Those Stubborn Facts: Some Banking Crisis Basics


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U.S. banks’ unrealized losses as of year-end 2022: $1.7 trillion

U.S. banks’ total equity as of year-end 2022: $2.1 trillion

Share of U.S. banks’ $17 trillion worth of deposits not insured by the federal government: c. 40 percent


(Source: “U.S. Banks are sitting on $1.7 trillion in unrealized losses, research says. That’s not a problem—until it is,” by Will Daniel, Fortune, March 23, 2023, U.S. Banks have $1.7 trillion in unrealized losses | Fortune)


Im-Politic: DeSantis’ Real Ukraine Mistake


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Since the Ukraine War is the first international crisis in decades that could draw the United States into a nuclear war, and since Florida Republican Governor Ron DeSantis could well become the nation’s next president, it’s vital to explain why the real mistake made by DeSantis in recently commenting on U.S. policy toward the conflict isn’t the one his critics have charged he’s made.

Instead, it’s a mistake that’s not only different, but actually serious, because it could eventually force him to support deeper and more dangerous U.S. involvement if he ever wins the White House.

The mistake DeSantis supposedly made in an interview published yesterday was flip-flopping, or at least seeming to walk back, an earlier statement downplaying Ukraine’s importance to the United States, and stating that because of nuclear war risk, should sharply limit its military aid and shift its focus to pushing for a peace deal.

Here’s his full statement to Fox News-talker Tucker Carlson. To me, the key passages are:

While the U.S. has many vital national interests – securing our borders, addressing the crisis of readiness within our military, achieving energy security and independence, and checking the economic, cultural, and military power of the Chinese Communist Party – becoming further entangled in a territorial dispute between Ukraine and Russia is not one of them.” And

Without question, peace should be the objective. The U.S. should not provide assistance that could require the deployment of American troops or enable Ukraine to engage in offensive operations beyond its borders. F-16s and long-range missiles should therefore be off the table. These moves would risk explicitly drawing the United States into the conflict and drawing us closer to a hot war between the world’s two largest nuclear powers. That risk is unacceptable.”

The core ideas: Ukraine’s fate is not a vital national interest of the United States’, and is therefore obviously not worth risking exposing America to a nuclear attack from Russia.

Full disclosure: At this point, DeSantis is my preferred presidential candidate. So keep that in mind as I evaluate his comments. And this Ukraine position is my position. But of course, it’s far from a consensus. According to supporters of current Biden administration policies (and even more aggressive actions), these first DeSantis remarks were fundamentally off-base because Ukraine is in fact a vital U.S. interest, and because therefore Russia’s aggression must in fact be defeated (a goal that could take several somewhat different forms) “no matter what,” as Mr. Biden recently declared.

It should be apparent even to DeSantis opponents or those neutral, though, that he was not proposing dropping all aid to Ukraine and leaving that country at Vladimir Putin’s mercy. But backers of the current (and even more aggressive) American policies thought confirmation of their flip-flop (or less dramatic “walk back”) claim came in yesterday’s DeSantis remarks. Here’s the passage they believe shows that the Florida Governor now sees the error of his ways in calling the war a “territorial dispute that’s not of “vital” importance to America:

Well, I think the [“territorial dispute statement has] been mischaracterized. Obviously, Russia invaded (last year) — that was wrong. They invaded Crimea and took that in 2014 — That was wrong.

What I’m referring to is where the fighting is going on now which is that eastern border region Donbas, and then Crimea, and you have a situation where Russia has had that. I don’t think legitimately but they had. There’s a lot of ethnic Russians there. So, that’s some difficult fighting and that’s what I was referring to and so it wasn’t that I thought Russia had a right to that, and so if I should have made that more clear, I could have done it, but I think the larger point is, okay, Russia is not showing the ability to take over Ukraine, to topple the government or certainly to threaten NATO. That’s a good thing. I just don’t think that’s a sufficient interest for us to escalate more involvement. I would not want to see American troops involved there. But the idea that I think somehow Russia was justified (in invading) – that’s nonsense.”  

I don’t see how these words can be read in any way other than saying that “territorial dispute” was poor wording, and that DeSantis still opposes any U.S. steps to “escalate more involvement.”

But his rationale for opposition changed significantly here. As opposed to simply denying that Ukraine’s independence and territorial integrity are vital U.S. security interests and therefore not worth the nuclear risk, here he’s saying that there’s not “sufficient interest for us to escalate more involvement because “Russia is not showing the ability to take over Ukraine, to topple the government or certainly to threaten NATO.”

That is, previously, DeSantis’ position focused solely on Ukraine’s intrinsic value to the United States. Russia’s strength or lack thereof was immaterial. Because he’s said nothing about changing, much less ending, the U.S. commitment to the NATO (North Atlantic Treaty Organization) alliance, whose members are protected by an American nuclear guarantee, I assumed that he believed that nuclear deterrence plus the major buildup of conventional forces from NATO members in those allies in Ukraine’s neighborhood would suffice to keep Putin at bay whatever Ukraine’s fate (which is my position).

But in the new interview, DeSantis made his opposition to a harder Ukraine line conditional on Russia’s capabilities, not Ukraine’s intrinsic importance. And I worry that if he becomes President this stance could trap him into a Biden-like Ukraine policy, with all the nuclear war risk, if Russia proves stronger (or more reckless) than he currently surmises, or after it becomes stronger in a post-Ukraine war world. As a result, he would wind up risking nuclear attack on America for a country that he may still consider of inadequate intrinsic interest to the United States – which I view as the height of foreign policy irresponsibility.

It’s still very early in the 2024 presidential cycle. In fact, DeSantis isn’t even a declared candidate yet. He’s a foreign policy newbie and it’s not even known yet who he’s been getting his foreign advice from – if he’s indeed getting any in a systematic way. So there’s still time for DeSantis to tack back to a genuine America First-type approach.

If he doesn’t, all else equal, I’d have to reconsider my support. And the next presidential campaign’s foreign policy debate, and the nation’s approach to Ukraine War and national security overall, will be all the poorer.

Following Up: Podcast Now On-Line of National Radio Interview on U.S. China Strategy


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I’m pleased to announce that the podcast of my interview last night on John Batchelor’s nationally syndicated radio show is now on-line.

Click here for a timely discussion – with co-host Gordon G. Chang – on whether President Biden’s Trump-y Buy American-focused trade policies are undermining his efforts to build effective global alliances to contain China.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Back on National Radio Examining the U.S.’ China Containment Strategy


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I’m pleased to announce that I’m scheduled to be back tonight on the nationally syndicated “CBS Eye on the World with John Batchelor.” Our subject – whether the trade and security elements of America’s strategy for countering the China threat are too often tripping over each other.

No specific air time had been set when the segment was recorded this morning. But the show – also featuring co-host Gordon G. Chang – is broadcast beginning at 10 PM EST, the entire program is always compelling, and you can listen live at links like this. As always, moreover, I’ll post a link to the podcast as soon as one’s available.

And keep on checking in with RealityChek for news of upcoming media appearances and other developments.

Our So-Called Foreign Policy: The U.S. Keeps Enabling European Free-Riding on Ukraine & Defense Generally


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Twenty-three years ago, I published an article (which you can download here) on defense burden-sharing in the America’s premier national security alliance, the North Atlantic Treaty Organization (NATO), titled “Promises, Promises.” I borrowed the title from a 1968 Broadway musical that was ultimately about cynically made pledges because I thought it was perfect for a study that documented how NATO’s European members kept welshing on their vows to raise their defense spending to serious levels – and how the real blame ultimately rested with an overly indulgent United States.

Twenty-three years later, the first major war in Europe since 1945 keeps dragging on, and fresh evidence makes clear (a) that the Europeans (both inside and outside NATO) remain defense deadbeats; and (b) that a prime reason remains their so-far-well-founded confidence that they can rely on the United States to pick up any slack.

Not that no burden-sharing progress has been made at all. As NATO itself just reported, seven members (including the United States) have now met the guideline of spending at least two percent of their national economic output on the military. That’s up from three in 2014.

Just three problems here. First, NATO has thirty members, meaning that the vast majority are still skimping on defense. Second, the two percent guideline was agreed to in 2014. Even had no Ukraine War broken out, that would be a pretty modest move in nine years. With a conflict raging in Europe itself, it’s minimal at best. And in fact, only one NATO country crossed that two percent threshhold since the Russian invasion – Lithuania, which is located awfully close to the war zone.

Third, the NATO guideline is just that – an aspiration, not a hard-and-fast promise, let alone something contained in a legally binding treaty. And reportedly, there’s scant enthusiasm among alliance members for raising it.

Of course, in this Ukraine War era, defense spending isn’t the only contribution that can be made to Europe’s security, and NATO isn’t the only grouping capable of helping out. But the widely followed “Ukraine Support Tracker” compiled by Germany’s Kiel Institute for the World Economy shows that after some brief, belated signs that countries in the European Union (EU – whose members contain both most NATO countries and others on the continent) were collectively stepping up with both military and mainly economic aid for Ukraine, these countries have begun slacking off again in relative terms.

As the Kiel analysts put in their February 21 update:

Over 2022, the US led the way with major support decisions for Ukraine, with EU countries following with some delay and overtaking the US in the meantime with their total commitments. With additional data now collected (November 21 to January 15), the US again takes the lead.”

The specific numbers? “With additional pledges of nearly 37 billion euros in December, the Americans have earmarked a total of just over 73.1 billion euros for Ukraine support. For the EU, the comparable figure is 54.9 billion euros.”

My “Promises, Promises” article documented in detail that the European NATO members kept free-riding on the United States because Washington repeatedly all but told them that America’s commitment to Europe’s defense would remain unchanged whatever the allies did spending-wise.   

These days, President Biden has also essentially invited the Europeans to free ride by repeatedly declaring that the United States would stand with Ukraine against Russia’s aggression – as he expressed it most recently last month in Poland – “no matter what.”  

Foreign policy realists (a group that should include you as well as me) aren’t mainly bothered by the flagrant unfairness of this situation. As long as it’s tolerated by the United States, free-riding is arguably in the interests of the NATO allies – and ultimately that’s what realists believe foreign policymaking should be all about (though allied leaders might usefully ponder the possible limits of even American patience).     

Instead, the main concern is pragmatic. In the end, allies are worth having only if they can be counted on to join a fight if one breaks out. At the very least, how can any military engage in any useful planning without knowing what forces will be available? Allies like the NATO free-riders, which plainly aren’t ready to make significant sacrifices on behalf of common security during peacetime, seem anything but dependable in the event of hostilities. That’s something Mr. Biden urgently needs to think through before his Ukraine policy creates the acid test.        

Our So-Called Foreign Policy: Biden Keeps Widening That Dangerous Lippmann Gap


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As made clear by its latest proposed defense budget, the Biden administration is creating an ever more serious Lippmann Gap problem – and courting greater and greater threats to U.S. national security in the process.

As known by RealityChek regulars, this term refers to a danger warned of by twentieth century philosopher and journalist Walter Lippmann – who argued that a country whose foreign policy objectives were exceeding the means at its disposal to achieve those objectives is headed for big trouble.

And practically since it entered office, that’s the fix into which Mr. Biden’s expansive foreign policy goals on the one hand, and his Pentagon budget requests on the other, keep sinking America. Worse, this year, the predicament seems especially worrisome, since the President is conducting foreign and national security policies that inevitably are super-charging tensions with both a nuclear-armed Russia and a nuclear-armed China.

No matter whether you believe either or both of these policies are necessary or not (and I view the Biden Ukraine/Russia policies as unforgivably reckless, because no vital U.S. interests are at stake, and his China policies unavoidable, because Taiwan’s semiconductor manufacturing prowess has turned it into a vital interest), you have to agree that fire is being played with.

This past week, the administration revealed that it will be asking Congress to approve $842 billion worth of spending on the Pentagon and its operations proper. (As usual, the annual defense budget request additionally includes tens of billions of dollars worth of extra spending, practically all on Energy Department programs for maintaining the country’s nuclear arsenal.)

It’s a lot of money. But it’s only 3.15 percent larger than the funds finally approved for the Defense Department for this current (2023) fiscal year. And when you factor in the administration’s estimate of inflation for 2024 (2.40 percent), in real terms, it’s barely an increase at all. Worse, if you believe that inflation might stay considerably higher, then we’re looking at a prospective defense budget cut in real terms.

Either the President believes that (1) the U.S. military can already handle both the threat of a Chinese invasion of Taiwan and a Ukraine War that might at least spill over into the territory of treaty allies; or (2) that neither event will happen; or (3) that they’ll be spaced out neatly enough to enable existing U.S. forces to handle them one at a time; or (4) that a marginally bigger defense budget will at least put the Pentagon on the road toward building the capabilities it needs to handle these new potential threats before they actually materialize.

Do any of these strike you as safe enough bets?

Nor is this type of Biden administration defense budget request anything new. Last year at about this time, the fiscal 2023 Pentagon budget request was unveiled. `As you may recall, “last year at about this time” was roughly a month after Russia invaded Ukraine, and after President Biden resolved to help Kyiv turn back Moscow’s forces. He ruled out using American boots on the ground, but began providing major military assistance and significantly adding to the U.S. military presence in countries throughout Europe – including those right next to Ukraine that Washington had already promised to protect with nuclear weapons if necessary because (unlike Ukraine), they’re members of the North Atlantic Treaty Organization (NATO).

In addition, since the previous August, the President had stated several times that the U.S. military would come to Taiwan’s rescue if Beijing attacked. Even though the White House has sought to walk back these comments, their number plainly means that the United States has taken on another sizable defense commitment.

But that fiscal 2023 budget request – again, made in March, 2022 – sought only 4.2 percent more in defense spending than was finally approved for fiscal 2022. And after the administration’s expected inflation rate expected, the rise was only 1.5 percent.

Further, Mr. Biden’s first defense budget request (for fiscal 2022), made in April, 2021, sought Pentagon spending that was only 1.6 percent higher than that finally approved for the final Trump administration budget year.

It’s true that this modest Biden request was much bigger than the proposal made by his predecessor for fiscal 2022. But it seemed way too paltry given that at the heart of Mr. Biden’s approach to foreign policy was the promise that America would come charging “back” from four Trump years of alleged retreat from the world stage and in particular neglect of defense alliances.

Of course, defense budget requests are only the first step in the defense spending process, and Congress will surely push through some increases as it’s done in years past. Also crucial to remember: The amount of military spending doesn’t automatically translate into more or less fighting prowess, since spending priorities within the top-line outlay can be and often are shifted to generate more bang for the buck (or achieve other newly added objectives). Indeed, that’s what one aim that the President says he’s aiming to achieve.

Nonetheless, the overall initial budget request certainly limits the extent to which specific programs can absorb more funds without overly shortchanging other important programs. It also tends to exert a gravitational effect on Congress’ political ability to add (or subtract).

Two other big problems to worry about. First, the latest inflation estimates by the Pentagon have been way off. For the 2022-23 calendar year, the actual inflation rate has so far turned out to be nearly three times greater (nearly six percent as of February) than the estimate for that fiscal year (2.2 percent).

The estimate for 2023-24 of 2.4 percent roughly matches the latest forecasts of the Federal Reserve and the Congressional Budget Office. But as noted, even if correct, the extra outlays will be minimal in after-inflation terms, as I’ve argued previously, politicians’ great temptation to stimulate the economy with all sorts of giveaways as a new presidential election cycle gets underway could well keep price increases robust.

Second, decisions to spend even much more on, for example, new weapons or troop readiness can take years to result in more effective forces. So even much bigger Biden requests were never going to work instant miracles.

At the same time, the global threat environment is hardly moving at a snail’s pace. And recent reporting from The Wall Street Journal describes what a mammoth strategic transition the Defense Department needs to make – from a force focused on fighting a Middle East-centric global war on terror to one able to handle two great power threats.

The option that I’d prefer is for closing the Lippmann Gap by reducing some U.S. defense commitments (principally relating to Ukraine, along with further downplaying the Middle East) along with hiking military spending faster (to cope with the mounting Chinese threat to Taiwan). But at the rate the Biden administration is going, America’s worrisome mismatch between its foreign policy reach and its grasp seems sure to keep worsening.

(What’s Left of) Our Economy: U.S. Manufacturing Output Surprises to the Upside Again


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Remember one of the signature expressions of 1960s sitcom character Gomer Pyle – “Surprise, surprise, surprise!”? That was my reaction to this morning’s Federal Reserve release on U.S. manufacturing production for February, which reported a second straight increase.

The February improvement was pretty marginal to be sure – 0.12 percent in after-inflation terms (the kind of numbers that will be presented here unless otherwise specified). And since its production is down on net since last February, domestic industry is still in recession. But any official gain in the hard data is noteworthy, given the lousy February sentiment-based survey results put out by many of the Federal Reserve’s regional branches (e.g., here), which have continued into March (e.g., here), and by leading private sector groups (e.g., here).

Also unexpected: January’s increase was revised up from one of 0.94 percent to one of 1.35 percent. That’s the best such performance since October, 2021’s 1.70 percent. So maybe that January figure wasn’t a one-off, as I speculated last month?

That’s not clear yet. Both the January and February advances also might still stem from a baseline effect – specifically, catch-up from an absolutely terrible December. That month’s manufacturing output decline has now been revised down a second time. Its 2.06 percent sequential dropoff is the worst such result since the 3.64 percent nose-dive in weather-affected February, 2021. But as that journalistic cliché goes, “It’s too soon to tell.”

Here’s what we do know – so far (keeping in mind that revisions of all statistics going back to 2021 will be issued on March 28).

The February report means that U.S.-based manufacturing output is now up since since just before the CCP Virus pandemic arrived stateside in force in February, 2020 by 1.65 percent – the same figure calculable from last month’s Fed release.

Only seven of the 20 broadest manufacturing sub-sectors tracked by the Fed boosted their production in February. The biggest winners were:

>the very big chemicals industry, which expanded output by 1.24 percent. Better yet, this growth came after a January increase of 3.11 percent (the best such performance since April, 2021’s 3.97 percent). The January pop looks like catch-up from December’s 2.63 slump (the worst such performance since weather-affected February, 2021’s 6.69 percent cratering). But the February follow-on could be a sign of truly regained strength.

Since immediately pre-pandemic-y February, 2020, chemicals production is up 7.52 percent, versus the 6.11 percent calculable last month;

>computer and electronic products, where production advanced for the first time since last September – and by 1.22 percent. But now it’s contracted by 0.62 percent during the CCP Virus era, versus having grown by 2.95 percent as of last month’s release; and

>wood products, whose output rose for the second straight month after having slumped for most of the past year. Not so coincidentally, this losing streak paralleled the housing industry woes prompted by the Federal Reserve’s historically rapid interest rate hikes. The February 1.11 percent gain was the best since the 2.81 percent surge last February.

But the wood products industry is still 2.49 percent smaller than it was just before the pandemic’s arrival in force, versus the 2.56 percent calculable last month.

The biggest February maufacturing output losers were:

>textiles and products, which saw production sag by 2.11 percent, the biggest decrease since last June’s 3.44 percent. The fall-off depressed output in this small sector to 12.96 percent below its February, 2020 level, versus the 8.93 percent calculable last month;

>plastics and rubber products, whose production decrease of 1.82 percent was its seventh straight monthly loss, and dragged its output losses down to 5.62 percent below its immediate pre-pandemic levels versus the 4.33 percent calculable last month; and

>miscellaneous non-durable goods, where output slipped by 1.52 percent, and pushed production down to 14.95 below its pre-pandemic level versus the 13.76 percent calculable last month.

Output also drooped in two sectors of continuing special importance to all of industry and the entire economy.

The story of CCP Virus era U.S.-based manufacturing has been in many respects a story of the automotive sector, and in February, vehicle and parts production dipped by 0.28 percent. This advance helped it draw to within 0.12 percent of its size in February, 2020, from the 1.61 percent shortfall calculable last month.

The diverse machinery industry, meanwhile, is crucial both to the rest of manufacturing and to the entire economy because its products are used so widely for retooling and modernization. So its growth indicates general manufacturing and overall business optimism, and vice versa.

Ordinarily, therefore, a moderately 0.40 percent monthly decline in machinery output would be moderately bearish, but the sector has been too volatile lately to be certain. The February decline followed a 3.42 percent burst that was the strongest since 5.12 percent pop of January, 2021. That’s a sign of a catch-up effect.

But the January results followed a 2.59 percent tumble in December that was the worst since last May’s 3.34 percent. All told, however, machinery output is now 5.54 percent greater than just before the pandemic struck, versus the 4.77 percent calculable last month.

Manufacturing sectors of special importance since the pandemic struck also suffered generally lousy Februarys performances.

The semiconductor shortages that have caused so many headaches for U.S. and foreign manufacturers seem to be easing, but supplies remain inadequate for many customers. And the situation won’t be helped by the 1.65 percent real output decrease U.S.-based chip production suffered in February.

Worse, this decrease was the sector’s eighth in a row – and some of these estimates have been revised down substantially. Due to these poor and worsening results, whereas as of last month’s Fed release, U.S. semiconductor output was 4.47 percent above its immediate pre-CCPVirus levels; now it’s 7.83 percent below.

Medical equipment and supplies, which contains the healthcare products used so widely to combat the pandemic, suffered a 0.73 percent real output contraction – its fifth straight monthly decrease.

Medical equipment and supplies output in February dropped for the fifth time in the last six months. But even with this latest 0.51 percent retreat, production in this sector – which includes so many of the products used to fight the CCP Virus – is now 10.52 percent higher than jut before the pandemic hit, versus the 9.85 percent calculable last month.

Production in pharmaceuticals and medicines was off by 0.54 percent in February, but the decrease was the first since last July, and depressed this big sector’s growth since immediately prepandemic-y February, 2020 to 20.42 percent versus the 21.44 percent calculable last month.

The exceptions to this pattern were aircraft and aircraft parts-makers – possibly because industry giant Boeing’s fortunes seem to be looking up finally. Their output increased by 0.35 percent in February, and is now up 30.19 percent since the advent of a pandemic that long hammered travel of all kinds, versus the 35.81 percent calculable last month.

What lies ahead? The entrails remain difficult to read, especially since the new banking crisis is creating doubt as to whether the Federal Reserve will continue an inflation-fighting effort it’s been making vigorously but that still hasn’t produced the economy slowdown it’s seeking – but that may at some point because these monetary tightening moves typically don’t start working for many months. See what I mean? 

If the central bank remains on course, domestic manufacturing’s troubles seem certain to return. But as long as the economy keeps defiantly expanding, its power may bring U.S.-based industry securely back into growth mode.

Making News: Podcast On-Line of New National Radio Interview on Banking Turmoil, the Fed, & U.S.-China Ties


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I neglected to mention it here yesterday, but at least I can post the podcast of my latest interview on the nationally syndicated “Market Wrap with Moe Ansari.” Click here for a timely conversation about the new, continuing turmoil in the U.S. banking system, about the Federal Reserve’s anti-inflation fight, and about how U.S.-China relations and the global economy are evolving. The segment begins at about the twenty-minute mark. (And yes, I was – and am – excited about the Princeton game!)

Moreover, keep on checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: (Much) More Evidence That Tariffs Can Work


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An independent U.S. government agency that most of you have never heard of just issued a blockbuster report full of evidence that further lobotomizies the clearly brain-dead but longstanding and still-prevailing conventional wisdom on a major economic issue facing Americans – how to deal with the global economy.

The agency is the U.S. International Trade Commission (USITC) and the conventional wisdom is that the sweeping, often towering Trump (and now Biden) administration tariffs on metals and on imports from China have cost the American economy on net.

Just as important: The report’s findings also shred the equally enduring belief that such trade protection causes the beneficiary companies or industries to become fat and lazy – and in particular to stop investing in expansion – because it’s so much easier and lucrative to reap higher profits from the higher prices they can charge from their existing operation.

The tariffs most comprehensively examined were those imposed on steel and aluminum imports starting in early 2018. The USITC looked at both their impact on those metals producers themselves, and on the “downstream industries” that use steel and aluminum.

As might be expected, the study reported that the metals levies – imposed to counteract massive foreign subsidies and other predatory practices – reduced imports of the products they covered significantly between 2018 and 2021 (the last year for which full statistics were available). U.S. purchases of affected foreign steel products sank by an annual average of 24.0 percent, and of their aluminum counterparts by an annual average of 31.1 percent

Further, as might also be expected, users of these metals often had to turn to buying domestically produced steel and aluminum in many instances. (In others, where U.S,-made alternatives weren’t available, they needed to eat the increased prices of the imports.)

But here’s where the conventional wisdom starts breaking down. According to USITC researchers, the price of Made in America steel and aluminum barely budged as a result of the tariffs. For steel, it rose by an annual average of 0.74 percent between 2018 and 2021. For aluminum, these increases were 0.87 percent. That sure doesn’t sound like price-gouging.

And one big reason undermines another claim of the tariff conventional wisdom. These prices hikes were so modest due significantly to output increases of these metals. And the higher output wasn’t due simply to the (modestly) higher prices metals-makers could charge. It reflected greater quantities of steel and aluminum that were manufactured. Between 2018 and 2021, because of the tariffs alone, steel companies boosted production volume (not dollar value) by an annual average of 1.9 percent and aluminum companies by an annual average of 3.6 percent. (See the table on p. 21.)

In fact, as the report notes, “Many domestic steel producers announced plans to invest in and greatly expand domestic steel production in the coming years” and capacity utilization in the industry hit a 14-year high in 2021. That’s resting on their laurels?

But the worst blow delivered by the report to the conventional wisdom was to the claim that the metals tariffs damaged the U.S. economy overall because whatever benefits the metals sectors enjoyed were completely swamped by the harm done to much larger metals-using sectors. (Here’s a detailed version. Unlike the USITC study, it focuses on employment and not output impacts, but undoubtedly there’s a pretty close relationship between the two.) According to the USITC, nothing of the kind happened.

As stated in footnote 342 on p. 125, thanks to the tariffs, steel production climbed by $1.90 billion in 2018, by $1.86 billion in 2019, by $0.92 billion in 2020, and by $1.33 billion in 2021. That adds up to $6.01 billion.

Aluminum production was $1.74 billion higher in 2018, $1.72 billion in 2019, $0.88 billion in 2020, and $0.92 billion in 2021 (footnote 347 on p. 126). That adds up to $5.26 billion. Add these steel and aluminum totals, and you get $11.27 billion in production gains by value attributable to the tariffs.

On p. 132, the USITC estimates that the tariff-induced production decline of steel- and aluminum-using industries averaged $3.40 billion from 2018 through 2021 – or $13.60billion in toto. So American output did indeed fall overall?

Not so fast. As the authors note (p. 125), the annual impact of the tariffs decreased during these years because the percentage of metals imports covered by the tariffs shrank – in part due to deals struck by Washington with various foreign metals producers to end levies on their products in return for agreeing to end illegal practices like dumping and to work harder to prevent previously tariff-ed Chinese metals pass through their countries to America via customs fraud.

So it’s likely that the gap between the U.S. metals output increases generated by the tariffs and the users’ output losses generated by the levies – pretty measly to begin with – would have shrunk and even vanished completely had all the tariffs remained in place. And who can reasonably rule out the possibility that the tariffs would have wound up boosting more American manufacturing production than they reduced – especially if the metals users were able to increase their production despite higher costs by improving their productivity. (See this post for a fuller discussion of the relationship between import use and productivity.)

The report didn’t look at the downstream effects of the much greater tariffs on Chinese goods, but presented evidence that they’ve been economic winners for the United States as well. As the study concluded, the China tariffs per se – also imposed to offset systemic economic predation by the People’s Republic – cut the value of Chinese imports by an annual average of 13 percent, and increased the price of domestically produced competitor products and the value of domestic competitor production by an annual average of 0.2 percent and 0.4 percent, respectively. between 2018 and 2021.

In other words, the China tariffs raised domestic production twice as much as domestic prices. And the problem is….?

The USITC authors admit that their model for evaluating the tariffs can’t capture all their effects. And their conclusions certainly don’t mean that all tariffs will work splendidly all of the time. But it’s arguable that for all the trade liberalization achieved since the end of World War II, protectionism and mercantilism by foreign governments remains widespread.  The USITC report strengthens the case that comparable U.S. responses should be used much more often.     

P.S. I published a detailed look at the impact of the 1970s and 1980s tariffs (including those imposed during the Reagan years) back in 1994 in Foreign Affairs and reported similar conventional wisdom-debunking findings.          

(What’s Left of) Our Economy: Better Wholesale U.S. Inflation but Consumers May Never Notice


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Today’s official report on U.S. producer price inflation could teach an important lesson on why prices move up and down in various circumstances.

Because the Producer Price Index (PPI) measures the costs of various inputs businesses sell to other business customers, it can often signal where consumer prices are going – especially when these costs go up. After all, when the goods and services bought by businesses go up, they feel understandable pressure to compensate by raising the prices they charge their customers – including individuals and households.

But as RealityChek regulars know, businesses can’t always pass on higher costs to their final customers. That’s because these customers don’t always feel that they can afford to pay higher prices (except, to a great extent, for essentials). So if demand isn’t strong enough, higher producer, or wholesale, prices don’t always translate into higher consumer prices, and the businesses serving consumers often need to suffer lower revenues and/or profits.

To complicate matters further, when business’ costs go down, there’s no inherent reason for businesses to lower the prices they charge their final customers – especially if demand remains strong enough. Unless they’re chasing market share? Or unless anyone thinks that they regularly, or even ever, like to give their customers price breaks just for the heck of it?

So since consumer demand remains strong – as made clear just yesterday by the official U.S. consumer inflation report for February – my sense is that the new PPI data don’t have much predictive power when it comes to living costs.

That’s a shame, since those wholesale prices results are pretty good in and of themselves. Headline PPI actually fell on month in February, by 0.15 percent – the best such result since last July’s 0.28 percent dip. Moreover, January’s torrid initially reported increase of 0.66 percent (the worst such result since last June’s 0.91 percent jump) has been revised down to a rise of 0.34 percent.

The unusually good monthly number for February could simply reflect some mean reversion from January. (That downward revised figure is still the highest since last June.) Indeed, that terrible June result was followed by the July 0.28 percent decrease. But let’s stay glass-half-full types for now.

Core producer price inflation cooled nicely on month in February, too. This measure (which strips out food, energy, and trade services prices supposedly because they’re volatile for reasons having little to do with the economy’s fundamental inflation prone-ness), pegged sequential wholesale price increases at 0.21 percent.

That figure was well off January’s 0.50 percent – the worst since last March’s 0.91 percent. And it in turn was revised down from the initially reported 0.59 percent. Some mean reversion could be at work here, too, but since last June (as has not been the case for headline PPI), core PPI has been pretty range-bound between 0.20 and 0.29 percent.

Not even taking baseline effects into account undermine the February wholesale inflation results fatally. On an annual basis, headline PPI in February climbed by 4.59 percent. That was the best such result since March, 2021’s 4.08 percent, and a big decrease from January’s data (which were revised down from 6.03 percent to 5.71 percent.

In addition, the February figure comes off headline PPI of 10.56 percent between the two previous Februarys. Those back-to-back results still indicate that businesses that sell mainly to other businesses still believe they have plenty of pricing power – especially given that the baseline figure for March, 2021 was a rock bottom 0.34 percent due to the steep CCP Virus-induced economic downturn. But the big difference between the sets of January and February, 2023 numbers also signal that this confidence has been dented.

Even better, January’s 5.71 percent headline wholesale price inflation followed a 10.18 percent increase during the previous Januarys. A decrease in the 2023 figures considerably bigger than the increase in the 2022 figures also points to wholesale inflation losing not trivial steam.

The annual core PPI story isn’t quite so good, but contains some encouraging news. The February advance of 4.44 percent was only a bit down from January’s 4.45 percent. But it was the lowest such rate since March, 2021’s 3.15 percent, and the January figure was revised down from 4.53 percent.

Baseline analysis, however, shows that pricing power in the economy’s core sectors remains ample. The January and February annual core PPI results followed previous annual increases of 6.89 percent and 6.75 percent, respectively. So they didn’t duplicate the heartening headline PPI pattern of 2023 annual PPI falling faster than its 2022 counterparts.

Moreover, back in March, 2021, when annual core PPI was running at 3.15 percent, the baseline figure for the previous March’s was just 0.10 percent. That is, there was almost no core PPI inflation – because of the sharp CCP Virus-induced slump. So it’s obviously too soon to declare victory over this kind of price increase.

But although this fairly good PPI report may tell us little or even nothing about future inflation, it will affect the nation’s cost of living in one significant if indirect way:  Like yesterday’s consumer price report, it was probably good enough to enable the Federal Reserve to slow or pause its anti-inflation interest rate hikes and other monetary policy moves in order to contain the new banking crisis while claiming that such chickening out won’t send price increases spiraling still higher.  At least not yet right away.