(What’s Left of) Our Economy: Welcome Signs of Healthier U.S. Growth


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With the Commerce Department having issued last week its second read on U.S. economic growth in the third quarter of this year, RealityChek can update its ongoing examination of a major but sorely neglected economic issue: Is the quality of America’s growth improving or worsening? That is, has the nation managed to generate more output in ways that will make a repeat of the last decade’s financial crisis and ensuing Great Recession likelier? Or is it still relying excessively on the same unsustainable growth engines that made the crisis inevitable?

Happily, the news here is pretty good. Not earthshaking, to be sure. But the new statistics confirm that, so far during 2017, the nation has made gradual (though by no means adequate) progress toward former President Obama’s essential goal of creating “an economy built to last,” rather than one dependent on spending and housing bubbles.

As suggested by that last sentence, RealityChek measures the health of growth by looking at the share of the inflation-adjusted gross domestic product (GDP) made up of consumer spending and housing – the toxic combination whose bloat let to the previous decade’s near meltdown.

These two sectors’ combined share of the after-inflation economy peaked in the third quarter of 2005, at 73.27 percent. Last week’s GDP statistics pegged it at 72.85 percent – the lowest since the 72.70 percent in the third quarter of 2016.

In the fourth quarter of 2016, this figure rose to 72.94 percent, and increased again to 73.14 percent in the first quarter of this year. But since then, it’s dipped for two straight quarters – the first such sequence since the first half of 2014.

The big change hasn’t come from personal consumption. In fact, it’s share of real GDP hit its all-time high in the second quarter of this year: 69.60 percent. And the latest third quarter figure is a still elevated 69.43 percent. What’s happened has been a dramatic shriveling of the housing sector. It peaked as a share of real GDP in the second quarter of 2005 at 6.17 percent. The new GDP report pegs it at just 3.42 percent

Business investment – another pillar of solid, healthy growth – may have picked up in the third quarter, too. The quarter’s first estimate of GDP judged that such spending accounted for 16.33 percent of its 2.96 percent annualized constant dollar growth. That would have continued a string of declining relative importance that began in the second quarter. But the newest data revises the business investment contribution upward to 18.10 percent of a (higher) 3.26 percent annualized price-adjusted growth rate.

This hardly a sterling performance. And it hasn’t lasted very long. But these results are considerably better than those for 2016 (when business spending actually subtracted 5.33 percent from the year’s 1.49 percent real growth) or for 2015 (when such investment’s role was positive, but it fueled only 10.34 percent of that year’s 2.86 percent real growth).

In addition, they could set the stage for an interesting test of the Republican party’s fundamental tax reform strategy: Use tax cuts to put more money into the pockets of businesses and wealthier Americans to encourage the building of more factories and labs and other kinds of productive facilities at home. If the Republican approach survives Congress intact, the GDP numbers will be a big help in seeing whether its promise of producing better and healthier growth is kept.


Im-Politic: A Think Tank-/China-Gate That Should be Investigated?


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If you (like me) thought that revelations about the corrupting funding practices of leading American think tanks couldn’t get any worse, we’ve been proven wrong in a jaw-dropping article in FOREIGN POLICY by contributing writer Bethany Allen-Ebrahimian.

Thanks to the author’s work, it’s now known that many of these organizations – on which U.S. policy-makers rely heavily for information and analysis that’s portrayed as the result of dispassionate research – not only receive contributions from a number of foreign governments. They receive contributions from an organization “bankrolled by a high-ranking Chinese government official with close ties to a sprawling Chinese Communist Party apparatus that handles influence operations abroad, known as the ‘united front.’”

The organization is a Hong Kong-based non-profit called the China-United States Exchange Foundation (CUSEF), and was founded in 2008 by Tung Chee-hwa, the former Hong Kong leader who strongly supported maintaining close ties with China following the city’s handover to the People’s Republic in 1997.

According to Allen-Ebrahimian, Tung “currently serves as the vice chairman of one of the united front’s most important entities — the so-called Chinese People’s Political Consultative Conference, which is one of China’s two rubber-stamp assemblies. The body is one of Beijing’s most crucial tentacles for extending influence.”

In addition, CUSEF “has cooperated on projects with the the People’s Liberation Army and uses the same Washington public relations firm that the Chinese Embassy does.”

Allen-Ebrahimian’s entire article is well worth reading – and essential to keep in mind in evaluating any China-related research or analysis from these organizations. But two other related points are well worth mentioning. First, CUSEF is a foreign agent registered with the Justice Department. In other words, it lobbies, which means that organizations accepting its donations arguably should be required to register, and identify themselves as lobbies, too – which think tanks so far haven’t done. Even those who think it’s perfectly for the leaders of an increasingly belligerent China to be perfectly should be free to buy influence in America’s policy-making process would surely agree that Chinese government sponsorship should be displayed front and center on these efforts.

Second, one of the D.C. lobbying mainstays the Foundation had hired to influence Congress on U.S.-China relations was the Podesta Group, which closed down last month after being connected with Donald Trump’s former presidential campaign chair Paul Manafort’s indictment for breaking American lobbying law.

The Podesta Group was founded and run by Tony Podesta and his brother John, former Secretary of State Hillary Clinton’s 2016 presidential campaign chair. And the Senate Intelligence Committee is investigating John Podesta’s possible involvement in the Democratic National Committee’s decision to pay for opposition research on Trump based partly on Russian sources.

So Allen-Ebrahimian’s article is a timely reminder that the Washington, D.C. swamp constantly attacked by President Trump and others entails many actors other than the standard industry lobbyists, that it’s totally bipartisan, and that Russia isn’t the only potentially dangerous foreign country that’s been swimming in it under the radar.

Those Stubborn Facts: No NAFTA Workers’ Paradise for Mexico


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Median Real Monthly Earnings Growth of Workers in Developing Country Members of the OECD, 2000 & 2015

China:                         15.3%*                   6.9%

India:                            5.7%***               1.0% (a)

Russia                           0.9%                    -9.5%

Turkey (d)                    1.7%                      5.6%

South Africa*              1.2%                      2.2%

Brazil:                         -1.3%                      2.7%

Indonesia:                    9.8%**                 -0.4%

Saudi Arabia (b)         6.1%                       5.2% (c)

Mexico:                        6.9%                       0.5%

*2001 figure

**2002 figure

***2007 figure

(a) 2012 figure

(b) 2010 figure

(c) 2015 figure

(d) 2004 figure

(Source: “Wage growth by region – ILO modeled estimates, Dec. 2016,” International Labor Organization. Link to ILO Global Wage Database available at “Data collection on wages and income,” International Labor Organization, http://www.ilo.org/travail/areasofwork/wages-and-income/WCMS_142568/lang—en/index.htm. HT to “The U.S.-Mexico Wage Gap Is Actually Widening Under NAFTA,” by Eric Martin and Nacha Cattan, Bloomberg.com, https://www.bloomberg.com/news/articles/2017-11-28/nafta-s-ugly-reality-u-s-mexico-wage-gap-is-actually-widening)

(What’s Left of) Our Economy: New GDP Figures Show Trade Keeps Boosting U.S. Growth


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The second estimate of third quarter real growth, which pegged the rate at 3.26 percent annualized, closely resembled last month’s initial read in showing a shrinking inflation-adjusted trade deficit to be a major engine of expansion. According to this morning’s Commerce Department report, trade fueled 0.43 percentage points of second quarter growth – up in absolute terms from its 0.41 percentage point contribution to the initial read’s 2.95 percent annualized growth, but down slightly in relative terms. This performance reflected the constant dollar trade deficit’s quarterly shrinkage from an initially estimated $595.5 billion annualized to $594.4 billion.

This third quarterly decrease – the first such stretch since a period overlapping 2012 and 2013 – brought the after-inflation trade shortfall to its lowest level since the third quarter of 2016 ($557.3 billion annualized). And the rate of decrease in the deficit from the first quarter level (12.52 percent annualized) was the fastest since the 46.14 percent annualized nosedive of the fourth quarter of 2013. Moreover, the new third quarter results continued to mark the first time since a 2012-13 stretch as well that trade has added to growth for three straight quarters. Even better, the pattern of deficit shrinkage – with real exports rising and real imports declining – revealed again that the economy had supplied increased demand from both abroad and at home simultaneously for the first time since the third quarter of 2014.

The new export figures were slightly weaker in general than the initial reads, but still remained at all time quarterly highs in all categories. All import categories showed slightly greater declines from the initial report’s levels. As a result, the quarterly rates of decrease remained at five- and six-year highs.

The price-adjusted trade deficit’s continuing fall also further reduced trade’s drag on real growth during the current recovery – from the 8.18 percent reported last month to 8.11 percent (or $228.1 billion in lost inflation-adjusted growth). In the second quarter, the trade drag was 9.24 percent. The trade drag of the Made in Washington deficit – which tracks flows heavily influenced by U.S. trade policy, decreased from 17.30 percent in the second quarter to 16.32 percent ($459.2 billion in lost real growth).

Here are the trade highlights from this morning’s report on the gross domestic product (GDP):

>The Commerce Department’s second read (of three) on third quarter inflation-adjusted economic growth confirmed last month’s finding that the narrowing of the real trade deficit played a major role in fueling expansion.

>The new figures showed that the trade shortfall’s decline to $594.4 billion at an annual rate contributed 0.43 percentage points to the quarter’s 3.26 percent price-adjusted annualized growth. The first reading – which judged the trade gap to have declined to $595.5 billion – pegged trade’s growth contribution at 0.41 percentage points to a 2.95 percent annualized growth rate.

>Thanks to the $594.4 billion figure (the lowest quarterly constant dollar trade deficit since the $557.3 billion reading in the third quarter of 2016), trade’s new growth-fueling role was its biggest since the fourth quarter of 2013 – when it added 1.29 percentage points to 3.90 percent annualized growth. The initial third quarter GDP data judged the trade contribution to be 0.41 percentage points to 2.95 percent annualized growth – a slightly bigger relative role.

>This morning’s GDP statistics also confirmed that in the third quarter, the real trade deficit fell sequentially for the third straight time. This kind of streak hasn’t been seen since a period starting in the second quarter of 2012 and lasting through the first quarter of 2013.

>In addition, the trade gap’s sequential rate of shrinkage in real terms in the third quarter (12.52 percent annualized) was its fastest since it plummeted by 46.14 percent annualized in the fourth quarter of 2013.

>The new GDP results also showed that the third quarter still marked the first time since the aforementioned 2012-2013 span that trade had generated real growth for three consecutive quarters.

>The pattern of real trade deficit shrinkage also remained encouraging. As with the initial read for the third quarter, the second report showed that the gap narrowed both because exports grew and imports shrank. In other words, the United States was supplying increased demand both at home and abroad simultaneously – the first time it has achieved that objective since the third quarter of 2014.

>Inflation-adjusted exports remained at quarterly records in the third quarter in all major categories, but overall their levels were slightly lower than in the initial read.

>Rather than increasing by a 2.31 percent sequential annual rate to $2.1937 trillion annualized, total exports are now judged to be up by 2.16 percent, to $2.1929 trillion.

>The price-adjusted goods export figure was revised up from an increase of 1.40 percent sequentially at an annual rate to $1.5056 trillion annualized, to an increase of 1.63 percent to $1.5065 trillion.

>But the inflation-adjusted services export results were revised down from a 4.04 percent increase at an annual rate to $689.2 billion, to a 3.17 percent increase to $687.7 billion.

>All import categories, however, showed slightly greater third quarter declines in this morning’s results than initially reported.

>The total imports decrease – the first sequential drop since the first quarter of 2016 (when annualized growth was a mere 0.58 percent) – was judged at 1.07 percent annualized, the fastest such fall-off since the fourth quarter of 2012 (3.82 percent). And the import level itself was revised down from $2.7892 trillion annualized to $2.7873 trillion.

>The inflation-adjusted goods import figures was lowered from $2.2914 trillion annualized to $2.2906 trillion – meaning that the sequential annualized decline was 0.65 percent. That represents the fastest rate since the 4.40 percent rate in the fourth quarter of 2012 – when overall growth was a bare 0.09 percent annualized.

>Real services imports were judged today to have fallen sequentially in the third quarter by 2.97 percent at an annual rate percent rather than 2.17 percent – still the fastest quarterly decrease since the 7.59 percent annualized plunge in the first quarter of 2011. The level of services imports was downgraded from $495.5 billion annualized to $494.5 billion.

>With the real trade deficit shrinking steadily, so is trade’s drag on the current economic recovery.

>The initial read on third quarter GDP pushed it down from 9.24 percent in the second quarter to 8.18 percent. The new data reduce it still further – to 8.11 percent, or $228.1 billion sliced off real growth during this recovery because of the after-inflation trade deficit’s expansion since the last recession ended.

>The growth-killing effects of the Made in Washington trade deficit have been considerably greater – but continue to fall as well.

>This trade deficit and its growth drag can be calculated by removing constant dollar oil trade and services trade from trade figures – two areas where trade liberalization’s impact so far has been modest at best. What’s left are the U.S. trade flows most heavily affected by trade agreements and other Washington policy decisions.

>When the first read on third quarter GDP came out, third quarter figures for the Made in Washington deficit were not available, but the second quarter GDP report revealed a drag of 17.30 percent, or $462.8 billion in real growth lost since the recovery began.

>Today’s GDP report shows that the Made in Washington trade drag is down to 16.32 percent, or $459.2 billion worth of real growth lost since the recovery began, in the middle of 2009.

(What’s Left of) Our Economy: What Blue-Collar Pay Surge?


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That was some claim made by The Economist earlier this month about blue-collar wages in America: They “have begun to rocket. In the year to the third quarter, wage and salary growth for the likes of factory workers, builders and drivers easily outstripped that for professionals and managers.” Even better, these workers, whose pay stagnation has practically defined the so far weak U.S. economic recovery from the Great Recession, have been enjoying pace-setting compensation gains for the last five years, the magazine writes.

I’d be feeling awfully good about this development – except the article in question was a model of overly enthusiastic cheerleading. More specifically, it’s a great example of how failing to look at statistics in enough detail can produce seriously flawed pictures of the economy.

The heart of The Economist‘s case is this chart, which shows that overall compensation (wages, salaries, and benefits) for occupations that don’t involve managerial, executive, or high level administrative responsibilities, and that lie outside the professions, has been rising faster than compensation for occupations that do deal with these matters.

But even a glance should reveal a serious potential problem – the categories are awfully broad. In fact, they lump together lots of occupations that on their own seem awfully big. (To be sure, the source – the Bureau of Labor Statistics – uses these categories. But it presents narrower ones, too.] Further, the five-year period The Economist uses as its longest-run time frame is a period that’s economically meaningless. And in fact, disaggregating those occupational categories and using an economically meaningful long-term time frame (the duration of the current recovery) yields significantly different results.

For example, according to the chart, the big American compensation winner has been the “production, transportation, and material moving” cluster. Adjusted for inflation (which the magazine doesn’t do), here’s how its compensation (including for government workers in these occupations) has improved over the latest quarter year for which data are available, the latest year for which we have statistics, and since the recovery began:

2Q 2017-3Q 2017: +0.38 percent

3Q 2016-3Q2017: +1.06 percent

current recovery: +5.56 percent

This performance is indeed much better than the super-category covering white-collar workers – “management, professional, and related” workers:

2Q 2017-3Q 2017: -0.01 percent

3Q 2016-3Q 2017: +0.01 percent

current recovery: +2.86 percent

But look what happens when you separate production workers from the transportation and material moving workforce:

2Q 2017-3Q 2017: +0.49 percent

3Q 2016-3Q 2017: +0.79 percent

current recovery: +4.58 percent

The compensation gains are still better than those for the managers. But the gap is a good deal smaller.

Now let’s remove professional workers from the management cluster. The compensation increases for business and financial managers are:

2Q 2017-3Q 2017: -0.01 percent

3Q 2016-3Q 2017: +0.57 percent

current recovery: +4.48 percent

Except for the latest quarterly figure, they’re pretty comparable to the advances for the production workers.

Now let’s look at another blue-collar category – “office and administrative support.” Compensation increases for the relevant time frames are as follows:

2Q 2017-3Q 2017: -0.009 percent

3Q 2016-3Q 2017: +0.19 percent

current recovery: +4.63 percent

These increases over the short-term are actually somewhat weaker than for the business and financial managers. When it comes to “installation, maintenance, and repair,” the latest quarterly compensation gains were a bit better than those for the business and financial managers. But the latest yearly and recovery era increases for the installation category were worse than those for the business and financial managers.

2Q 2017-3Q 2017: +0.01 percent

3Q 2016-3Q 2017: +0.39 percent

current recovery: +4.40 percent

And we see the same kinds of numbers for the catch-all “service operations” category:

2Q17-3Q17: -0.01 percent

3Q16-3Q17: +0.38 percent

current recovery: +3.04 percent

So what’s really going on here is that compensation for some blue-collar workers has recently begun to rise faster than compensation for some white-collar workers, and that compensation for some white-collar workers continues to rise faster than compensation for some blue-collar workers. And let’s not forget how governments across the country have acted in the last few years to juice blue-collar pay – by raising the minimum wage. These actions, whatever their substantive merits or flaws, tell us nothing about underlying trends shaping the economy.

Yes, it’s hard to turn those observations into a catchy headline and an eye-opening story. But that’s why discerning readers have learned to distinguish journalism from clickbait.

Im-Politic: More Fake News on Trump and Muslims


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American’s mistrust of the Mainstream Media is so great that even the Mainstream Media is getting worried. If these reporters and editors keep turning out slanted stories like Politico‘s article yesterday reporting a growing national shortage of Muslim clerics, their trust deficit can only deepen.

The main message that author Sally H. Jacobs and the Politico staff wanted to send is stated clearly in the headline and subhead: “America is Running Out of Muslim Clerics. That’s Dangerous: How Trump’s travel ban worsened a shortage of qualified preachers – and why that’s dangerous.”

And the piece does contain several anecdotes about imams from Muslim countries invited to serve mosques in the United States being turned away during the last year by U.S. immigration authorities. Moreover, it leads off with a story about one of those congregations being unable to generate enough volunteer imams from its own ranks, ostensibly because of studies showing that violence against American Muslims has been rising since the 2016 election that put Mr. Trump in the White House.

But there are two enormous, related problems with these points – one which Jacobs and her editors don’t appear to be aware of but should have investigated further, and one they clearly are aware of (which of course is a clear indication of bias).

The problem that’s known to the Politico team is that the only big decrease in the numbers of imams permitted to enter the United States that emerges from the best data available took place under former President Obama. How do I know that this is known to Jacobs and the Politico staff? Because it’s mentioned in the article:

In an effort to stem fraudulent applications for such visas, the number of R1s [a U.S. visa issued for temporary religious workers] issued during the Obama era declined significantly from 10,061 in 2008 to 2,771 in 2009. In the following years, though, the number rose steadily and in 2016 the government issued a total of 4,764 R1s.

It is unclear whether or by how much those numbers have dropped during the Trump administration, as statistics for fiscal year 2017 will not be available until next year, says a U.S. State Department spokesman.”

And something else crucial should be apparent from these sentences: The reason that the Obama administration cracked down – even as the Muslim population of the United States kept rising, thereby boosting the demand for clerics – is because it perceived a phony imam problem that needed to be nipped in the bud. This problem, moreover, surely grew under the presidency of George W. Bush – who so many Never Trump-ers across the political spectrum are now portraying as a paragon of tolerance.

If only these vital points hadn’t been buried in Jacobs’ piece!

The problem that Jacobs and the Politico staff may not be aware of (but arguably should have been) is that the main hate crimes figures cited in the piece come from a source that, to put it mildly, has reputational and objectivity problems: The Council on American-Islamic Relations (CAIR).

Just one such problem: In 2009, a federal judge ruled that the U.S. government (under George W. Bush) “has produced ample evidence” to establish CAIR’s association with groups like the Holy Land Foundation (an Muslim charity convicted in the United States of funding Islamic militants) and Hamas (listed by the U.S. government as a terrorist organization since 1997).

There’s no denying that an actual or impending shortage of American Muslim clerics is an important and interesting development in its own right. And it raises the at least as important and interesting question of why Jacobs and Politico were so determined to turn a real news story into a fake news attack on President Trump?

(What’s Left of) Our Economy: More Establishment Happy Talk About De-Industrialization


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I’m all for looking on the sunny side of life. Making up the sunny side of life? Not so much. That’s why I find Anne-Marie Slaughter’s recent Financial Times column so disturbing. For the author – a contributing editor of the FT, the president of New America (a tech and offshoring industry-funded think tank in Washington, D.C.), and a former leading foreign policy adviser to President Obama) has just served up an exercise in economic hopium that is almost entirely fact-free, and that repeats a canard that was hopelessly out of date twenty years ago.

Slaughter’s fanciful claim? That the spread of the internet of things throughout American manufacturing is going to spur a revival of America’s hard-hit, industry-heavy midwestern Rust Belt. One main reason, according to the author:

“[T]he next phase of the digital revolution is the internet of things. The Midwest is the traditional home of makers — of cars, tractors, machines and household appliances. Companies such as Deere & Co, Carrier or Ford may have shifted manufacturing abroad, but the design, engineering and innovation is still concentrated back home. Those jobs may be less sexy than billion-dollar start-ups, but they will be stable and well paid. On Thanksgivings to come, Midwest cities seeking to grow their tech sectors should have more and more to be thankful for.”

Although the headline (which Slaughter probably isn’t responsible for) – “The internet of things helps spark a rust belt revival” – signals that the Midwestern renaissance is already well underway, the author herself is honest enough to specify in the text that the only metrics she presents show progress on this score limited to “a fraction of a percentage point.” But it would have been more honest to at least hint at all the data suggesting how pie-in-the-sky her prediction is over any foreseeable time frame.

For example, although there’s no authoritative source of information showing how many employees of manufacturing companies based in the United States (either U.S.- or foreign-owned) work in science and technology positions, numbers are available for the share of American manufacturing workers occupying both blue-collar and white-collar jobs. These aren’t definitive, because many of the white-collar jobs are administrative and management jobs having little or nothing to do with innovation, and because manufacturing companies have tried to eliminate as many as possible to maximize cost savings.

But it’s still surely revealing that, since the offshoring phase of U.S. trade policy officially began when the North American Free Trade Agreement (NAFTA) went into effect at the beginning of 1994, American manufacturing employment falling outside the “nonsupervisory and production” category is down by 956,000 – or 20.45 percent. That’s a smaller hit than taken by industry’s blue-collar workforce – which is down by 39 percent, or 3.418 million. But over the last two-plus decades, the blue-collar/white-collar job split in manufacturing has barely budged, with the former’s share down from only 72.27 percent to 70.21 percent. Does that tell you a dramatic U-Turn is anywhere on the horizon?

Moreover, the U.S. Bureau of Labor Statistics (the source of the above figures) did take a cursory look at the employment of some types of engineers in various sectors within domestic manufacturing. It found that, in May, 2015, between about 38 percent and about 55 percent of the workforces in American information technology hardware production belonged in science and technology categories. But little of this type of manufacturing is located in the rust belt.

The only data set this same study contained that looked relevant to the midwest covered the increase in the number of mechanical engineers employed in the motor vehicle parts and various industrial machinery sectors. Only in motor vehicle parts did the workforces (modestly) exceed 10,000 – and this in an industry whose payrolls approached 564,000 that month, and whose total white-collar workforce came to just over 128,000.

Although it’s true that the statistics could be missing the kind of shift Slaughter expects (and her headline writer regards as already underway), anyone familiar with the way manufacturing typically works would understand why extreme skepticism is in order. In real-life manufacturing companies, and especially factories (as opposed to those imagined by so many think tankers and academics), production on the one hand and research and development etc on the other are rarely activities that are so sharply distinctive that one can readily take place around the world from another. In fact, they are so closely related that knowledge tends to flow back and forth between production line and lab in a continuous, interactive feedback loop. And it’s not remotely good enough to exchange this information electronically. That’s why, in sector after sector of manufacturing, when the production leaves the country, the research and development and design and engineering tend to follow.

And that’s why the only useful purpose served by Slaughter’s article – and the FT‘s decision to publish it – is reminding readers that, as long as American trade and other globalization policies keep needlessly fostering the export of manufacturing, offshoring interests, their hired guns in the think tank world, and their unwitting dupes in the press will strive to portray these losses as all for the best.

As my book, The Race to the Bottom made clear, it was a phony excuse for de-industrialization back in 1997, when former Clinton Secretary of State Madeleine Albright touted the advent of high tech products “designed and begun in the United States and…manufactured in Asian countries,” and it’s no less dangerously off-base today.

(What’s Left of) Our Economy: With Friends Like This, Today’s World Trade System Doesn’t Need Enemies


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One of the best pieces of advice I’ve ever received about analytical and opinion writing is “Let your adversaries hang themselves with their own words.” So on the eve of Thanksgiving, 2017, I’m especially grateful to Bill Emmott, the former editor-in-chief of The Economist magazine, for making clear why President Trump and other nationalist critics of U.S. trade policy have been exactly right in slamming as a huge mistake America’s decision to join the World Trade Organization (WTO) – the linchpin of the global trade order for the past two-plus decades.

Writing on the Project-Syndicate.org website, Emmott reports that the Trump administration has embarked on a campaign to cripple the operations of the WTO, which went into business at the beginning of 1995 and which possesses unprecedented internationally recognized authority not only to develop rules for governing many kinds of global commerce, but for enforcing them.

As with other efforts to subject countries to some legal-type checks, the ostensible purpose of the WTO was to remove power from the picture when countries negotiated trade arrangements, and especially when they dealt with the disputes over such arrangements that inevitably arise.

Many powerful critiques of the WTO have been advanced by trade policy critics across the spectrum, but I’ve always viewed two interlocking objections as supremely convincing. First, despite its lofty stated legalistic objectives, the WTO has always been as quintessentially a political organization as other international organizations, like the United Nations. Second, the politics of the WTO has always been decidedly anti-American – for the overwhelming majority of its members depended heavily on amassing big trade surpluses with the United States in order to generate adequate growth for themselves.

So Washington’s decision (backed by Democratic and Republican leaders alike of course) to spearhead the WTO’s creation and become a founding member achieved none of its promised major advantages for the U.S. economy (an impartial forum for handling trade disputes), and saddled the country with all of the major drawbacks of such a system (nullifying most of its ability to use its immense market power to resolve most of these disagreements favorably).

And wouldn’t you know it? Emmott, whose former publication was created in the mid-19th century precisely to advocate for so-called free trade principles, strongly agrees! As he wrote in an essay yesterday:

With the WTO essentially out of the picture, the US will launch a new initiative to strike bilateral deals on trade rules – an approach that Trump advocated in his APEC [Asia Pacific Economic Cooperation forum] speech. Given that the US remains a vital market for most exporters, such an initiative will have clout.”

Even Emmott’s suggestion that these U.S. moves will fail unwittingly confirms the case that American leverage will secure the best possible outcomes for Americans. “Asian and European countries,” he writes, “should be preparing for the worst by negotiating their own trade agreements with one another to preempt American mercantilism. After all, taking the initiative to boost trade and other commercial contacts is the best way to resist a trade war.”

What the author apparently misses is that the United States is such “a vital market for most exporters” precisely because the latter countries simply don’t believe in opening their economies to others’ goods and services any more than is absolutely necessary. It’s entirely possible that the dramatically altered circumstances created by new unilateralist U.S. policies could imbue these mercantile economies with some free trade religion. But decades- – and in some cases, centuries- – old approaches generally don’t die so easily. Moreover, if such market-opening did indeed take place, and it could be adequately monitored and enforced, why wouldn’t the United States want to take part?

Until then, however, it would make the most possible sense for Washington to proceed along the unilateralist lines Emmott dreads. For thanks in large measure to its transparent political system and strong rule-of-law tradition, the reciprocal market-opening promises offered by America in bilateral trade diplomacy will be much more credible than those made by Japan, or China, or Germany, or other major protectionist economies. The days of selling the United States much more than they buy from it would come to an end. But genuinely intelligent foreign leaders will recognize that receiving a half a loaf from dealing with Washington on this new basis is the best trade bet they can realistically hope for.

As for countries that stubbornly refuse (possibly egged on by free trade zealots like Emmott) the United States – with its considerable present degree of self-sufficiency and matchless potential for much more – will be more than capable of shrugging its shoulders and moving on.

Incidentally, as RealityChek regulars may recall, Emmott isn’t the first globalization cheerleader unintentionally to reveal that the WTO was a pig in a poke for U.S. economic interests, and indeed was created expressly to neuter American power. Chad Bown, a former World Bank economist now with the Offshoring Lobby-funded Peterson Institute for International Economics, handed trade policy critics, and the American people, a similar gift just last August.

Our So-Called Foreign Policy: The Blob Keeps Discrediting Itself on Trump and Asia


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President Trump’s recent Asia trip – or, more specifically, the chattering class commentary it keeps generating – is the gift that keeps on giving, especially for a blogger. I can’t remember a foreign policy event that has generated so much material from so many mainstays making of the nation’s foreign policy blob making so clear how systematically they fail tests of basic competence, common sense, and even internal consistency .

It’s long been clear that you don’t get ahead in America’s bipartisan foreign policy establishment with thinking that even peeks outside the box, but I had always thought that this hidebound crowd at least valued minimal knowledge. The November 14 essay by the Washington Post‘s David Ignatius casts doubt even on that proposition.

As Ignatius sees it, “Trump’s trip may indeed prove to be historic, but probably not in the way he intends. It may signal a U.S. accommodation to rising Chinese power, plus a desire to mend fences with a belligerent Russia — with few evident security gains for the United States. If the 1945 Yalta summit marked U.S. acceptance of the Soviet Union’s hegemony in Eastern Europe, this trip seemed to validate China’s arrival as a Pacific power.”

I had to read this passage several times before convincing myself it was actually written. For although it’s entirely legitimate to question Mr. Trump’s approach to China, the historical comparison indicated is jaw-droppingly ignorant. In fact, it amounts to endorsing a narrative about the beginning of the Cold War that’s been emphatically rejected by all students of the period outside the ranks of the lunatic right.

After all, evoking Yalta as an example of appeasement requires believing that the United States (with or without the help of the United Kingdom and France) could have done something to prevent the Soviet Union from establishing control over what would become the Iron Curtain countries. Why is this preposterous? Because literally millions of Red Army soldiers were occupying the region. Can anyone this side of sane really suppose that, after nearly four years of costly conflict with Nazi Germany – and with six months left of brutal combat against Japan – American leaders were going to turn on Moscow?

Just as important, although nothing done by President Trump indicates any desire to recognize China as a superior or even a co-equal in the Asia-Pacific region (as made clear here), there’s no question that China has been catching up to the United States economically and militarily. So why didn’t Ignatius broach the question of “Why?” Could it be because the reckless trade expansion with China backed enthusiastically by the entire foreign and economic policy establishment has transferred literally trillions of dollars worth of trade profits and defense-related technology to Beijing? So there’s another test Ignatius has flunked – that of intellectual honesty. (Interestingly, Ignatius himself seems to have been silent on the issue when it was being debated heatedly in the late 1990s and into 2000.)

Hal Brands’ Bloomberg View essay on the same subject two days later shows off another feature of establishment foreign policy thinking that’s all too common: trafficking in euphemisms aimed at hoodwinking the public – and, no doubt, unsophisticated politicians. According to Brands, a senior professor at The Johns Hopkins University School of Advanced International Studies, the Trump visit reminded Americans and Asians once again that the president

is blind to the importance of trade and commercial openness in underpinning America’s key security relationships. The president praised America’s tradition of defense cooperation with Japan, yet he continued to harangue Tokyo over its trade surplus with the U.S. Administration officials sought to foster enhanced multilateral cooperation on regional security issues, yet Trump reiterated his previous condemnations of the multilateral trade deals that previous administrations had seen as necessary complements to those defense relationships.”

Further, Mr. Trump seemed oblivious to how, “In the broadest sense, U.S. security and economic relationships have long gone hand-in-hand. Liberal trade practices have provided the economic lubricant for military partnerships, and reinforced the idea that America’s interactions with its closest friends are positive-sum rather than zero-sum.”

Likewise,” he Brands writes, “allies have deferred to Washington on geopolitical issues not just because of the military protection the U.S. provides but because of its critical role in advancing an open international economy from which those allies benefit enormously.”

Trade deals that [have] been “necessary complements to…defense relationships.” “Liberal trade practices [that] have provided the economic lubricant for military partnerships.” “Allies deferring “to Washington on geopolitical issues not just because of the military protection the U.S. provides but because of its critical role in advancing an open international economy from which those allies benefit enormously.”

Judging from these phrases, the longstanding status quo in East Asia has been so farsighted, so mutually beneficial, and even so warm and fuzzy and pleasingly symmetrical, that only a knave, a fool, or both would want it undermined. But translated into plain, euphemism and metaphor-free English, what Brands is saying is that the arrangements he believes Mr. Trump wants to shake up require the United States not only to bear the vast bulk of the burden of (rapidly growing, and increasingly nuclear) military risk, but most of the economic costs as well (both in the form of outsized defense spending and wildly lopsided trade flows).

And despite the “enormous” benefits enjoyed by the allies, if the United States doesn’t keep delivering on both grounds, these Asian countries will (a) be fully justified in questioning Washington’s reliability, and even telling the Seventh Fleet and the U.S. nuclear umbrella, to pack up stakes and return home; and (b) will be sorely tempted to do so.

Brands has every right to argue that the United States should expose itself to the ever greater danger of nuclear attack (from North Korea or China) on behalf of countries that insist on remaining free to shut American producers out of their markets, and that subsidize the destruction of U.S. jobs and output. He also has every right to contend that these allies will threaten to abandon security cooperation with the United States (and leave themselves more vulnerable to Chinese power) if Washington simply starts defending its legitimate economic interests.

But Brands has a corresponding obligation to state these views explicitly rather than follow well-worn establishment practice and cloak them in soothing cliches. While he’s at it, he might deign to explain to us peons how these approaches to Asia can possibly enhance the safety and well-being of the American people. And if he and the rest of the foreign policy blob refuse, the various media outlets that for so long have carried their work and helped propagate their messages should force them to lay their cards on the table – and at least expose the con job they’ve been pulling on the public.

(What’s Left of) Our Economy: New Fed Figures Show U.S. Manufacturing Blowing Past Hurricane Setbacks


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The Federal Reserve’s new industrial production figures for October (released last Thursday) illustrated the perils of measuring economic performance month-by-month – especially where hurricanes and other individual shocks are concerned. For most of the industries hit hardest by the recent storms staged strong and even record sequential production bouncebacks in October.

At the same time, the data also make clear that the strong output momentum exhibited by America’s domestic manufacturing before the hurricanes continued even as they undercut sectors highly concentrated on the Texas and Louisiana Gulf coasts; and that this strength extended into October.

The month’s strong (1.29 percent) monthly inflation-adjusted production gain, combined with upward revisions, lifted manufacturing out of its latest output recession. And the October year-on-year in real output increase (2.73 percent) was industry’s best July, 2012’s three percent. The technical recession into which the automotive sector has fallen continued into its fifteenth month in October, but even here some good news emerged, as constant dollar output rose for the fourth straight month – the best such stretch since last May through October.

Overall, manufacturing’s strong recent after-inflation output performance has brought the sector to within 2.56 percent of the production levels it reached just before the last recession struck – nearly ten years ago, at the end of 2007.

Here are the manufacturing highlights of the Federal Reserve’s October industrial production report: 

>American domestic manufacturers overcame their hurricane-related losses and then some in October, according to new Federal Reserve industrial production data that show month-on-month real output gains and revisions strong enough to life the entire sector out of its latest technical recession.

>After-inflation production rose by 1.29 percent on month in October, the Fed reported – the best such improvement since April’s 1.37 percent.

>Positive revisions buoyed manufacturing as well. September’s constant dollar production – which was initially reported to have advanced by 0.10 percent sequentially despite the hurricanes – is now estimated as a 0.38 percent rise. August’s monthly real output decline was revised down again, from a 0.20 percent dip to 0.16 percent. And rather than decreasing by 0.35 percent in July, that month’s real manufacturing output is now judged to have flat-lined.

>Keying the October monthly real production surge in manufacturing were the sectors hit hardest by the recent hurricanes because they are heavily concentrated along the Texas and Louisiana coasts of the Gulf of Mexico, and especially because they rely on oil and natural gas as feedstocks.

>For example, price-adjusted production in organic chemicals cratered by a downwardly revised 14.92 percent on month in September. But in October, the sector’s after-inflation production skyrocketed by 28.05 percent – the biggest improvement on record (in this case, going back to 1986).

>Inflation-adjusted petroleum refinery output dropped sequentially in September by an upwardly revised 2.11 percent. October’s monthly 4.60 percent increase was the sector’s best since October, 2008’s 17.72 percent.

>In the huge chemicals sector in which many of these hurricane-impacted industries are located, constant dollar output in August and September is now reported to have dropped month-to-month by 2.57 percent and 2.22 percent – slightly better results that initially pegged, but still the worst since recessionary December, 2008’s 4.85 percent shrinkage. But October’s 5.82 percent sequential real production increase was its best monthly figure on record (in this case, going back to 1972).

>And in the non-durable goods sector in which chemicals are found, two sizable monthly production fall-offs in August and September were followed by a 2.33 percent sequential spurt in output in October – its best such performance since January, 1983.

>Nonetheless, some hurricane-affected sectors continued to lag. In plastics materials and resins, September real output tumbled by 8.16 percent sequentially – its worst month since recessionary December, 2008 (11.72 percent).

>In October, however, inflation-adjusted production slipped by another 4.65 percent sequentially, making for the worst two-month drop (12.43 percent) since November and December, 2008 (23.31 percent).

>In the automotive sector, a technical recession (more than two straight quarters of cumulative real output decline) continued into its fifteenth month in October. Since July, 2016, inflation-adjusted production is off by 0.23 percent.

>But the industry, which led manufacturing’s overall early recovery comeback from its sharp recessionary downturn, has shown some signs of life in recent months.

>The October Fed figures showed that its constant-dollar output is now up for three straight months. That kind of improvement hasn’t been seen since the May-October period of 2016.

>Further, revisions have been positive, including a September upgrade all the way from 0.07 percent to 1.69 percent.

>October’s Fed figures still left domestic manufacturing considerably smaller than at the onset of the Great Recession – which began in December, 2007. But the October monthly figures plus the revisions produced major catch-up. Last month’s Fed industrial production report showed that real manufacturing output remained 4.26 percent lower than when the last recession broke out. The October report shows the gap has narrowed to 2.56 percent.