.

Uber’s main competitor, Lyft, is looking to take on the company with an IPO of their own. WhileLyft is certainly not as dominant as Uber, but they are still making waves and offer significant competition. One of the world’s largest investment banks, J.P. Morgan, is leading the charge on the company going public at their target time of early 2019. An anonymous source has stated that the company’s valuation could be around $15 Billion, nowhere near their competitors’ sky high number but certainly still noteworthy. Obviously, Lyft faces similar concerns to Uber, including the struggle to cut losses. However, Lyft could possibly see a benefit from going public before their rival as all the attention will be on them. Not only that, but Lyft has been able to avoid many of the public scandals that have plagued Uber. Lyft definitely has a tough road ahead, so does their main opponent and it will be interesting to see if they will come out on top. The upcoming battle between Lyft and Uber will surely be a topic of discussion as everyone is wondering how the public markets will treat the two services. Will the markets heavily favor one over the other or will it be a constant tug of war struggle? The financial world is excited to see the outcome and both Uber and Lyft will need to be focused if they both want to survive. –HS Sources: https://www.wsj.com/articles/uber-proposals-valuecompany-at-120-billion-in-a-possible-ipo-1539690343 https://goo.gl/P1WZzg; https://goo.gl/3zYUrJ


Deficit Dilemmas

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he Treasury Department announced this week that the budget deficit for fiscal year 2018 was $779 billion dollars; 17 percent higher than 2017 and approximately 3.9 percent of GDP. This deficit is the highest dollar amount since 2012. The deficit increase is the result of federal spending increasing by 3.2 percent, accompanied by a 0.4 percent decrease in revenue from taxes. Deficits such as this accumulate and compound to produce our national debt which is now $21.5 trillion and growing. Such a drastic increase may come as no surprise to anyone following the current administration’s fiscal policies. According to NPR, corporate income tax collections have fallen nearly 31 percent; despite strong corporate profits. The corporate income tax accounts for roughly 9 percent of the federal government’s revenue. White House Budget Director Mick Mulvaney has stated that economic growth will fill the gaps in the budget; however, the Congressional Budget Office has forecasted that fiscal year 2019’s budget deficit will be $973 billion and more than a trillion dollars the following year. Despite these reports Congress is planning on expanding upon the Tax Cuts and Jobs Act passed last December. Increases in budget deficits are directly tied to increases in government borrowing. This increased borrowing may cause a crowding out effect and increased interest rates. This may

explain President Donald Trump’s recent critiques of the Federal Reserve’s ever tightening monetary policy. When the government borrows to fund its budget, it leads to increased demand in the money markets, thus increasing the price associated with borrowing (interest rates). As rates on government bonds grow private sector investment becomes comparatively less attractive; thus, causing private sector investment to decrease. In a situation such as this, government borrowing will not lead to an increase in aggregate demand, but rather a transfer of investment from the private sector to the public sector. The current administration is operating on the assumption that their fiscal policies will increase public sector growth to such an extent that it will make up for this transference and make up for the budget deficits as well. This assumption is based on supply-side theory; which states that freeing up more money at the corporate level will lead to investment in research, capital and human resources, which will lead to an increased output of goods and services. This increase in supply should lead to lower prices for consumers and benefit the broader economy in general. These policies have proven to be more detrimental than beneficial thus far; how long should we wait to see the benefits of supply-side economics before rejecting its premise.--JA Sources: https://www.taxpolicycenter.org/briefing-book/whatare-sources-revenue-federal-government https://goo.gl/5kZtdm; https://goo.gl/yBChP


Inappropriate Communications

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n recent weeks the President of the United States has raised eyebrows by critiquing the Federal Reserve’s interest rate policy. For a sitting President to make negative comments about the Fed is rare throughout recent history. For decades Democrat and Republican leaders have set the precedent of not commenting on their decisions. Politicians and the Federal Reserve are naturally going to disagree. Politicians most pressing concern will usually be the next election while the Fed has the luxury of planning for the long term. However, if you look further back you can find an example of the consequences of a President influencing the Fed. The Fed is set up as an independent institution. Their monetary policy decisions do not have to be approved by any branch of government. They also don’t receive funding from Congress and the terms of the members of the board are for fourteen years. In 1970, Arthur Burns was elected as Chairman of the Board of Governors of the Federal Reserve System. Prior to being elected he was a counselor to President Nixon, which is already a bad sign. During Richard Nixon’s 1972 re-election campaign he demanded that Arthur Burns supply an expansionary monetary policy and a growing economy to make it more likely that Richard Nixon would win. Evidence shows that he did just that. In 1969 inflation stood at over six percent and from 1970 to 1972 Burns consistently lowered interest rates. The shortterm result was faster growth in GDP and a lower unemployment level. However, this is a great example of why those who set monetary policy have to look at the long term. If the federal funds

rate is too low for too long inflation should follow. There were other factors but following Arthur Burn’s decision the following eight years were characterized by inflation of over eight percent. President Trump criticizing the Federal Reserve because he disagrees with their decisions is not the same thing as Richard Nixon forcing easy monetary policy to be re-elected. However, it does show the importance of Federal Reserve independence and why generally it’s not a good decision for politicians to go after them. Their job is challenging and their goals are not the same as politicians. --PR Sources: https://www.federalreservehistory.org/people/arthur_f_burns https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.20.4.177

BRIEFINGS •

Saudi Arabia has been in the news recently due to the death of journalist Jamal Khashoggi within the Saudi consulate in Istanbul. The journalist was a frequent critic of the Saudi Arabian government. The story of what exactly happened within the consulate is continuously changing, but currently the Saudi government claims he was killed during a fight in the consulate. Los Angeles Lakers are off to a tough start to the NBA season. They have fallen to 0-3 after last nights heartbreaking overtime loss. Before the year started Vegas had their season win total as over/under 48.5. While the season just started, that number will be out of reach if they don’t start winning consistently.

Profile for The Optimal Bundle

Optimal Bundle Volume 54  

Patrick Reilly, Zachary Shick, Jared Anderson, Holden Sabato

Optimal Bundle Volume 54  

Patrick Reilly, Zachary Shick, Jared Anderson, Holden Sabato

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