(What’s Left of) Our Economy: A Super Bowl Lesson About Bubble-ized Growth

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Super Bowl ads this year have generated an unusual controversy: On-line lending and mortgage giant Quicken Loans is being accused of egging on another housing/consumption bubble – i.e., the same kind of reckless borrowing and spending behavior that helped produce the 2008 financial crisis, and the painful recession and painfully slow recovery that followed.

Watch the ad and judge for yourself whether Quicken is guilty as charged. But also keep in mind that, Quicken or not, bubble territory is exactly where the U.S. economy is heading, at least if the official figures on the gross domestic product (GDP) are accurate. Indeed, by one key measure, the nation, according to GDP figures that take the story through the end of 2015, is now considerably more bubble-ized than at the start of the last recession: Housing and household spending together keep increasingly leading economic growth, and as a result are becoming ever larger shares of the economy.

I’ve repeatedly called these two components of GDP the toxic combination whose excessive growth inflated the last decade’s bubble. At its peak, in 2005, they accounted for 73.09 percent of the U.S. economy after inflation – with housing at 6.13 percent (an all-time record according to government figures that go back to 1999) and personal spending at 66.96 percent (then a post-World War II record).

Housing began crashing soon after, but by the time the recession arrived in the last quarter of 2007, their total share of real GDP still came to 71.40 percent. Through the recession, this figure sank, but it rebounded along with economic growth. By 2013, it was back over 71 percent, and in 2014, hit 71.19 percent.

Last year, the personal spending and housing comeback kicked into another gear. Their combined share of the economy shot up to 71.83 percent – higher than at the onset of the bubble-spurred recession. And their momentum grew throughout the year. Between the first and the fourth quarters, this figure rose from 71.67 percent to 72.17 percent.

High profile push-back against Quicken Loans’ alleged message shows that at least some leading economic voices are aware that America is once again on a low-quality growth path. But concerns expressed by politicians, much less presidential candidates? Their silence remains deafening.

(What’s Left of) Our Economy: 2015 was a Trade Disaster for America

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There were so many revisions to deal with in yesterday’s jobs report that it just wasn’t possible to post on the monthly trade figures that came out at exactly the same time. But don’t get the idea that they’re less important – if only because they add to the full-year, 2015 data that’s now available, and that give us an ever clearer picture of the ongoing economic recovery. The big takeaway from the trade numbers: They deserve much blame for keeping the current expansion historically weak, and American trade policy has been the worst offender.

Here’s what I mean. As I reminded in covering the first full-year 2015 economic growth figures we’ve gotten (which describe the gross domestic product, or GDP), when the nation’s trade balance improves, America’s export and import performance contribute to growth. When it worsens, it subtracts from growth. As a result, the growth of the trade deficit since the current recovery began in mid-2009 has slowed overall economic growth, adjusted for inflation, by 9.59 percent.

Another way to think about it: From the second quarter of 2009, when the recession officially ended, through the fourth quarter of 2015, the economy expanded in real terms by $2.0867 trillion. But had the after-inflation trade deficit simply stayed the same, the nation would have enjoyed just over $200 billion more growth.

Even better, practically all of this new output – and the jobs it would have created – would have come in the private sector. And its creation wouldn’t have required a single dollar of new tax cuts, or a single dollar of extra government spending – none of which is affordable (unless you agree with the idea that the federal government can and should spend whatever it takes to restore growth to acceptable levels).

As for trade policy, it can be identified as a special problem because, as I’ve repeatedly pointed out, the Census Bureau conveniently publishes figures for that (huge) portion of U.S. trade flows that are heavily influenced by trade deals and related decisions. These are exports and imports minus oil (which is always left of out trade agreements) and services (where liberalization has been modest so far).  And Census is even good enough to adjust these numbers for inflation, so they can be studied in the context of the growth figures that are watched most closely.

This real non-oil goods trade has been in deficit for as long as statistics have been collected (since 1994).  And its growth since mid-2009 has reduced total recovery-era growth by more than twice as much in real terms: $418.35 billion. This means that inflation-adjusted expansion would have been a shocking 20.05 percent stronger.

For now, these are the biggest remaining developments revealed by the new trade figures:

>America’s manufacturing sector racked up yet another record trade deficit in 2015, with the $831.40 billion figure shattering 2014’s previous mark of $734.44 billion by 13.20 percent. (These figures are expressed in pre-inflation dollars, not real terms.) It doesn’t take too active an imagination to see the manufacturing deficit move close to the $1 trillion neighborhood this year.

>As noted by most of the economics world, the strong U.S. dollar and weak global growth combined to depress American manufacturing exports. They fell by 6.73 percent in 2015. But even though America’s economy was growing pretty slowly, too, manufactures imports kept rising – by 0.87 percent.

>The manufacturing-heavy U.S. goods trade deficit with China hit a new record in 2015, too. At $365.70 billion, it eclipsed the old mark of $343.08 billion – also set in 2014 – by 6.59 percent. And U.S. merchandise exports to China fell in 2015 for the first time since recessionary 2009. The latest decline, moreover, was twenty times greater than the 2009 decline, even though the Chinese economy continues growing at an official (though probably overstated) near-seven percent annual rate.

>The nearly four-year-old trade agreement between the United States and South Korea (KORUS) has provided the blueprint for President Obama’s negotiators as they developed the Trans-Pacific Partnership (TPP) trade agreement. But the results of the Korea deal shows that the U.S. approach is failing badly. Since it went into effect, in March, 2012, America’s merchandise deficit with South Korea has more than tripled on a monthly basis – from $561.4 million to $1.996 billion.

>On that monthly basis, U.S. goods exports to Korea have plunged by 19.78 percent, while imports are up 12.50 percent.

>Between 2014 and 2015, the American merchandise trade shortfall with Korea increased by 13.09 percent, from $25.05 billion to $28.33 billion. U.S. goods exports to Korea fell by 2.18 percent, but imports rose by 3.32 percent.

>Overall, the combined global U.S. goods and services trade deficit was 4.56 percent higher in 2015 than 2014. The $531.50 billion total was the highest since 2012.

>Combined American exports dropped by 4.82 percent, from $2.343 trillion to $2.230 trillion – the lowest such total since 2012. Imports were off by 3.15 percent – from $2.852 trillion to $2.762 trillion. That still represented their second highest total ever.

>The United States ran an annual surplus in services trade – as it has since 1971. But that surplus declined year-on-year (by 2.45 percent, from $233.14 billion to $227.43 billion) for the first time since 2003.

Much more detailed data is available on the U.S. International Trade Commission website, and I’ll be posting on them in the days to come!

(What’s Left of) Our Economy: Manufacturing Ends its Jobs Recession

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Manufacturing ended its technical jobs recession in January, as the sector’s 29,000 employment increase represented the strongest monthly rise in more than a year. Most revisions were positive, but manufacturing’s year-on-year job gains (45,000) in January were still among the lowest in the last three and one half years.

Nonetheless, industry’s share of total non-farm employment rose and is no longer at record low levels, and though still a recovery-era laggard, manufacturing wages showed their most strength since recessionary 2009 – aided in part by the Labor Department’s latest benchmark data revisions. These changes also finally pushed inflation-adjusted manufacturing wages back above their levels at the outset of the current economic recovery.

Here’s my analysis of the latest monthly (January) manufacturing figures contained in this morning’s employment report from the Bureau of Labor Statistics:

>Manufacturing employment in January continued a recent run of generating good news, as the best monthly net increase in payrolls (29,000) since November, 2014 helped the sector exit its latest jobs recession. Prior to this morning’s release, manufacturing employment had fallen on net for seven straight months – more than the two consecutive negative quarters central to most definitions of GDP recessions.

>Most of the latest manufacturing jobs revisions were positive as well. December’s 8,000 increase was upgraded to 13,000, and November’s previously reported 2,000 improvement now stands at 3,000. October’s last reported 3,000 advance, however, was downgraded to 2,000.

>The better employment numbers also meant that manufacturing jobs are no longer at an historic low as a percentage of total non-farm jobs (the Bureau of Labor Statistics’ employment universe). As of the previous jobs report, this figure stood at 8.61 percent. It has now inched up to 8.62 percent.

>Manufacturing’s January year-on-year jobs performance, however, was less impressive. Industry added 45,000 new positions on net over January, 2015 levels. But this increase was one of the lowest such totals since July, 2013.

> In fact, although it topped December’s upwardly revised 33,000 rise and November’s similarly upgraded 42,000, it was well below October’s 68,000 and September’s 92,000.

>The yearly gap in job creation for January, 2016 was even greater when compared with January, 2014-15 (217,000) and January, 2013-14 (114,000).

>Since manufacturing hit its 2010 employment bottom, the sector has regained 903,000 (39.38 percent) of the 2.293 million jobs it lost during the recession and its aftermath. By contrast, the private sector overall lost 8.801 million jobs from the recession’s December, 2007 onset through its February, 2010 absolute employment low. Since then, it has increased net employment by a shade under 14 million.

>In fact, whereas total private sector employment is now 4.58 percent higher than at the recession’s beginning, manufacturing employment is still 10.11 percent lower.

>The January jobs report featured some of the best manufacturing wage numbers since the recovery began. But comparisons are complicated by the benchmark revisions to earlier data incorporated by the Bureau of Labor Statistics in its newest release.

>Manufacturing wages before adjusting for inflation increased in January by 0.31 percent on month – the fastest rate since August’s 0.63 percent. That gain was also much faster than December’s 0.04 percent (which itself was revised up from a 0.04 percent decrease), and helped produce a year-on-year January manufacturing wage boost of 2.56 percent. In turn, that result would have been the greatest such increase since March, 2014’s 2.53 percent.

>But the unusual (0.16 percent) upward revision in December’s current dollar manufacturing wage level pushed that month’s year-on-year increase to 2.65 percent. That’s manufacturing’s best such performance since October, 2009 (3.03 percent).

> October and November monthly manufacturing wage gains were also upgraded, but these revisions were only about half as great (0.16 percent) as that for December.

>By March, 2010, when manufacturing was in clear expansion mode, those yearly wage gains dropped all the way down to 0.74 percent. It’s an open question whether the latest wage increases will last longer.

>At the same time, even some of manufacturing’s strong recent wage gains trailed those of the private sector as a whole (whose data were also revised in that benchmark exercise). For example, in January, private sector wages before inflation advanced by 0.47 percent sequentially, though that month’s year-on-year improvement of 2.54 percent slightly lagged manufacturing’s.

>Longer term, manufacturing’s wage-laggard status is even clearer. Since the current economic recovery began, in mid-2009, its pre-inflation wages are up less (11.25 percent) than overall private sector wages (14.68 percent).

>Manufacturing’s wages have under-performed after adjusting for inflation as well. The latest Labor Department figures are from December, and showed that in real terms, manufacturing wages were up sequentially by 0.09 percent – the same pace as that of the overall private sector.

>Year-on-year, December real wages were up by 1.90 percent for manufacturing, and by 1.91 percent for the private sector – which also, however, makes clear that manufacturing has been narrowing the gap.

>Since the recovery began in mid-2009, real manufacturing wages are up only 0.09 percent, whereas inflation-adjusted pay in the private sector is up 3.01 percent. But however modest that increase, it means that real manufacturing wages have finally made back all of the losses they experienced during the recovery.

(What’s Left of) Our Economy: Factory Orders Keep Falling and Slowing the Recovery

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This morning, I reported on the new U.S. labor productivity statistics just published by the government, which revealed that this crucial measure of the economy’s efficiency continues to grow at historically low rates. Now let’s look at the second major set of full-year, 2015 statistics issued this morning that illuminate the state of the American recovery. They cover factory orders and, they’re considerably worse.

This new orders data shows how much new business is being won by manufacturers in various sectors, and the main category of company economic observers look at is “non-defense capital goods excluding aircraft.” Purchases from these firms, often referred to as “core capital spending” (“core capex” for short), get special attention because they’re a good proxy for the nation’s level of business investment – excluding the volatile (but big!) aircraft, and defense spending (which of course isn’t driven by free market spending). Such investment in turn can be a powerful engine of overall long-term growth.

Unfortunately, capital spending currently is helping to lead the economy’s slowdown. Core capex fell by 1.44 percent from November to December, its biggest monthly drop since winter-affected January, 2015 (2.21 percent). Ignoring such weather-distorted data, you need to go back to June, 2012 (1.89 percent) to see a bigger sequential plunge.

Overall levels of core capex peaked in July, 2014, and on a monthly basis have fallen since then by 8.15 percent. In other words, the economy has suffered a technical factory orders recession (two consecutive quarters or more of cumulative decline) for nearly a year and a half. Moreover, between full-year 2014 and full-year 2015, these orders sank by 3.90 percent – the worst performance since recessionary 2008-09 (-18.50 percent). And since that sharp downturn began, in December, 2007, monthly core capex is up only 1.22 percent.

These figures give some credence to the notion – which I disputed recently – that American manufacturers are mainly being troubled today by a weakening of U.S. demand for industrial goods. I noted that continually rising imports indicate that demand for foreign-produced manufacturers keeps growing. Tomorrow we’ll get the first full-year 2015 trade data, which will shed more light on the relative importance of these factors. For now, though, it’s clear that weak factory orders are one more obstacle domestic manufacturing – and the larger economy – will need to overcome to speed up the recovery and place it on more solid, production-heavy, ground.

(What’s Left of) Our Recovery: Though Nearing Recession, Manufacturing Remains America’s Productivity Growth Leader

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The good economic news today was that the government released more full-year 2015 data that gives us a better fix on where the U.S. economy stands. The bad economic news was that both the labor productivity figures and factory orders numbers show that a continuation of the historically sluggish recovery is about the best foreseeable future that Americans can hope for.

The productivity report was the most disturbing, since improvements in this measure of efficiency are the nation’s best hope for improving living standards in a sustainable way. Just to review, economist measure productivity in two ways – by gauging labor productivity (which tracks how much inflation-adjusted output is generated for each hour on the job put in by American workers) and by studying multi-factor productivity (which tells us how efficiently employers make use of a wide variety of inputs, like capital and energy and materials, as well as labor).

The productivity statistics released this morning were the labor productivity data, which come out quarterly. (There’s a longer time lag with the multi-factor results). And these preliminary numbers for the fourth quarter of 2015 were awful. For non-farm businesses – the broadest category examined – output per hour fell from third quarter levels at an annualized rate of 3.04 percent. That’s the biggest such sequential drop since the first quarter of 2014’s 3.54 percent – which was dragged down in part by the harsh winter.

During the course of 2015, the year-on-year quarterly change dropped from a 2.51 percent gain in the first quarter to 1.37 percent in the fourth quarter. Now, to be fair, that first quarter pickup was juiced by the very low number recorded for that weather-affected first quarter of 2014. But the fourth quarter, 2015 yearly gain was also smaller than those for the second and third quarters. And the third quarter’s previously reported sequential improvement was revised down from 2.20 percent to 2.10 percent.

Moreover, the longer the time frame you examine, the worse this productivity performance looks. For all of 2015, labor productivity rose by a mere 0.60 percent over 2014 levels. That’s a deceleration from 2014’s underwhelming 0.70 percent, though it beat 2013’s literal flat-line.

Since the labor productivity data go way back, it’s possible to compare its growth during the last three economic recoveries – the best way economists know to get apples-to-apples figures. During the 1990s expansion, which lasted from the second quarter of 1991 through the first quarter of 2001, labor productivity increased by 23 percent even. During the 2000s expansion, which ran from the fourth quarter of 2001 through the fourth quarter of 2007, the gain was 16.09 percent – a somewhat faster annual rate. But for the current expansion, which began in the second quarter of 2009, a total labor productivity improvement of only 6.22 percent has been recorded.

As usual, the story with manufacturing labor productivity is better, but only because the rest of the economy has set such a low bar. Its efficiency by this measure fell by only 0.38 percent between the third quarter and the fourth quarter. That’s also, though, its worst drop-off since the first quarter of 2015 (0.60 percent), when the winter also depressed economic activity.  And it’s a much slower quarterly increase than the 4.86 percent surge for the previous three-month period, which was revised down slightly. 

On an annual basis, however, manufacturing labor productivity gained momentum during 2015 – rising from 1.16 percent between the first quarter of 2014 and the first quarter of 2015, to 1.51 percent between the fourth quarter of 2014 and the fourth quarter of 2015. For the full year, labor productivity in manufacturing increased more than twice as fast as in the overall non-farm economy – by 1.30 percent versus 0.60 percent.

During the last three recoveries, manufacturing labor productivity’s advance has also been much stronger than that of the rest of the economy. During the 1990s expansion, it rose by 46.71 percent – more than twice the rate of the growth for all non-farm businesses. During the shorter 2000s expansion, no one’s idea of a golden age of U.S. manufacturing, it improved even at a faster annual rate – 41.03 percent total. During the current expansion, which is only slightly longer than its predecessor, manufacturing labor productivity has led the nation’s as well, but it’s up by only 24.89 percent. At the same time, the slowdown is much less dramatic than that suffered by the rest of the economy, so the manufacturing productivity premium has widened.  

What a shame, then, that the sector is on the verge of a recession – which typically is a productivity killer. We’ll look at the latest evidence for a manufacturing slump – the new full-year factory orders data – in the next post!  

P.S. Don’t forget that when it comes to labor productivity, the numbers are somewhat misleading, especially in manufacturing since, as I’ve explained previously, the way the Labor Department calculates these numbers results in the offshoring of production contributing to productivity growth.  Labor is aware of this problem, but the old methodology remains in place.

 

(What’s Left of) Our Economy: Wage Inflation Claims Keep Flunking the Laugh Test

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Amid the excitement of last week’s Iowa Caucus homestretch, it was easy to overlook the Labor Department’s release of new data on overall U.S. pay levels. Even so, they deserved attention, because they represent yet another set of full-year 2015 figures that offer an unusually informative glimpse of where the economy stands. P.S. – they put yet another nail in the coffin of claims that American wages are taking off or about to.

Perhaps most surprising: A trend I spotted last year is holding: Pay gains have lagged badly in the professional, scientific, and technical services category – sectors that include many of those knowledge jobs widely considered crucial to the nation’s future competitiveness and prosperity, and where companies are constantly crying “Labor shortage!” and (successfully) demanding more immigrant workers.

The compensation figures make up the Employment Cost Index (ECI). They suffer two drawbacks compared with the wage numbers that come out each month in that they’re not adjusted for inflation, and they’re only issued quarterly. But the ECI measures salaries and benefits, too, so it reveals more about a larger share of the U.S. workforce. And what they reveal is not only slowing increases in overall compensation over the longer haul, but even over the past year.

According to these data, from the first quarter of 2014 to the first quarter of 2015, total pay in America grew by 2.75 percent before accounting for price changes. (I don’t bother looking at the numbers for public sector employees, because their pay reflects political decisions more than market forces, and therefore tell us little about the state of the economy.) In the fourth quarter, this growth had slowed to 1.88 percent.

Moreover, that fourth quarter annual increase was the third worst such performance since 2001-02, when this series begins. The worst came in the recession year 2008-09 (1.19 percent) and the second worst was 2011-12’s 1.82 percent. This is wage inflation?

The compensation picture doesn’t look much better – possibly unless you’re an employer – when we compare this recovery’s trends with that of its predecessor (the only one on record). That’s the economics world’s best version of apples-to-apples data (along with comparing recessions). During the six-year expansion of 2001-2007, the ECI rose by a total of 21.71 percent. During the current recovery, which has been slightly longer, this figure has been only 13.79 percent.

One relative bright spot: manufacturing. Over the past year, some pickup can be seen in the growth of compensation in that sector – from 2.37 percent annually during the first quarter to 2.50 percent in the fourth quarter. Moreover, that fourth quarter 2014-15 advance was manufacturing’s best fourth quarter increase since 2010-2011, and its improved every year since then.

The current recovery has seen smaller gains in the manufacturing ECI than during the last recovery. But the gap was smaller than for private sector workers as a whole: 21.21 percent versus 15.38 percent.

And compared with that high tech professional, scientific, and technical services, grouping, manufacturing pay was just killing it. In those allegedly labor-short industries, compensation not only grew more slowly over the last year – the growth rate cratered. During the first quarter, it rose by 3.61 percent over the first quarter of 2014. By the fourth quarter, this increase was down to 1.58 percent. That’s also the category’s third worst fourth-quarter-to-fourth quarter gain since government data started being published (for 2003-04). It trailed only 2004-05’s 1.31 percent, and recession-ary 2008-09’s 0.53 percent.

Over the last two recoveries, compensation in these sectors of the future looks dismal, too. During the previous expansion, it reached only 15.05 percent – but that only takes into account four years of data. If this growth rate is projected out to six years, however, it still only comes to 22.58 percent. That’s just slightly better than the pay growth for the private sector as a whole. But during the current recovery, professional, scientific, and technical services pay growth sank to 12.72 percent – meaningfully slower than that for the entire private sector.

As anyone schooled in economics knows, when anything is inflating, its costs should be rising ever faster. And when anything is in short supply, its costs should be inflating. That neither of these developments has been visible in the U.S. economy makes clear that those claiming wage inflation are either fools or – far more likely – self-seeking knaves.

Im-Politic: So What Happened to Trump?

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Iowa has now come and gone, and there’s no question that last night’s results were bad news for real estate magnate Donald Trump – who seemed to be the clear Republican front-runner before the state’s caucuses. His stumble seems rooted in a number of problems, some of which should be pretty easy to correct or overcome, and some of which appear certain to dog him throughout the campaign.

Regarding the second type of challenge, there’s little doubt now that Trump’s decision to boycott the final pre-caucus debate hurt him, especially with voters who chose their candidate late in the game, and with that overlapping group that never became hard-core Trump-ites. But that’s not to say that if he shows up at all the remaining such events, Trump is home free on this score. For I suspected that one of his concerns was being subjected to a blast of videos showing him expressing all sorts of views that don’t pass muster with Iowa Republicans – or Republicans anywhere. Both Senators Ted Cruz of Texas and Marco Rubio of Florida got this treatment from the debate’s Fox organizers on the immigration issue – which is obviously just good journalism. But those rivals boasted solid conservative pedigrees.

I agree that many Republican voters no longer care about ideological purity. But Trump was certain to pay a higher price for prior “sins” with those who value conservative principles because his departures sound so much more egregious. And litmus test challenges will face Trump throughout the primaries, simply because staunch conservatives dominate the GOP primary electorate (much the way staunch liberals represent the lion’s share of Democratic primary votes). Ditto for ostensibly incriminating videos broadcast at debates.

In addition, whether Trump’s debate decision reflected animosity toward Fox anchor Megyn Kelly or not, his accusations of bias and other insulting comments could only reinforce fears even of voters still in his camp that he lacks the temperament to be president. Moreover, if Trump calculated that a feud with Kelly would enable him to dominate media coverage of the debate – which initially seemed like a good bet – his disappointing Iowa showing may be a sign that this act is wearing thin. It’s true that snubbing the debate might have been especially damaging in Iowa, where voters expect candidates to court them with special fervor. But New Hampshire voters demand similar treatment, so Trump may have created a hurdle for himself in the Granite State, too.

The Iowa results could also reveal another big character-related problem with Trump: The more viable his candidacy appears, the larger such issues could loom. When Trump could be dismissed as a flash in the pan, many voters arguably could become enthused and choose him in polls fully confident that their positions would be ultimately harmless protests. But as Trump ascended to front-runner status, the prospects of him actually winning the Republican nomination and occupying the Oval Office appears to have struck at least some of his erstwhile supporters and – more important – some leaners as unnerving. More troubling for Trump, there’s little evidence yet that he can pass this bedrock credibility test.

Finally, the organizational weakness that clearly hurt Trump in a retail-politics-dominated state like Iowa might have exposed a broader weakness in his campaign. Most immediately, as noted above, New Hampshire-ites also typically demand lots of individual attention from political contenders. Trump hasn’t done many town halls, much less coffee klatches, or other small meetings in the state. The vote is a week away. How many Granite State voters can he meet face-to-face during this time? And will his ground game get out the New Hampshire vote more effectively than in Iowa?

Moreover, if Trump survives New Hampshire, it’s still not clear that he can create the organizational structure needed to translate his existing popularity into support that can last through November. His business experience of course means that he’s good at mobilizing resources and completing major projects. But we’re not talking about building a casino – even in a business-unfriendly city or state. Some Republican political consultants and some portions of some candidates’ organizations will offer their talents to Trump, but will they – and former partisans of more establishment-oriented GOP contenders – work for him enthusiastically enough? Can the the true believers match the experience of their Democratic counterparts (who might of course be dealing with an enthusiasm gap of their own if Hillary Clinton wins that party’s crown)? Visible organizational weakness in turn, could aggravate Trump’s gravitas problem?

Nonetheless, other Trump issues seem correctable or surmountable. As I’ve written, Iowa was highly unlikely to be Trump country. His “New York values” were destined to be a problem whether his rivals brought them up or not. Although the kind of evangelical voters who dominate Iowa Republican ranks may be a more complex group than previously judged, Trump never had much to offer them on social issues. Further, Iowa isn’t the epitome of prosperity suggested by many political reporters, but the state is one of the few in America that’s benefited on net from the trade policies blasted by Trump. His economic populism will undoubtedly play better in economically weaker New Hampshire and across the nation, and this message will become increasingly convincing unless the slowing economy revives suddenly and strongly. Moreover, Trump’s Republican competitors are anything but problem-free themselves – including the not-easily-solvable kind.

Finally, as with anyone who has achieved major success, Trump no doubt has a reasonably steep learning curve. As his critics love pointing out, notwithstanding his “winner” mantra, his business ventures have suffered bankruptcies and other big setbacks. That he’s still prominent and uber-wealthy attests to the ability to adapt and adjust – as his opponents implicitly concede with their chameleon charges.

At the same time, Trump has never faced a spotlight as intense as that of a presidential campaign – not to mention a deadline as tight, thanks to the still-compressed primary season. I’d be the last person to count him out. So for once the conventional political wisdom in this presidential campaign looks right on target: Iowa has completely scrambled the Republican race.

Im-Politic: 2016’s Real Trump Effect

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I have no idea who’s going to win tonight’s Iowa presidential caucuses in either party, but I feel confident in making one prediction: If and when Republican front runner Donald Trump either drops out at some point on the primary trail, or gets denied the delegate count needed to win the nomination either before or during the convention, most serious talk in the Republican race about the economy’s biggest problems will come to an abrupt halt.

Right now, given Trump’s strong showings in the latest Iowa polls, and even better performances in New Hampshire, South Carolina, and other surveys, such speculation seems besides the point. But I can’t dismiss out of hand one possible result unfolding tonight: A Trump defeat, or relatively poor second-place showing, could – as many commentators have suggested – puncture the aura of invincibility that’s been created by a combination of his unexpectedly broad appeal and his brash personality. In other words, a disappointing showing tonight could turn this “winner” into a hype-dependent “loser” in the public eye.

And as I’ve written, even – or especially – if Trump survives Iowa in good shape, the Republican establishment he’s run against could start consolidating behind a single champion as the more “conventional” hopefuls drop out. This candidate might start winning near-majorities in the polls while Trump remains stuck in the 30s or at best low 40s.

If and when the campaign becomes Trump-less, most signs indicate that the Republican campaign will give the shortest possible shrift to the pocketbook issues that matter most to the public. The most compelling evidence so far? The last Republican debate, on October 28 in Iowa, was Trump-less (by his choice). And judging from the proceedings, you’d never know that the United States has spent more than six years crawling out of an historically deep recession at an historically slow rate, and that living standards for the typical family have been stagnating literally for decades.

Economic subjects weren’t completely ignored. But throughout the two-hour event, they were a clear afterthought. There were zero questions on jobs and wages, and when the Fox News panelists did touch on the economy, it was for two main purposes. They either wanted to draw the candidates out on philosophical questions, like the ideal size and role of government, that Trump’s rise in particular suggest have become marginal even to committed “movement” conservatives. Or they sought to plumb the candidates’ views on the Iowa-specific issue of ethanol subsidies.

Of course, immigration figured prominently that evening. But the candidates almost exclusively focused on its national security aspects, not its potential to either strengthen or weaken American growth or employment.

Exceptions to these patterns did pop up. Though the topics were completely ignored by the Fox interrogators, Governors Chris Christie and John Kasich touted their job growth records in New Jersey and Ohio, respectively, as did Jeb Bush for his years in the statehouse in Florida. Texas Senator Ted Cruz did promise to end welfare payments to illegal immigrants, while Florida Senator Marco Rubio mentioned the need to ensure that immigrant flows contain more skilled and educated newcomers ready to contribute economically upon their arrival, and fewer immigrants whose only entry qualifications were family connections to existing legal residents. Kentucky Senator Rand Paul used his closing statement to warn of the dangers of the national debt. And Cruz answered the single question about Obamacare in impressive detail – in the process calling it the nation’s “biggest job-killer.”

But that paragraph pretty well sums it up.

It’s entirely possible that the Fox panel neglected the economy because its members thought Iowa is prospering, and that therefore the issue hasn’t resonated. (Here’s why they’re wrong.) So maybe when the primaries move into states with more obvious troubles, this focus will shift – for all the networks. In principle, Fox might also have concluded that the Fox Business debate in Milwaukee in November covered the economy adequately (along with the October CNBC debate in Colorado, which wildly veered into numerous other areas as well).

It’s also revealing, however, that unlike Trump, few of the other Republican contenders consistently take the opportunity to pivot to economic issues when asked other questions. Perhaps they believe the economy has been superseded by terrorism and related national security issues? Could they be holding their economic fire for the general election? Are they convinced that the economy simply is no longer bad enough to harp on? That last possibility has me particularly intrigued, since it strikes me as so stunningly wrong. But by the same token, it could be just the latest evidence that the Republican party’s mainstream power brokers really are out of touch with the national mood.

(What’s Left of) Our Economy: The Establishment’s Dead-End Thinking on Trade

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The new year has brought a positively weird confluence of events in the trade policy world. On the one hand, a spate of Trans-Pacific Partnership (TPP) endorsements by the Offshoring Lobby and a big study on its effects from a major Washington, D.C. think tank suggests that a strong campaign to push the Pacific Rim trade deal through Congress is in the works. On the other, recent weeks have also seen a flurry of acknowledgments from national policy mainstays that the U.S. trade strategy on which the TPP is based has backfired powerfully.

Stranger still (or not?), these expressions of buyers’ remorse make clearer than ever that the country’s economics and business establishment has no realistic ideas for solving the serious problems they admit their favored trade measures have created.

The most glaring example comes from Ben Bernanke. As I’ve written, the former Fed Chair is one of the economics profession superstars who has linked the last financial crisis to the buildup of historic trade-centered imbalances in the global economy. Given the rebound during the current economic recovery in both the Chinese trade surplus and the American deficit at the heart of the previous meltdown, you’d think that Bernanke would be thinking seriously about how to prevent a rerun. But you’d be wrong.

New York Times economics writer Josh Barro has just reminded us that Bernanke rejects out of hand widespread calls to punish China and other countries that have long manipulated their currencies to steal growth and jobs from countries like the United States – and which, in the case of China, are still realizing the trade benefits of long years of manipulation that have distorted price structures to its advantage. But the only response he suggests is rightly dismissed by Barro as “asking nicely.” In Bernanke’s words:

countries do respond I think to diplomatic overtures and to pressure from their trading partners when what they’re doing is perceived as, you know, counterproductive to the global economy.”

Barro’s article also shows that many of the second thoughts voiced lately on trade policy have been sparked by another new study – this one on the impact of greatly expanded U.S.-China trade– and by Republican presidential front runner Donald Trump’s (so far short-lived) call for a 45 percent U.S. tariff on imports from China. Such measures of course are still taboo throughout the policy community. But are we hearing about any good alternatives? Not judging from the debate so far.

Michael Pettis is one of the world’s genuinely knowledgeable observers of China and the founder of a must-read blog on its economy. But his solution to China’s dangerous mercantilism mirrors Bernanke’s almost to the word. After telling Fortune magazine that his “really big concern [about the weak world economy nowadays] is that we’re going to see a soaring trade deficit in the U.S. which could derail the U.S. economy, which is the only bright spot right now,” Pettis was asked if American leaders should “enact protectionist policies to prevent a soaring trade deficit.” His answer:

The best thing would be for the world to get together and say we can’t allow [1930s-style trade wars] to happen, it would be incredibly stupid.” He then added, “But I’m not confident that this will happen.”

Other thinkers have proposed counter-measures that don’t literally depend on the kindness (or enlightenment) of strangers. But they hold no more potential to put either the U.S. economy or its beleaguered workers on a sounder financial footing. An especially noteworthy example was former Obama administration official Steven Rattner’s New York Times column last week asking “What’s Our Duty to the People Globalization Leaves Behind?”

Rattner, a former Times reporter, Wall Street-er, and an architect of the Obama administration’s auto industry rescue plan, not only rejected the notion that automation and other efficiencies are the main causes of job destruction and wage lag in the trade-centric manufacturing sector. He actually blamed specific trade deals like the North American Free Trade Agreement (NAFTA).

Also to his credit, Rattner didn’t dredge up failed recommendations for better training and re-education programs as the cure for what ails America’s workers. But his apparent first choice – “huge tax redistribution, both as a moral matter and as a mechanism for ensuring political support for free trade” – is entirely conventional. It’s just a variation of the classic “compensate the losers” option that enjoys widespread support in the economics profession, but that dangerously pretends government transfer payments can adequately substitute for earned income. As one former colleague of mine cracked years ago, “It’s work-to-welfare.”

The upcoming Iowa Caucus results – and other early primary season contests – will reveal much about whether Americans favor candidates who stand for incremental changes in the policy frameworks long established by the two major parties, or politicians who favor breaking the mold. If the latter prevail, surely one reason will be a trade policy consensus that keeps offering the working public either more of the same debilitating results, dispairing shrugs, or bigger handouts.

Im-Politic: Signs that the Left is Getting It on Trump-ism

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On the eve of an Iowa caucus that could put Donald Trump firmly in the driver’s seat for the Republican presidential nomination, the nation’s intertwined political-media establishment seems pretty convinced of a remarkable trend spreading among long-time GOP fixtures: The party’s power structure is reluctantly but unmistakably making its peace with the idea that the bombastic real estate magnate and reality TV star will become their standard bearer and possibly the next president.

More recently, though, the chattering class has noted a development that might be at least equally important, especially for the longer term future of American politics. Many liberals are abandoning their standard portrayal of Trump as a simple racist, nativist, xenophobic, misogynistic, (ADD YOUR FAVORITE ADJECTIVE) demagogue.

Instead, they seem to be warming to the idea that Trump is a genuine economic populist, and one who is not only giving (needlessly crude) voice to widespread and legitimate working- and middle-class frustrations, but who is consistently pounding on specific themes with which progressives should be entirely comfortable. In fact, some of them have picked up on my claim from last September that there’s enough overlap between Trump’s positions and those of Democratic Socialist Vermont Senator Bernie Sanders to create the (eventual) possibility of a new and enduring left-right populist synthesis.

The latest sign has come from journalist John Judis, who for decades has been one of the few prominent media figures to focus on the politics of American economic issues and the economics of political controversies. Judis has just published an essay on Vox.com titled “This election could be the birth of a Trump-Sanders constituency.” In Judis’ words:

Sanders and Trump differ dramatically on many issues — from immigration to climate change— but both are critical of how wealthy donors and lobbyists dominate the political process, and both favor some form of campaign finance reform. Both decry corporations moving overseas for cheap wages and to avoid American taxes. Both reject trade treaties that favor multinational corporations over workers. And both want government more, rather than less, involved in the economy.”

He continued:

[E]ven if Trump and Sanders are denied the White House, their campaigns will have been extremely significant, perhaps even changing presidential politics forever. Their success in building a following in their parties is an early warning sign of discontent with the outlook that has dominated American politics for decades.”

I’d add, as I noted in my original post, that Sanders used to express realistic concerns about the impact of mass immigration on the wages and broader living standards of Main Street Americans. But when he decided to run for president, he apparently concluded that his campaign would make no headway among a critical mass of Democrats unless he went into full Hispanic-pander mode.

Of course, readers familiar with the national media world know that Judis has long been distinctive among his peers for recognizing how much of the Democratic party’s mainstream has drifted away from its working- and middle-class roots in favor of the kind of Wall Street-friendly outlook championed by former President Bill Clinton. I suspect he would also sympathize with the idea that many more left-leaning Democrats have become too enamored with an agenda centered around identity politics and cultural issues that not only offers nothing to their traditional – whiter – base, but that treats their own values with thinly disguised and often open disdain.

As a result, what really stands out about the Judis article is the venue. For since its launch in 2014, Vox.com has established itself as a bastion of elitist liberals who in particular strongly endorse the trade and immigration policies so harmful to native-born U.S. workers. Its staff is also keen on the idea that Democrats should be helping to speed America’s transformation into a society and economy that’s both younger and more diverse racially and ethnically, as well as one that’s more globalized and cosmopolitan, greener, and alienated from traditional beliefs about family structure, gender and sexual identity, and employment patterns. Think of hipsters enamored with the idea of the gig economy.

Moreover, the Judis piece isn’t alone. Last July, Huffington Post was so dismissive of Trump’s – then embryonic – candidacy on so many grounds that it famously announced that it would stop reporting on Trump’s run as part of its political coverage. Instead, the website explained,

we will cover his campaign as part of our Entertainment section. Our reason is simple: Trump’s campaign is a sideshow. We won’t take the bait. If you are interested in what The Donald has to say, you’ll find it next to our stories on the Kardashians and The Bachelorette.”

At the end of last year, Huffington Post reclassified Campaign Trump. Arianna Huffington, the site’s founder, made abundantly clear that her contempt for Trump was as heated as ever. But just this morning, one of her Associate Politics Editors posted an item titled, “A Democrat Explains Why She’s Voting for Donald Trump.” The main reason? Her hometown of Dubuque, Iowa

is suffering from a stagnant economy, and [she] is disappointed with Democrats for failing to adequately turn things around. When Trump, a wealthy businessman who espouses protectionist economic policies, rails against nations like Mexico and China, [subject Rebecca] Thoeni says she can relate.

“‘People at the company I work for, they lost their jobs. They’re sending those jobs to China,” she said.’”

For good measure, the article’s author contended that this Iowan “is one of many working-class whites who make up a large portion of the Trump phenomenon currently sweeping across the country. It is a coalition that spans Southern states and the Rust Belt, which has suffered from economic decline, population loss and urban decay. It also includes a good chunk of less educated Americans who do not have a college degree, and who feel like they’ve been ignored by leaders in Washington.”

A few days before, progressive stalwart Robert Reich wrote in a column about an epiphany he came to while touring the nation promoting his latest book:

I kept bumping into people who told me they were trying to make up their minds in the upcoming election between Sanders and Trump.

At first I was dumbfounded. The two are at opposite ends of the political divide.

But as I talked with these people, I kept hearing the same refrains. They wanted to end “crony capitalism.” They detested “corporate welfare,” such as the Wall Street bailout.

They wanted to prevent the big banks from extorting us ever again. Close tax loopholes for hedge-fund partners. Stop the drug companies and health insurers from ripping off American consumers. End trade treaties that sell out American workers. Get big money out of politics.

Somewhere in all this I came to see the volcanic core of what’s fueling this election.”

Reich has by no means become a Trump-ite. But he acknowledged that”

“If you’re one of the tens of millions of Americans who are working harder than ever but getting nowhere, and who understand that the political-economic system is rigged against you and in favor of the rich and powerful, what are you going to do?

…You don’t care about the details of proposed policies and programs.

“You just want a system that works for you.”

I could go on. But more important at this point is to note the publication of an article in The New York Times yesterday indicating that what’s happening is that the chattering class’ liberal wing is finally getting a message being sent it by the grass roots. The piece, by correspondent Noam Scheiber, reported a “form of anxiety…weighing on some union leaders and Democratic operatives: “their fear that Mr. Trump, if not effectively countered, may draw an unusually large number of union voters in a possible general election matchup. This could, in turn, bolster Republicans in swing states like Ohio, Pennsylvania, Michigan and Wisconsin, all of which President Obama won twice.”

And according to Scheiber, these Democratic stalwarts weren’t blaming American workers for succumbing to racism, xenophobia, etc. In their view, “The source of the attraction to Mr. Trump, say union members and leaders, is manifold: the candidate’s unapologetically populist positions on certain economic issues, particularly trade; a frustration with the impotence of conventional politicians; and above all, a sense that he rejects the norms of Washington discourse.”

There’s of course a distinct possibility that none of this will matter on Tuesday morning. Perhaps a Trump loss in Iowa – even a close one – will puncture the aura of invincibility and even inevitability that some believe is surrounding him, and trigger a collapse of his White House hopes. Or Trump could finally hurl one bombshell that turns off even his hard-core supporters. Or maybe once enough of his competitors drop out of the race, one of Trump’s remaining rivals could consolidate enough of the anti-Trump vote under one banner to send him to defeat. (Trump has never so far won a majority of Republican primary voters in any poll.)

But even if Trump flames out at some point, it’s increasingly clear that “Trump-ism” will remain with us. And if it finds a champion who can combine Trump’s passion with some softer personal edges and a somewhat thicker skin, both wings of the chattering class may regret that they don’t have The Donald to kick around anymore.

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