Im-Politic: Both Trump and Media Critics Need to Get Real on Immigration


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Among the biggest news emerging from this presidential campaign is that Donald Trump is not a model of verbal precision or restraint. Because loose lips can be dangerous in a president, whose words can move markets, shake governments, and even trigger war (and “sink ships”), it’s entirely proper for the media to cover the flood of factual blunders, hyperbole, illogic, canards, and half-baked ideas the Republican hopeful generates.

But an even bigger insight about the Trump phenomenon is being almost entirely missed so far: In an important way, journalists’ coverage of Trump’s statements has been just as juvenile and downright silly, juvenile, and obtuse as this rhetoric himself. And nowhere is this problem worse than in coverage of the two issues on which Trump has most forcefully opposed the establishment consensus that too many Mainstream Media journalists either actively support or implicitly accept: immigration and trade. The former has of course generated the biggest headlines, so let’s confine our discussion today to that subject. And to keep this relatively short, let’s focus on “mass deportation.”

As I’ve noted, Trump is largely responsible for the uproar over this option. Although deportation was never mentioned in his immigration plan, he did endorse the idea, and surely out of stubbornness, has refused to back down. The media – including Fox News’ Bill O’Reilly – have proceeded to rake Trump over the coals, characterizing his position as everything from delusional to racist, xenophobic, and fascistic.

There’s no doubt that mass deportation is wildly impractical, for reasons ranging from economic to humanitarian. And that’s why nothing even remotely like it will happen, even under a Trump administration. Indeed, that’s likely why such deportation was absent from his plan (though I have no evidence to support this claim). But it’s not necessary even to insist that journalists concentrate on the plan – which is full of proposals strongly endorsed by many immigration specialists in academe, and even strong bipartisan majorities in Congress (e.g., expanding the E-Verify program) – to recognize the immense bigger picture the Big Media is missing.

Thoughtless as their content is, Trump’s deportation remarks were necessary push-back against strong bipartisan insistence that America has no choice but to accept that the roughly 11 million illegals estimated to be living here. Thus, both Democrats and Republicans in their parties’ mainstreams have worked overtime to insure that what immigration debate is permitted is limited to whether illegals will be granted a path to citizenship or not.

But however reasonable these views seem, they overlook (or cleverly define out of existence?) a huge likely downside: Any form of legalization will become a powerful magnet for still more illegal immigration, no matter how circumscribed legal status is, how strict the conditions for securing it, or how well the border is secured. Disagreeing amounts to accepting two related propositions that make mass deportation look like the essence of realism:

>That populations in Latin America in particular will react by thinking, “The U.S. government has just decided that if we can get into the United States, we’ll be allowed to stay forever. Therefore, we’ll just keep living here in [Mexico, El Salvador, Guatemala, etc. – including, more recently, collapsing Venezuela?].”

>That when Latin populations begin coming north, Washington will decide to leave them stranded in the Mexican desert.

That’s why it’s time for journalists to start doing some thinking to try to figure out what Trump is really saying – and why it’s resonating so strongly even beyond Republican ranks. Roughly translated, it’s “Legalization looks like a disaster. As a result, it would be off the table in my administration. And something else is urgently needed.” And indeed, not so surprisingly, Trump’s plan points unmistakably to the alternative: an “attrition” strategy that aims at denying illegals both jobs and government benefits.

Clearly, this might leave a large illegals population still in the country. But eliminating most payoffs for unauthorized border crossing is likely to both prompt some outflows (much evidence indicates that the U.S. recession convinced many illegals to pick up stakes and return home) and, at least as important, deter inflows. Trump himself of course could help clarify matters enormously by shifting his own emphasis. But some minimal smarts by the media wouldn’t hurt, either.

Fortunately, some evidence of genuine thought is starting to emerge in its ranks. Is it delusional to hope that we might get at least a tad more?

(What’s Left of) Our Economy: What Really Matters About China These Days


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U.S. financial markets haven’t been the only case of volatility in the world recently. Just look at the American economic and financial establishment’s broad conventional wisdom about China. Between its mysterious but apparently slowing economy, and its leaders’ erratic reactions over the last few weeks, the PRC has been at or near the center of the investment turmoil. Therefore, maybe it’s not surprising that hitherto prevailing assumptions about a dawning Chinese Century or epoch are being rethought dramatically. But it’s especially important that U.S. political leaders not succumb to the kind of fallacies that have muddled their dealings with Japan for decades.

As followers of international and business news are endlessly reminded, during the 1980s and into the mid-1990s, many American analysts were convinced that Japan’s growing prowess and wealth could enable it to challenge U.S. global predominance in finance, technology, and even overall economic power. Almost immediately afterwards, of course, Japan ran into major problems on all those fronts, and those claims – along with calls for the United States to emulate many Japanese policies and practices – were quickly dismissed as quintessential alarmism. Views of China could well start moving along the same trajectory.

What has largely been missed about Japan, however, is that what always mattered to America for the foreseeable future was not whether Japan would become “Number One” or not. First of all, no one’s crystal ball is good enough to know and second, that’s largely because, barring “shock” events like wars, these kinds of shifts usually unfold over very long time periods. Instead, what has always mattered most has been that regardless of Japan’s overall power versus America’s, it has gained enough specific strengths to be able to pose major ongoing problems for the U.S. economy.

Notably, Japanese industry has gained global leadership in a variety of advanced manufacturing sectors ranging from automotive to information technology components. Because such components are so crucial to manufacturing competitiveness, this means that Japan’s global rivals, including in America, depend heavily on Japanese businesses for key supplies – as was illustrated dramatically after the Fukushima earthquake struck in 2011.

Since Japan is still the world’s third largest national economy, its longstanding protectionist trade and anti-competitive business practices deny U.S.-based producers access both to a potentially huge foreign market and to domestic American customers they would be servicing if bilateral trade was not distorted by Tokyo’s decisions. These lost markets, in turn, mean not only lost profits but lost advantages of scale for U.S. producers and their employees. And undoubtedly Japan has been able to continue posing these problems because American confidence in its demise has persuaded U.S. leaders that it no longer deserves urgent attention.

Unlike Japan, China is not a quasi-ally of the United States – and often challenges American security interests. So it’s even more important that U.S. assessments of the PRC focus on the essentials, as opposed to “Chinese Century” claims or “Whither China” debates. There is one important exception. The suddenness of the Soviet Union’s demise demonstrated how fragile even global behemoths can be, especially when ruled by intrinsically brittle dictatorial systems. It’s not necessary to believe that China is facing a “1990 moment” to recognize that the regime’s survival could before too long be mortally threatened by any number of economic, political, and even environmental setbacks. In fact, it’s a sign of China’s current predicament that more and more commentary is going out of its way to note that some kind of collapse isn’t imminent.

But this speculation aside, what we can and do know about China is that its own advanced manufacturing industries are rapidly gaining on America’s; that its dumping of steel and other industrial products can harm U.S.-based producers for reasons having nothing to do with free trade; that it continues to steal valuable American intellectual property, which kneecaps the sales and all of their commercial benefits for American producers; and that it can marshal enough wherewithal to (a) finance investments in the United States that are both strategically and economically important, especially in the tech sector, and (b) seed the creation and foster the ramp-up of numerous high value industries.

Militarily, China has emerged as a major threat to America’s cyber-security – and possibly, as a top American military official recently suggested, a “peer competitor.” And although its more conventional military forces are doubtless far from matching U.S. global capabilities, some of its own strategists believe in a doctrine called “asymmetric warfare.” This school of thought suggests that China can prevail in regional conflicts in Asia by exploiting specific vulnerabilities against American forces even though the latter enjoy overall superiority.

China has become so big and important that I certainly hope someone important in Washington is thinking through the implications for America of large-scale upheaval in China, or worse (and of continued rapid Chinese progress). But the preeminent challenges America faces from China are much more immediate and concrete, and they should be policymakers’ first and foremost concerns. Nonetheless, I can think of one way in which the recent spate of bad news from China could significantly improve America’s approach – if it reminds Washington that the United States has always held the main cards in this bilateral relationship.

(What’s Left of) Our Economy: Despite New Uptick, Trade Remains a Long-term Loser for Sluggish US Economy


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The new GDP revisions released today by the Commerce Department revealed a further marginal quarterly improvement in America’s trade flows that translated into a slightly bigger contribution to second quarter growth than originally estimated. This performance contrasted dramatically with the record relative bite taken by trade from growth in the first quarter, due partly to severe weather and West Coast ports labor issues. The latest revisions still left all import categories, and services exports, at new records, however, and show that net trade has remained a major drag on the current historically sluggish recovery.

Here are the trade highlights from this morning’s GDP report:

>Today’s GDP figures, which present revised figures for the second quarter of 2015, show that a slightly narrowing after-inflation trade deficit modestly boosted the latest U.S. economic growth readings over last month’s initial estimate, and contributed just as modestly to the economy’s second quarter sequential improvement.

> Nonetheless, although this morning’s revisions also brought down the second quarter’s total imports and goods imports levels, they still remained at all-time highs in absolute terms. Services imports, which were revised up marginally, are also at record levels, along with services exports.

> Moreover, the inflation-adjusted quarterly trade gap ($541.2 billion) was still the nation’s second highest since the second quarter of 2008 ($550.4 billion) – near the outset of the Great Recession. As a result, the trade shortfall’s widening remained a major drag on the historically weak U.S. recovery since it technically began in mid-2009.

> The new second quarter real trade deficit of $532.7 billion represented a small decrease from last month’s initially reported $536.3 billion figure, and was 1.57 percent lower than the first quarter level.

> An improvement in the trade balance fuels growth on net. As a result, the revised second quarter data show that net trade contributed 0.23 percentage points to that period’s annualized 3.70 percent inflation-adjusted growth. The previous second quarter statistics reported a 0.13 percentage point contribution to 2.30 percent growth. In the first quarter, a trade deficit worsened in part by severe winger weather and West Coast ports labor troubles subtracted 1.92 percentage points from 0.60 percent annualized real growth – the biggest relative hit on record.

> Including the new second quarter data, the growth of the inflation-adjusted trade deficit has slowed the pace of the current recovery by 8.45 percent

> Yet it’s important to note that this figure includes the dramatic recent improvement in America’s energy trade. Excluding those flows, along with services trade, produces the trade balance heavily influenced by trade policies and deals such as President Obama’s proposed Pacific Rim agreement.

>According to the Census Bureau’s separate monthly U.S. trade data, the growth of this non-oil goods deficit has now cut recovery-era growth by a whopping 20.69 percent after inflation.

The new second quarter data revealed that U.S. total imports reached $2.6505 trillion at an annual rate on an inflation-adjusted basis, down from the $2.6550 trillion reported in the initial estimate, but still a record. The new import total was 0.68 percent higher than the first quarter’s total – which was the old record.

> Annualized goods import totals were also revised down – from $2.1807 trillion to $2.1754 trillion, but that amount also broke the first quarter’s former record of $2.1611 trillion by 0.66 percent.

> Services imports at annual rates were revised up this morning, from $472.7 billion to $473.5 billion. That level is 0.79 percent higher than the first quarter’s previous record of $469.8 billion.

> Real exports, which were not at record levels, were revised down as well in the new second quarter data. Total annualized exports after inflation were judged to be $2.1179 trillion, fractionally lower than the initial $2.1187 trillion estimate. That performance, however, still represents a 1.27 percent gain over the first quarter figure, and the second highest figure on record (just behind the fourth quarter’s $2.1239 trillion).

> Total goods exports for the second quarter were revised down from $1.4529 trillion to $1.4520 trillion, and 1.59 percent greater than the first quarter total. The scale of the upward services export revision was comparable – $664.6 billion to $664.7 billion. But that 0.62 percent sequential advance enabled quarterly real services exports to reach an all-time high as well.

Following Up: Casino Capitalism is Everywhere But in the Macroeconomic Data


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Over the last year I’ve published an op-ed and a book review that both challenged the widespread claim that the Wall Street deregulation dating from the late-1970s turned American business leaders in general from responsible stakeholders dedicated to creating real wealth for society into shortsighted casino capitalists. My evidence was government data on the macroeconomy showing the contribution to growth made by business investment both before and after that de-regulatory Big Bang. If the claims – most notably made by Democratic presidential contender Hillary Clinton in a ballyhooed speech – are right, I reasoned, then such investment (on factories and labs and warehouses and equipment and the like) should have made a much smaller contribution after the supposed Age of Short-term-ism began than before.

My article found just the opposite, but recently someone in the field whose work I respect expressed some skepticism, and suggested that if I had used different data, I’d get significantly different results. So that’s how I spent some of this afternoon, and just found out that the story remains the same. That is, when you look at the economy, as opposed to anecdotes about corporate greed, there are just no figures that point to a fundamental degeneration in the nature of American capitalism.

My challenger objected mainly to my use of inflation-adjusted data. My rationale was, and still is, that for all the difficulties of accurately measuring price changes, it’s better to use figures that try to distinguish between real economic output and its increase on the one hand, and the impact of rising prices on the other. But the pre-inflation data fails to turn up any noteworthy Big Bang effects, either.

My original article looked at long American expansions since the 1960s, since the 1950s economy was surprisingly choppy, and growth kept getting interrupted, and since comparing expansions (or recessions) is the best way to get apples-to-apples data. This exercise clearly showed that business spending played a smaller role in the post-deregulation 1980s recovery than during the pre-deregulation 1960s expansion (generating 10.75 percent and 9.78 percent of their growth, respectively).

But during the 1990s boom and the bubbly recovery of the previous decade, business spending’s contribution to growth was twice as great – even though business is thought to have become even more obsessed with crackpot financial engineering. And during the current recovery, such investment has been responsible for substantially more than than one quarter of the historically weak real growth that’s been recorded.

Remove the inflation adjustment and the numbers change only modestly – and not nearly enough to even begin supporting the casino capitalism thesis. During the 1960s expansion, business spending generated 13.80 percent of total growth. As with the post-inflation data, this share dropped during the 1980s recovery (to 10.41 percent). But thereafter it rose and stayed much higher than its level in the 1960s – to 17.33 percent during the 1990s expansion, 14.33 percent during the 2000s bubble, and 18.09 percent during the current recovery.

I’ve focused on business investment’s contribution to growth because I wanted data that wouldn’t “penalize” corporations when they were making these spending decisions at times when the economy was faltering for other reasons. Moreover, fueling growth is one of the main reasons we value business spending in the first place. But my challenger wanted to know whether it was correct to argue that business spending as a share of the economy on a static basis peaked in the 1970s – before the financial deregulatory wave was triggered. The answer? Yes, but not even these results show anything like a late-1970s watershed. And that’s even using pre-inflation figures, as I was asked to.

During that decade’s relatively short 1975-1980 recovery from its oil shock-induced miasma, business investment represented 12.92 percent of gross domestic product before factoring in inflation. During the 1980s expansion, that figure dropped off significantly (consistent with the growth contribution figures), to 11.02 percent. But that so-called Reagan boom represented the nadir. During the expansion of the Clinton years – marked by, among other developments, a huge telecommunications- and internet-led technology build-out – the figure bounced back to 12.66 percent.

Business as a share of the economy did fall during the bubble decade, when Wall Street shenanigans were peaking. But the falloff was minimal – to 12.48 percent. It’s been lower during the current recovery – currently averaging 12.12 percent. But that’s still higher than its level during the pre-deregulation 1960s expansion (11.11 percent).

Moreover, it’s crucial to remember that a crash in business investment was one of the main drivers of the Great Recession – when credit seized up all around the world and Armageddon fears were rife. It shouldn’t be any surprise that corporations didn’t reopen the spigots all at once. But reopen them they have, to a great extent. In fact, starting from a low of 11.08 percent of GDP in 2010, this business spending ratio hit 12.88 percent of GDP by 2014, and stood at 12.82 percent during the first half of this year – just marginally below those late-1970s levels. And although it’s true that Wall Street reform efforts have reduced financial engineering possibilities by American financiers, the role played by share buybacks in powering the stock market’s post-recessionary surge makes clear that they’re alive and well elsewhere in U.S. business ranks.

None of this is to say that business spending levels today are adequate, and that (as just mentioned), the financial regulatory regime doesn’t enable too much capital to be expended in too many unproductive ways. But anyone yearning for re-regulation to bring back a golden age of corporate stakeholder capitalism should keep in mind that the business spending data, at least, say that America never had one to begin with.

(What’s Left of) Our Economy: RealClear Fakeonomics on Trade


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George Mason University’s Donald J. Boudreaux is one of many economists worth following simply for his skill at articulating the profession’s completely brain-dead and actually harmful conventional wisdom about trade – and I’m pleased to report that he’s just done it again. Almost as revealing, his latest missive on why trade expansion of any type is always good, and all limits imposed on this expansion always bad, was highlighted this morning on the influential website. That is, it was deemed to contain unusually penetrating and newsworthy insights.

Timely maybe, since two major presidential candidates this year – Republican Donald Trump and Democrat Bernie Sanders – have been major trade policy critics, too. But the only news in Boudreaux’s latest post is how clueless so much of the nation’s economic policy establishment remains about the consequences of trade absolutism despite a financial crisis that taught exactly the opposite lesson with a vengeance.

According to Boudreaux, there’s not only nothing wrong with running even chronic, massive trade deficits. They bring crucial and widely unappreciated benefits. In his words, “If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a ‘deficit’ or a ‘surplus’ in the international balance of trade.”

More specifically, “If the Chinese become zealous devotees of a religion whose doctrine requires that they serve Americans by shipping to Americans goods and services free of charge, then Americans are made better off….If the Chinese monetary authority buys US dollars with newly created yuan in order to (of necessity temporarily) make Chinese exports artificially inexpensive for Americans to buy, then Americans are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).”

I’ve been hearing these arguments for more than 20 years, and in fact recall vividly a session in Washington, D.C. in which the late William Odom, head of the National Security Agency under President Ronald Reagan, upbraided critics of U.S.-Japan trade policy who were ungrateful to Tokyo for supplying Americans with all those great products in exchange for IOUs (i.e., the Treasury debt needed to buy those imports – since the U.S. trade deficit meant that Americans weren’t earning enough to pay for them with their incomes).

Another way of expressing Odom’s idea is that it’s more important for Americans to be able to access stuff in financially irresponsible ways than to be able to buy them with their wages, salaries, and other earnings – and never mind the debt buildup required.

Yet Odom and others like him – and they were legion – at least had the excuse of speaking and writing before a terrifying financial crisis that nearly melted down the entire world economy, and whose after-effects are still being felt in the form of an historically weak recovery following an excruciating recession. Yet despite this near-catastrophe and its painful aftermath, Boudreaux is still preaching that consuming and spending – and the still-dangerous debt accumulation needed to support this activity – matter more than ensuring the wherewithal vital for consuming and spending responsibly. I’m still trying to figure out his excuse, and that of

(What’s Left of) Our Economy: Gallup Survey Shows No Public Consensus on Boosting Recovery


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I’m a strong believer the American people’s ability to understand policy clearly enough to govern themselves wisely, and an equally strong believer in viewing opinion polls skeptically. But some new Gallup findings on economic issues are so contradictory and confusing that it’s enough to make the most dedicated populist think twice.

You can see the full results here. (And Gallup says it will expand upon this exercise throughout the rest of this presidential cycle.) But here are some that are especially head-scratching:

> Of the 47 policy ideas presented to voters, only nine were judged likely to be “very effective” at improving the economy by half or more of respondents, and of these, four were so rated by 50 percent even. That’s no doubt in part a function of the large number of proposals (which would tend to fragment preferences – as we seem to be seeing for the Republican presidential field). But the diversity of popular responses strongly points to less comforting explanations.

> The only two proposals cracking the 60 percent “very effective” mark were “Ensuring that women receive equal pay for equal work” and “Improving job training for veterans.” Trailing close behind, at 58 percent, was “Giving small businesses easier access to loans to start or expand their businesses.” Nothing else exceeded 55 percent.

> The 50 percent neighborhood is where the fun really starts. Principally, budget deficit hawks will be heartened by roughly this level of enthusiasm for “Reducing federal government spending”; “Requiring a balanced budget”; and, arguably, “Reforming Social Security to ensure it remains solvent.”

> But spending doves will be just as pleased to see that roughly half of respondents saw great potential in “Spending more government money to improve U.S. schools and education”; “Providing free community college education for all Americans who want it”; and “Providing new federal government programs designed to increase manufacturing jobs.” Perhaps tipping the balance in the doves’ favor is the near-majority backing for increased public sector funding for pre-school education, more government loans for small businesses, and tax incentives to encourage business to train workers. These results also seem to signal fairly high public confidence that more educational opportunity is needed for spurring and spreading prosperity.  

> Some of the measures most prominently touted by politicians in both major parties haven’t lit raging fires under American voters, according to Gallup. “Increasing the minimum wage” was described as a “very effective” way to strengthen the economy by a solid but not spectacular 44 percent of respondents. Generating even less excitement were “Reducing income tax rates for all Americans” and “Reducing government regulations on small businesses,” which both came in at the 40 percent mark.

> However much Americans complain about the quality and quantity of their infrastructure, only 39 percent regard “Developing federal, state, and private partnerships to invest” in such systems as a great way to spur better economic performance. And for all the animus against Wall Street and the rest of Big Business, only 38 percent registered great confidence in “Setting a limit or ceiling on corporate executives’ salaries.”

> Immigration and trade issues were gauged by Gallup, too, but here the results look less reliable, thanks to some dubious wording choices. One possible reason: The polling firm received input on the entire survey from, among others, “economists, academics and economic and political observers” – groups where orthodox, establishmentarian views (of both liberal and conservative varieties) reign supreme.

> The immigration questions seemed unexceptional, and showed the public saw relatively little economic payoff from encouraging more immigration either by “high-skill” foreign nationals who graduate from American universities, by skilled workers generally, or by their low-skill counterparts. But respondents were never asked about the potential of limiting or reducing legal immigration flows, much less about cutting off illegal immigrants’ access to jobs and public benefits.

> Much more problematic were the trade questions, which gave respondents two choices: “Negotiating trade and economic agreements designed to enhance trade with other nations” and “Increasing tariffs and taxes in order to make it more expensive to import goods into the U.S. from overseas.” The former was seen as a very promising growth engine by 29 percent of respondents, the latter by 24 percent. But if you think about it, why should anyone intrinsically doubt the benefits of “enhancing trade,” especially if no drawbacks are listed? Conversely, including the word “tax” in the question suggesting trade barriers was bound to reduce this option’s popularity. What kinds of results would Gallup have gotten, for example, if its question mentioned something on the order of “Increasing tariffs to replace goods in our stores made by foreign workers with goods made by American workers”?

I’ll keep monitoring Gallup’s efforts on this score – and hope that the company does a better job framing the debate on the globalization-related hot button issues that seem to be generating an unusual number of political headlines.

By the way, it’s important to recognize that this survey doesn’t measure public backing for or opposition to these economic ideas. Instead, it measures how well the public believes these measures will or won’t improve the economy.  These questions are similar, but not identical.      


Im-Politic: Labor’s Immigration Priorities Keep Putting Americans Last


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Just when you think the intertwined worlds of politics and policy can’t get any loopier, reality stomps in to prove you wrong. The latest evidence? Attacks by a major U.S. labor union on a federal program that aims to attract immigrants who promise to make job-creating investments.

The program sounds like exactly the kind of immigration policy America needs – encouraging immigration that unmistakably strengthens the economy and actually trickles down to Main Street.

I’m sure it’s not perfect, and therefore equally sure that if and when it gets re-authorized by Congress (which needs to happen by sometime next month), improvements can and should be made – e.g., in oversight, in maximizing the overall hiring requirements, and in ensuring that it meets specific legislative targets (like benefiting poor rural regions, which allegedly have gotten short shrift).

So it’s good that UNITE HERE, the big service sector union, seems to support Congressional Democrats and Republicans seeking such changes. But that’s far from the union’s main objection to the program, according to a new Washington Post report. What’s really wrong with the EB-5 visa process is that it doesn’t benefit enough of America’s illegal immigrants! As a UNITE HERE staff member complained to the Post (for attribution), How does this [program] help the 11 million people in this country who are stuck in immigration reform limbo?”

There’s nothing new about unions’ steady shift on immigration policy – from fear that excessive inflows would undermine employment and wages for native-born workers to nearly unbridled enthusiasm for opening the border much wider. (The rationale seems to be enlarging that share of American voters who will support the Democratic Party’s Big Government agenda, and gaining access to large number of potential dues-paying members.)

What is new here is at least one major union’s decision that an immigration program that’s unmistakably (if perhaps inadequately) a job-creator needs to explicitly aim at fostering employment for Americans here illegally, as well as for legal residents (including legal immigrants). What’s next? Numerical quotas? Well why not? Continued and even growing public anger at both liberal and conservative U.S. elites’ determination to put Main Street native-born Americans and even legal immigrants last in their economic plans? Count on it.

(What’s Left of) Our Economy: A Gathering Storm?


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The wild swings of stock markets around the world today should caution anyone against reading too much into recent global financial turmoil. As should be obvious to everyone – but is so easy to forget – these stock market declines are anything but the first that have been seen, and they’re anything but the worst that have been seen. The same goes for the economic situation in China and elsewhere – which matters much more.

But although this clearly is no end-of-the-world moment or even close, the latest news is a warning that the dangerous weaknesses that plunged the world into genuinely terrifying financial crisis and then savage recession just seven years ago have only been papered over, and have begun worsening again. More seriously, the United States and the rest of the world look much less capable of resisting powerful downdrafts.

Just to review very quickly, as I see it, the last crisis resulted fundamentally not from failures to regulate Wall Street adequately, the housing bubble, or any largely financial conditions. These were simply symptoms of mounting weaknesses in America’s real economy stemming largely from disastrously shortsighted trade policies. Both major parties became so enamored with offshoring-friendly trade deals and other policies that they sent overseas a critical mass of the U.S. productive base, and therefore a critical mass of the income-earning opportunities available to middle- and working-class families.

The George W. Bush administration, the Congress, and the Federal Reserve under then-Chairman Alan Greenspan could have reversed or even slowed this trade policy approach in order to restore these crucial domestic sources of income- and wealth-creation. Instead, they decided to double down on the offshoring. But to enable consumers (who are after all voters) to preserve their living standards, they decided to create then-unprecedented amounts of easy money, which made possible substituting borrowings (typically based on the bubble-ized home prices) for inadequate paychecks. Until that bubble’s inevitable bursting, the results were widely praised as having produced an economy whose “fundamentals” were “strong.

Once the crisis struck, the Fed and other major world central banks have sought to reestablish and preserve national and global economic momentum through yet greater money printing and thus credit-creation. National governments in the United States (during President Obama’s first year in office) and especially in China lent a big hand through stimulus programs aimed at creating new government-supported demand for goods and services, and therefore for workers.

Seven years later, the results are in, and it’s fair to say that they have produced growth and employment levels that keep lagging historical standards not only in the United States, but everywhere. In fact, largely because the Fed so quickly and energetically capitalized on its massive credit-creation powers, America is a conspicuous out-performer. But as I’ve also pointed out, the makeup of the U.S. economy still strongly resembles that of the housing- and consumption-heavy bubble decade, which is why a more compelling description of America’s situation is not “ho-hum recovery” but “secular stagnation.” This concept, popularized by former Clinton-era Treasury Secretary and Obama chief economic adviser Larry Summers, holds that the nation has lost so much productive oomph that it’s forced to rely on Fed-created bubbles for whatever growth it can muster – and thus to run the ongoing risks of bubble-bursting as well.

Something, though, has clearly changed in recent weeks. The one-word description is “China” but the real answer is of course much more complicated, and looks to be a function of a seemingly fatal flaw of global easy-money policies: They’ve fostered way too little productive, growth-boosting investment, and way too much mal-investment. The latter has barely kept growth in positive territory but that’s gifted Wall Street and executives at big publicly traded companies with huge windfalls thanks to a (so far) mutually reinforcing cycle of share buybacks and rising stock prices that has supercharged their largely stock price-based pay. Other uses for cash and credit that have seemed more tempting than servicing economically fragile and in many cases still-cautious American consumers included buying up other companies and, mainly for Wall Street, simply parking the money at the Fed, where big finance firms could earn a bit of interest on trillions of dollars for doing absolutely nothing.

But still other distorted investment choices have included so-called emerging markets. In those lower income countries, higher levels of risk brought attractive levels of return, but investors (and not just financiers) were also impressed with relatively high growth rates. And that’s where much of the latest round of troubles is rooted.

Several big and chronic weaknesses and vulnerabilities of these countries – including China – were largely overlooked. First, because incomes were comparatively low, these countries were never able to grow mainly by turning out goods and services for their own populations. Growing fast enough to spur significant economic progress required finding markets “where the money is,” which meant abroad generally and disproportionately in the United States. When growth in the United States merely kept slogging along, many of the new factories that were built with American consumers in mind began looking awfully risky.

Just as bad, many of these emerging market countries themselves got greedy. Their governments and central banks took advantage of low global interest rates by trying to juice extra growth and rising incomes by offering easy credit to their consumers, home-builders, and other businesses, too. But they weren’t able to borrow sufficiently in their own currencies, and many jumped at the chance to take on abundant dollar-denominated debt – including companies that could borrow on their own, without working directly through their governments. Moreover, many of these low-income countries (and some wealthy counterparts, like Australia and Canada) had gotten an added boost from China’s seemingly endless demand for their raw materials, which produced the lion’s share of their growth. But they failed to use earnings from the resulting high commodity prices to diversify their economies and take at least a few eggs out of that basket.

Lately, both China and the Federal Reserve have hit the emerging world with several punishing whammies. China itself continued to depend heavily on exports for its growth, and therefore started slowing itself as global demand continued disappointing. Its performance was additionally undermined by a decision to let permit the yuan to strengthen, in order to win it reserve currency status and greater long-term economic independence.

Beijing had also been trying to subsidize more growth led by domestic demand. But as with other third world countries, because Chinese incomes remain so low even after impressive pay raises, massive amounts of stimulus ranging from infrastructure and housing investment to (most recently) stock market manipulation did more to saddle that country with immense debts than to keep growth and job-creation at levels that were both economically acceptable, and politically essential – i.e., strong enough to keep the masses reasonably happy.

If official data is close to accurate (hardly a certainty), China’s growth rate is still world-class. But even its recent decline from previous blistering levels clearly has been enough to ravage global demand for fuels, industrial metals, and foodstuffs alike – and in turn the economic prospects of the commodity producers. Since the economic prospects of these erstwhile johnny-one-note high-riders began worsening so markedly, foreign investors began pulling money out, putting downward pressure on their currencies, and consequently on their ability to import – including from the United States. At the same time, China’s own recent yuan devaluation deepened this predicament – by further diminishing the PRC’s own purchasing power, and by reducing the price competitiveness of all the finished goods that the commodity producers and their more manufacturing-oriented third world counterparts needed to sell.

If anything, the Fed’s impact on the developing world has been still more destructive. Like the United States, much and even most of its recent growth has depended on artificially cheap credit. But unlike the United States, it can’t borrow in its own currencies. As a result, these countries are exposed to exchange-rate risk (created mainly by the rising dollar) as well as to interest rate risk (which can be created not only by the actual Fed interest rate hike that Chairman Janet Yellen and colleagues have been promising, but by a perception of impending hikes that reduces the third world’s creditworthiness and thus their access to affordable new money.

The real U.S. economy is more than capable of staying relatively unscathed by this global turmoil. For despite the best efforts of American leaders, it’s still less reliant on trade, foreign investment, and the well-being of the rest of the world than practically any other economy. U.S. stock markets, by contrast, could be in for greater trouble, which could be the single most important reason for their recent drop (keeping in mind that their levels are always determined by a great variety of long and short-term influences).

The reason? Among the major props for stocks during the current feeble U.S. recovery has been American companies’ remarkable ability to grow profits despite the real economy’s woes. As widely noted, much of this growth has been on the bottom line – resulting from greater efficiencies rather than better revenues. Human ingenuity’s power should never be underestimated, but by the same token, it’s hard to believe that infinite amounts of blood can be drawn from that stone. Indeed, faltering recent American productivity performance strongly indicates that diminishing returns are in store for these efforts. Emerging markets, with their historically high growth rates and gargantuan populations, have long been viewed as business’ best future hope for accelerated top line growth, and so far they’ve performed well enough to justify considerable confidence.

This latest set of emerging market troubles, including China’s, signals that this ace in the hole really isn’t – which understandably raises questions about whether current stock valuations can be sustained. As usual, please take all forecasting efforts, including mine, with a big boulder of salt. But it seems to me at least conceivable that, just as Wall Street has for years comforted itself by observing that “the stock market is not the economy,” unless Washington screws up royally, Main Street will start becoming grateful for this divide.

But that doesn’t mean that a healthy speed up in the recovery is in sight. Speculation has abounded lately that the Fed might not only postpone those interest rate hikes but need to launch another round of bond-buying – i.e. “quantitative easing.” Yet why a new influx of easy money would generate more sustainable growth than its predecessors isn’t at all apparent.  Washington could return to greatly increased deficit spending, but with so much of U.S. consumer and business demand being satisfied by imports, and with foreign currency devaluations likely to continue, the growth and employment benefits seem more certain than ever to leak overseas.  In principle, this new spending could be targeted on domestic infrastructure, but however popular this idea has been in Washington, it hasn’t yet been popular enough to produce enacted programs, and the intensifying presidential cycle could well turn into a new obstacle.

What about tariffs on imports, which could spur growth by cutting the trade deficit – and without budget-busting tax cuts or stimulus programs? As usual, they’re completely off the table. Indeed, new trade agreements, and therefore higher deficits and even slower growth, appear to be next on that front – though perhaps not until both Democrats and Republicans are safely past the next election.

That leaves fostering an unhealthy speed up in the recovery – kicking the can down the road yet again secular stagnation-style, for the usual unspecified reasons expecting meaningfully different results, and acting surprised when crisis clouds begin gathering anew.        


Making News: Podcast of New BBC Interview on China and Global Markets


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I’m pleased to announce that I was interviewed on the BBC this morning on China’s economic and financial turmoil, and how it’s been shaking the world’s economy and financial markets.  Click on this link for the podcast.  My segment is titled “Global Markets React to China’s ‘Black Friday'” and yours truly comes in at about the 7 minute-50-seconds mark.

Moreover, even as we speak, I’m working on a more detailed analysis that I hope to post shortly.  Stay tuned!

Im-Politic: How Carly Fiorina Helped Feed the China Beast


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Although I doubt that Carly Fiorina has as much of a chance of winning the Republican presidential nomination as even Donald Trump, her remarks today on America’s China policy deserve attention. For she unwittingly highlighted – in unwittingly personal terms – one of the biggest blind spots in America’s approach to the PRC: its long-time “see no evil” record on utterly reckless and apparently voluntary corporate transfers of defense-related technologies to China.

As I’ve repeatedly written, the United States will never satisfactorily deal with Beijing’s growing military might, its determination to become East Asia’s kingpin, or its cyber-hacking, as long as it continues permitting U.S.-owned companies to set up research labs in China, share much of their best knowhow with Chinese partners (all of which are controlled one way or another by the Chinese government), and train legions of Chinese scientists and technicians. And it’s a lesson that Fiorina evidently needs to learn, too.

In an interview with “Meet the Press” host Chuck Todd today, Fiorina made what’s by now an increasingly standard Republican and conservative call for a tougher policy towards these Chinese provocations. Specifically, the former Hewlett-Packard CEO stated “We ought to make it very painful for the Chinese to be aggressive in cyber-warfare.” She added that she would “begin to provide our allies in the South China Sea with some of the technology they’ve asked for. Be very aggressive about insuring that China does not control the South China trade route.”

But what Fiorina didn’t mention, and what Todd apparently didn’t know about, was HP’s own record of feeding this beast while she ran that tech giant. According to Hewlett-Packard itself, under Fiorina’s leadership (mid-1999 to early 2005) alone:

In 2002, HP instituted the Software Solutions Center in Shanghai, which is dedicated to developing enterprise-class solutions for customers in China and throughout Asia Pacific.

In 2004, also in Shanghai, HP established the Industry Innovation Center with Intel to showcase technology and business solutions for the finance, manufacturing, public sector and telecommunications industries.

HP Labs China was established in 2005 to collaborate with public and private sectors to research and develop future information management systems.”

And a year later, the company “developed the HP IT R&D Center in Shanghai,” which presumably was planned during Fiorina’s tenure.

HP is hardly the only American company that has bolstered China’s innovation capabilities, or even the worst offender. But it clearly has been part of the problem. Here’s hoping that reporters – and voters – start asking Fiorina whether she’s going to pursue a genuinely comprehensive, strategic China policy, or whether she’s just another pseudo-hawk.


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