(What’s Left of) Our Economy: A Laughable Indictment of Trump’s World Bank Choice

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I was going to post this morning on more implications of yesterday’s new monthly U.S. trade figures, but as so often happens, the Mainstream Media has just come out with an article whose mind-boggling cluelessness reveals such deep-seated biases that I had to switch gears. Special bonus – it didn’t even come from a mainstay of the establishmentarian U.S. foreign policy and globalization Blob. Instead, we have the Financial Times editorial board to thank.

What other conclusion can be reasonably drawn from the FT editorial slamming President Trump’s appointment of David Malpass to head the World Bank?

Not that Malpass has been God’s Gift to Economics or to the cause of third world economic development. But according to the FT, a big problem with Malpass is that he lacks the leadership experience as well as intellectual and often political heft of previous U.S. choices like – wait for it – Robert S. McNamara.

That’s right – the same Robert McNamara who deserves such blame for the American disaster in Vietnam. What’s next for the FT? Criticizing Mr. Trump for appointing a senior military adviser lacking the battlefield genius of George Armstrong Custer?

Almost as bad: What’s given the FT editorialists the idea that McNamara, or any of his pre-Malpass successors, was such a whiz at the Bank? Here’s an appraisal of McNamara’s tenure arguing that he unintentionally created “incentives for Bank staff and management to push money out the door, sometimes with relatively little regard for how it would be used—a practice that still bedevils the Bank’s work today.” And this was from an admirer.

A second major FT argument against Malpass looks more reasonable at first glance:

His judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under.”

What the FT conveniently forgets, though, is that using this standard would rule out virtually every economist in the world as World Bank president.  

Considerably stronger is the FT‘s observation that “As early as 2011 [Malpass] suggested tightening monetary policy and driving up the dollar, a hard-money philosophy entirely at odds with the reality that the Fed had averted economic disaster.”

The problem with this school of thought is that, although the Federal Reserve’s flooding of the American economy with easy money may have been necessary to keep the nation (and world) afloat, it’s also arguably created a global addiction to super-cheap credit that’s kneecapped chances of restoring genuine long-run economic health.

As contended by no less an economic authority than Lawrence Summers (a former World Bank research chief), the result has been “secular stagnation” – the inability of the United States or other major countries to grow acceptably without inflating lending and spending bubbles that are doomed to burst disastrously.

As the editorial makes clear, the FT mainly objects to Malpass because he’s “deeply sceptical of multilateral institutions.” Which would be funny even if the FT itself didn’t describe the Bank as already “dysfunctional” – despite being led by McNamara and all his supposedly genius successors.

More fundamentally, all else equal, why should anyone lack skepticism about any means to an end? Worshiping multilateralism is like worshiping a hammer. Sometimes is the best tool to use; sometimes it’s not.

The FT reasonably argues that “With an increasing number of rival sources of development finance — not to mention private capital — the bank needs to think hard about where it can best add value.” The paper just as reasonably concludes that effecting change requires its president “to be a critical friend of multilateralism who recognises that its institutions need to be adapted to a changing world, not an instinctive ideological enemy.”

But given that these – and other – problems with the Bank have persisted for so long, it’s hard to imagine that a leader accepted by multilateral fetishists like the FT would generate the necessary push.

As a result, the Malpass nomination can just as reasonably be viewed as a Trump administration attempt to change the kind of losing game coddled for so long by diehard multilateralists like the FT editorial board. Such critics should exhibit a little more humility before writing him off as a sure failure. Not to mention minimal historical memory. 

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(What’s Left of) Our Economy: New U.S. Trade Figures Start Creating a Trump China Scorecard

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After a roughly month-long shutdown-related delay, the latest U.S. monthly trade figures were finally released this morning – bringing the story up only through November. But although they’re clearly somewhat dated (especially considering how fast China trade-related events are moving), they reveal some noteworthy China-related developments and point to some equally noteworthy potential China-related trends.

The new trade report makes clear that, at least through November, President Trump’s tariffs, and possibly the threat of more, are influencing trade flows. And there’s even some evidence that, although the U.S. bilateral goods deficit that so bothers Mr. Trump is moving in the wrong direction, the underlying trends are much more favorable. Here’s what I mean.

It’s true that, on a year-to-date basis, the American goods deficit with China is up considerably. In fact, the 10.90 percent widening of this gap during this period is the biggest since the same period between 2010 and 2011 – when the U.S. economy was conclusively moving out of recession, and the deficit jumped by 22.38 percent.

But the November monthly figures point to a more complicated picture, especially keeping in mind that two big sets of U.S. tariffs have been imposed on goods imports from China since last July.

For example, despite widespread reports of tariff “front-running” late last year aiming at avoiding future levies, the U.S. merchandise trade deficit fell on a monthly basis by 12.16 percent – from $43.01 billion in October to $37.86 billion. Yes, the October trade gap represented the fourth straight monthly record high. But the November drop was the biggest overall since last February’s 18.61 percent. And the November total was the lowest since August’s $38.57 billion.

Moreover, because U.S.-China trade is so seasonal (think, in large measure, “Christmas”), it’s instructive to compare last November’s results with its most recent predecessors. And this exercise reveals that the sequential deficit decline was the biggest November monthly decrease since recessionary 2008’s 17.41 percent.

A similar pattern emerges for exports. America’s goods sales to China in November fell sequentially by 5.10 percent, from $9.13 billion to $8.66 billion. That’s the lowest such level since May, 2016 ($8.54 billion) and the lowest November level since recessionary, 2009 ($7.37 billion). And the monthly November merchandise deficit decrease was the biggest since recessionary 2008’s 14.83 percent. Interestingly, though, last November’s monthly export drop was smaller than October’s (6.73 percent).

Goods imports from China were off markedly as well – by 10.93 percent sequentially in November, from October’s all-time high of $52.23 billion. The $46.53 billion November total was the lowest since last July’s $47.10 billion.

In addition, the monthly decrease was the biggest since last February’s 14.68 percent, and the biggest November fall-off since 2008 (16.95 percent).

But U.S. policy’s effectiveness can’t accurately be evaluated unless the China trade flows are examined in the context of broader American economic trends and in particular manufacturing trends – since bilateral trade flows are so manufacturing-heavy. And what the key numbers suggest is that, even though the merchandise deficit with China has grown rapidly and indeed is heading for an all-time annual record, American industry is starting to reduce its dependence on Chinese parts, components, and other inputs.

The main evidence is the relationship between the growth of U.S. manufacturing production on the one hand, and the growth of U.S. goods imports from China on the other. If the resulting ratio is rising, then so is that U.S. dependence. If it’s falling, the reverse would seem to be true. So here are those figures for the first eleven months of each year going back to 2010-11, when the current U.S. economic recovery finally showed some real legs. (Incidentally, RealityChek regular may recall a similar exercise last November regarding American manufacturing’s growth and the global manufacturing trade deficit.)

2017-18: 4.64:1

2016-17: 3.41:1

2015-16: the deficit fell by 5.94 percent while manufacturing grew an inflation-adjusted 0.03 percent.

2014-15: the deficit fell by 7.21 percent while manufacturing shrank an inflation-adjusted 2.02 percent

2013-14: 4.18:1

2012-13: 4.66:1

2011-12: 3.18:1

2010-11: 7.80:1

According to the above table, U.S. manufacturing’s dependence on Chinese inputs has grown faster between the first eleven months of 2016-17 and the first eleven months of 2017-18. But the latest year-to-date results are much lower than those for 2010-11. And this year’s numbers are probably also inflated by that tariff front-running. We’ll know more as the figures for the next few months come in, but with the possibilities live both of tariffs going up and coming off, definitive conclusions still look pretty far off.

Im-Politic: Out of the Mouths of Globalists – A Case for the Wall

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With the possibility of another Border Wall-related government shutdown hanging over tonight’s State of the Union – and all of American politics – it’s pretty astonishing to recognize that The New York Times editorial board, which strongly opposes the wall, and which has long championed a globalist approach to foreign policy issues, has just unwittingly endorsed a Trump-ian, America First-style approach to border security.

The endorsement came in The Times‘ recent editorial calling for a prompt U.S. military pullout from Afghanistan – a position that’s also decidedly Trump-ian.

According to Times editorial writers, the main rationale originally cited for fighting in Afghanistan was flawed from the start. It focused too tightly on

the idea that war abroad could prevent bloodshed at home. As [then President George W. Bush] explained in 2004: ‘We are fighting these terrorists with our military in Afghanistan and Iraq and beyond so we do not have to face them in the streets of our own cities.’”

Globalists well to the left of Bush endorsed this rationale as well, notably former President Barack Obama. His first bid for the White House stressed that Afghanistan was a “good war” and a conflict that “had to be won” in order to “take the fight to the terrorists” – in stark contrast to Mr. Bush’s “dumb” war in Iraq.

But The Times – which admirably recognizes that it bought this line as well – now suggests that this argument never made much sense. Although acknowledging that “since 9/11, no foreign terrorist group has conducted a deadly attack inside the United States,” it adds that

there have been more than 200 deadly terrorist attacks during that period, most often at the hands of Americans radicalized by ideologies that such groups spread. Half of those attacks were motivated by radical Islam, while 86 came at the hands of far-right extremists.”

The Times doesn’t draw the obvious implication, but it couldn’t be clearer even to a minimally perceptive observer: The kinds of terrorist threats the paper spotlights have appeared in the United States in large measure because border security has been so shoddy for so long. In particular, American immigration authorities have never adequately screened newcomers from countries where radical Islam has taken root, and who are therefore unusually vulnerable to radicalization.

It’s conceivable that border security could effectively address these challenges without the kind of physical barriers now sought by President Trump – and demonized by most of Congress’ Democrats. But at the least, The Times‘ rationale strongly militates for other Trump-ian, America First-style border security measures, like applying travel bans against countries that are known hotbeds of terrorism and strict limits on admitting refugees and asylum-seekers from these same points of origin.

And barriers look especially important given the extensive legal/due process protections now automatically awarded to anyone who sets foot on American soil, including from countries whose threadbare (at best) governments lack the capacity to document the identity of their residents satisfactorily. Therefore, adequate vetting by the U.S. government will be excruciatingly difficult, to put it mildly.

But if The Times wants to clinch the case for withdrawing promptly from Afghanistan, it should make a point I’ve made repeatedly: It will be far easier to protect against terrorist threats by relying mainly on border security because access to the country is something Washington can reasonably hope to control. Protecting against terrorist threats mainly by chasing jihadists around a completely dysfunctional region of the world whose greatest strength is spawning extremism would base American strategy on something Washington can’t reasonably hope to control.

And of course, connecting an end to massive American military involvement in the Middle East with the need for more secure borders could only bolster President Trump’s position, too.

(What’s Left of) Our Economy: Inside that Big New Manufacturing Jobs Revision

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Last Friday’s U.S. jobs report (for January) contained a special bonus: On top of the usual monthly numbers, and the insights they yielded on the impact of Trump tariffs on domestic manufacturing (described in this post), the statistics incorporated an annual revision that goes back several years – and they change the picture of industry that’s been available to date.

The big takeaways: U.S.-based manufacturing’s job creation performance has been slightly weaker lately than initially reported. But its wage performance has been more mixed – better in absolute terms but worse compared with the private sector overall. (The focus in this post when discussing relative performance is mainly on the private sector, because its economic performance stems largely from market forces. For the overall non-farm employment figure – the definition of the American employment universe used by the Labor Department, which reports these data, includes government jobs. Their results are driven largely by politicians’ decisions.)

First, let’s examine those latest monthly jobs numbers. They show that manufacturing hiring kicked off the new year on a soft note. Only 13,000 net new jobs were added – the worst such figure since August’s 8,000. And revisions were negative – with December’s initially reported 32,000 growth in payrolls downgraded all the way to 20,000.

As a result, 2018 still stands as manufacturing’s best job-creation year since 1997 – when employment grew by 304,000 on net. But the annual increase of 284,000 now stands at 264,000. Also noteworthy: The 2018 jobs gain far exceeded 2017’s 190,000 (which itself was first reported as 209,000.)

The downward revisions also decreased the improvement manufacturing had shown as a share of total non-farm employment. According to the previous employment release, manufacturing’s share of this U.S. jobs total came in just short of 8.56 percent – the best such figure since July, 2016’s 8.56 percent.

Today’s report lowered that December number to 8.52 percent – and kept July, 2016 at 8.56 percent. January’s share is 8.52 percent as well. The revised data show that manufacturing payrolls during the Trump administration have still been rising faster than total non-farm payrolls, since the figure for the first full Trump month stayed at 8.49 percent. But the out-performance has been more modest than previously judged.

So has the total increase in the number of manufacturing jobs since this figure bottomed in early 2010 – shortly after the official mid-2009 beginning of the current economic recovery. Before the latest revisions, Labor Department data showed that, through December, domestic industry had regained 1.389 million (60.58 percent) of the 2.293 million net jobs it had lost during the recession and its aftermath. Now, this figure stands at 1.356 million (59.14 percent of the lost jobs), and in January, it rose slightly to 1.369 million (59.70 percent).

Worse, the revised results show that manufacturing has been just as much of an employment laggard during this recovery than previously thought. Pre-revision, the Labor Department reported that overall private sector employment fell by 8.785 million from the December, 2007 onset of the last recession through its own February, 2010 bottom. These figures also pegged private sector jobs gains as 20.608 million from that low point through last December.

The revised private sector figures are 8.794 million jobs lost during the recession and its immediate aftermath, and 20.533 million regained through December. The January results pushed the jobs rebound figure up to 20.829 million.

On the pay front, the revisions show that manufacturing wages during the current recovery have actually risen slightly faster than previously reported, but that the gap with overall private sector wages actually widened.

First, the new monthly numbers. Pre-inflation hourly pay in manufacturing sank by 0.44 percent sequentially in January – the worst such performance since May, 2012’s 0.62 percent monthly drop. This decline greatly overshadowed the upward revision in December’s current dollar manufacturing wage improvement from 0.26 percent to 0.33 percent.

The overall private sector didn’t enjoy a great wage month in January, either: Pre-inflation hourly pay increased sequentially by only 0.11 percent – its worst such performance since October, 2017’s 0.15 percent decline. In addition, December’s monthly gain was revised down from 0.40 percent to 0.36 percent. But these latest results still beat manufacturing’s.

The January drop-off depressed manufacturing’s year-on-year pre-inflation wage gains down to 1.38 percent – the weakest such advance since February, 2015’s 1.25 percent. But the upward December monthly revisions did push that month’s annual increase up from 1.98 percent to 2.02 percent.

By contrast, the revisions increased December’s yearly current dollar private sector wage gain from 3.15 percent to 3.34 percent – the best since April, 2009’s 3.42 percent. January’s annual increase was 3.18 percent – also much better than manufacturing’s.

The new revisions improve manufacturing’s wage performance throughout the recovery, but not by much. Previously, such hourly pay was reported to have risen only by 18.60 percent from the expansion’s June, 2009 onset through December. Now that increase is judged to have been 18.72 percent, but the January monthly drop dragged down the new cumulative figure to 18.20 percent.

But from mid-2009 through December, pre-inflation hourly wages for the overall private sector also rose faster than previously thought – by 24.35 percent rather than 24.21 percent. As a result, the gap between the two widened, with private sector wages having increased by 30.07 percent faster than manufacturing wages during this period, not the 29.68 percent originally reported.

And the January numbers broaden the gap still further – to 34.50 percent.

The January inflation-adjusted wage figures won’t be out till later this month, but they don’t favor manufacturing, either, especially over the longer run.

In real terms, December’s monthly manufacturing wage increase has been upgraded from 0.28 percent to 0.37 percent, but the November results are literally a mirror image. They’ve been revised down from a 0.37 percent improvement to 0.28 percent.

The overall private sector’s after-inflation December wage gains have been revised down, too – from 0.46 percent to 0.37 percent. It’s 0.19 percent November advance was left unchanged.

On an annual basis, the new revisions still leave manufacturing’s December real wage gains at zero. At least that represented an improvement over the previous annual decrease of 0.28 percent. The overall private sector’s performance was upgraded from 1.12 percent to 1.30 percent – its best such results since 2015’s 1.82 percent.

The story is scarcely better for manufacturing when extended to the entire recovery. As with current-dollar wages, constant-dollar wage growth during this period was revised up – from 0.75 percent to 0.84 percent. The real private sector wage increase was upgraded, too – from 5.43 percent to 5.63 percent. So the real wage performance gap widened actually decreased – from 7.24 to 1 to 6.70 to 1.

Nonetheless, manufacturing remains in a real wage recession.  After-inflation hourly pay is down 0.09 percent on net since February, 2017. 

 

(What’s Left of) Our Economy: It’s Still the Same Old Story – No Tariff Damage to U.S. Manufacturing’s in Sight

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At this stage, despite what you read in the Mainstream Media, it would be genuinely newsy to report that official U.S. government data were indeed showing any significant damage to domestic manufacturing from the President Trump’s tariffs. Figures showing no significant damage at all from either the levies on steel and aluminum, or on products from China? They’ve become old hat, and this morning’s Labor Department report on the job market for January was no exception.

As of this January data, we now have ten months’ worth of statistics shedding lots of light on whether the metals tariffs have harmed the country’s metals-using industries. As you’ll recall, a main argument against the metals tariffs held that because the metals-using sectors were much larger, even if the levies helped steel and aluminum makers, they’d become an exercise in cutting one’s nose off to spite one’s face. For the number of workers and factories hurt by higher costs for a key material would far outnumber those helped by more expensive steel and aluminum.

Nonetheless, the January jobs report shows once again that nothing of the kind is happening. Indeed, as the table below makes clear, most of the country’s main metals-using manufacturing industries keep outperforming the rest of manufacturing. And some are creating jobs at a faster pace than the private sector overall.

And the laggards? Automotive is unmistakably gaining momentum, and household appliances are still experiencing the effects not only of metals tariffs, but of narrower tariffs on household laundry machines, and of a slumping housing sector.

                                                         Old thru Dec.    New thru Dec.     Thru Jan.

entire private sector:                       +1.37 percent    +1.36 percent    +1.60 percent

overall manufacturing:                   +1.45 percent    +1.39 percent    +1.49 percent

durable goods:                                +1.67 percent    +1.72 percent   +1.97 percent

fabricated metals products:            +1.75 percent    +1.57 percent   +1.78 percent

non-electrical machinery:              +2.20 percent     +2.33 percent   +2.57 percent

automotive vehicles & parts:         +0.77 percent     +1.07 percent   +1.15 percent

household appliances:                     not available      -2.21 percent    not available

aerospace products & parts:            not available     +5.51 percent     not available

But maybe the story is different for the China tariffs? Here the picture is fuzzier, both because the first tranche has only been in place since early July, and because the jobs data doesn’t match up that well with the categories of products tariff-ed in that first group (except for farm machinery and equipment). In addition, most of these categories are too narrow to show up in the Labor Department interactive data bases without a one-month lag. But the numbers below, which represent major manufacturing sectors that contain the tariff-ed goods, don’t show much tariff-related damage on the employment front since (and including) July.

As has been the case during this period, some industries have outperformed; others have under-performed. The resulting takeaway? Lots of factors other than China tariffs are affecting payrolls in these manufacturing segments.

                                                             July-December                     July-January

overall manufacturing                         +0.80 percent                      +0.91 percent

aircraft engines and engine parts:       +0.58 percent                       not available

industrial heating equipment:             +1.12 percent                       not available

oil and gas drilling platform parts:     +2.71 percent                       not available

farm machinery and equipment:        +0.20 percent                       not available

ball bearings:                                     +1.05 percent                       not available

But although the coverage of the Trump tariffs has stubbornly remained an exercise in gloom-mongering in the face of increasingly overwhelming evidence (here’s just one recent leading example), one reason for hope can be identified. Maybe the gulf between the trade reporting and the trade facts simply results from inherent argumentativeness and contrarianism – the kind that’s often seen in teenagers. If I’m right, the minute the tariff data becomes bad, the Mainstream Media will start serving up anecdotes about plucky exceptions to the rule.

 

Making News: Two National Radio China Trade Podcasts — & More!

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I’m pleased to announce some new broadcast appearances.

Last night, I returned to John Batchelor’s nationally syndicated radio show to provide an update on the U.S.-China trade talks that are taking place in Washington, D.C. right now.  Click here for a timely discussion involving John, me, and co-host Gordon G. Chang.

Incidentally, you might notice that John was not sounding like his usual chipper self.  He’s in the middle of some radiation treatment, and although he’s obviously a strong believer that “the show must go on,” he’ll be taking a break for several weeks to complete the regimen.  He says his prognosis is bright, but I’m sure you’ll all join me in wishing him a speedy and complete recovery.

Also, on Monday, I got a last-minute invitation to appear on Breitbart News Tonight to discuss the China trade talks as well as a bizarre New York Times article pretending to explain why more manufacturing can’t be returned from China to the United States.  Here’s the link to this radio interview.

Finally, tonight I’m scheduled to appear on Israel’s i24News tonight to analyze the China talks.  This television network offers only paid content on-line – including streaming videos of previous segments. But if you’re a subscriber, I hope you’ll be able to tune in live at 7:30 PM EST.

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

 

Im-Politic: Home Delivery for Chinese Propaganda

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For all the attention that’s been focused lately on the mainstream media’s objectivity and credibility, there’s no doubt that some major newspapers have for years been foisting unmistakably fake news on their readers, and I just got a reminder when I went out to my front porch this morning to pick up my Washington Post. It comes in the form of the ChinaWatch supplement (see here, e.g.) that arrives stuck inside the print edition periodically.

My main problem with ChinaWatch – which also has deals with other leading publications, including The Wall Street Journal – isn’t that it’s issued by the Chinese government, and therefore is nothing more than Beijing propaganda. Any country valuing free expression should welcome all comers to its media markets and national debates.

Instead, my main problem with ChinaWatch is that there’s no way for anyone lacking considerable knowledge about China and its state-run media to know that ChinaWatch is a Chinese government product.

Near the top of the front page, readers can see that the ChinaWatch supplement is “prepared by China Daily, People’s Republic of China” and “did not involve the news or editorial departments of the Washington Post.” At the very bottom comes the statement, “ChinaWatch materials are distributed by China Daily Distribution Corp., on behalf of China Daily, Beijing, China. Additional information is on file with the Department of Justice, Washington, D.C.”

But why should that raise any red flags (no pun intended) with non-specialists? After all, the Post and most other news organizations routinely report that the Chinese economy is full of “private companies.” (See, e.g., here.) Why not simply assume that China Daily Distribution Corp. is simply one of them? It certainly sounds like a typical American-style business. And although the Justice Department reference might look a little odd, how many readers of American newspapers recognize it as a sign that the “company” is required under U.S. law to register as a foreign agent (though not necessarily as a foreign government)?

On page two you’ll find the masthead, with contact information for ChinaWatch‘s offices in China and various foreign locations. But no hint of any Chinese government affiliation appears here, either.

But there’s an easy fix for this problem: Require ChinaWatch to mention prominently on the front page (at least) that it’s a Chinese government publication. And because ChinaWatch is hardly the only foreign government product to appear in American news media outlets, the same should go for the United Kingdom’s BBC, Russia’s RT America, and others. As those two are among the foreign government media organizations that mainly broadcast, their identification could come in the form of text that continually appears in the “crawls” that so many televised news programs run at the bottom of the screen, or, in the case of radio, as periodic announcements (say, every five minutes).

And finally, in the interests of full disclosure, although ChinaWatch specifies that its content has nothing to do with the news and editorial departments of papers like the Washington Post, its appearance has lots to do with the business departments of those newspapers, and their bottom lines. For ChinaWatch is paid advertising. So the Post and the Journal and any others should make clear on a regular basis that they depend in part on the Chinese government for revenue.

After all, as the Post declares ominously in its new, Trump-era advertising slogan, “Democracy dies in darkness.” That’s also the place where reader ignorance and conflicts of interest flourish.

(What’s Left of) Our Economy: New Reminders of Why Growth’s Quality Mustn’t be Ignored

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For years I’ve been beating the drum about the need for American to pay as much attention to the quality of growth generated by the economy as they pay to the rate of growth itself. And in just the last 24 hours, two great examples have emerged of how ignoring the former can produce worrisomely off-base policy conclusions.

To repeat, the quality of growth matters because even growth that seems satisfactory, or even better, on a quantitative basis can be downright dangerous if its composition is wrong. Go back no further into the nation’s economic history than the last financial crisis to see why. Excessive reliance on intertwined housing, personal consumption, and credit booms nearly led to national and global meltdowns because, in former President Obama’s apt words, America became a “house of cards” overly dependent for growth on borrowing and spending. And he rightly emphasized the need to recreate an economy “built to last” – i.e., one based more on investing and producing.

In numerous posts, I’ve documented how little progress the nation has made in achieving this vital goal. And new reports by the Congressional Budget Office (CBO) and the National Association for Business Economics (NABE) valuably remind of one big reason why: This crucial challenge remains largely off the screen in government, business, and economics circles.

The new CBO study is its annual projection of U.S. federal budget deficits and federal debts, and the agency helpfully describes in detail the economic assumptions behind these forecasts. One key finding concerned the impact on American growth of the Trump administration’s various tariffs on certain products and U.S. trade partners.

Largely echoing the conventional wisdom, CBO predicted that if the levies remained unchanged, the tariffs would “reduce U.S. economic activity primarily by reducing the purchasing power of U.S. consumers’ income as a result of higher prices and by making capital goods more expensive. In the meantime, retaliatory tariffs by U.S. trading partners reduce U.S. exports.”

Specifically, according to CBO, “new trade barriers will reduce the level of U.S. real GDP by roughly 0.1 percent, on average, through 2029” – although its economists acknowledged that the estimate “is subject to considerable uncertainty.”

So that sounds pretty like a pretty counter-productive outcome for the President’s trade policies. But check out what else CBO said about the short-term impact of new U.S. tariffs. “Partly offsetting” the negative effects of those rising prices, along with the damage done by retaliatory foreign tariffs, the levies will also

encourage businesses to relocate some of their production activities from foreign countries to the United States….In response to those tariffs, U.S. production rises as some businesses choose to relocate their production to the United States. In the meantime, tariffs on intermediate goods encourage some domestic companies to relocate their production abroad where those intermediate goods are less expensive. On net, CBO estimates that U.S. output will rise slightly as a result of relocation.”

In other words, the Trump tariffs will lower overall growth a bit, but more of that growth will be generated by domestic production, rather than by consumers and businesses purchasing more imports – primarily financed of course with more borrowing, and boosting debts. For anyone even slightly concerned with the quality of growth, that could be an acceptable price to pay for a healthier American economy over the long run.

Over the longer run, CBO speculates that the tariffs will reduce private domestic investment and productivity (and in turn overall growth), though it admits that this outlook is even more uncertain than that for the short run. Moreover, it’s easy to imagine public policies that could negate considerable tariff-related damage. For example, if the trade curbs do indeed undermine productivity in part by reducing the competition faced by domestic businesses – and therefore reducing their incentives to continue to improve – more overall competition could be restored through more vigorous anti-trust policies. So the tariffs could still result in growth that’s somewhat slower, but more durable.

The NABE’s January survey of members’ companies painted a pretty dreary picture of another Trump initiative – the latest round of tax cuts. As reported by the organization’s president, “A large majority of respondents—84%—indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans.”

As a result, even though the sample size was pretty small (only 106 companies responded to the organization’s questions), these answers significantly undercut tax cut supporters’ claims that the business-heavy reductions would lead to a capital spending boom.

Yet a closer look at the results offers greater reasons for (quality-of-growth-related) optimism. And they represent some evidence that the tariffs are achieving intended benefits as well. In the words of NABE’s president, “The goods-producing sector…has borne the greatest impact, with most respondents in that sector noting accelerated investments at their firms, and some reporting redirected hiring and investments to the U.S.”

This goods-producing sector includes manufacturing, and its outsized reaction to the tax cuts makes sense upon considering how capital-intensive industry has always been. In addition, manufacturing dominates U.S. trade flows, so it makes perfect sense that the tariffs’ jobs and production reshoring impact has been concentrated in this segment of the economy.

And once again, the bottom line seems to be more growth spurred by more domestic production – which can only improve the quality of the nation’s growth, and the sustainability of its prosperity.

Of course, the best results of new American economic policies would be the promotion of more and sounder growth. But as widely noted, big debt hangovers resulting from financial crises make even pre-crisis growth rates difficult to achieve even when quality is ignored – as the specialists quoted in this recent New York Times article appear to admit. So in order to achieve the best long run results, Americans may need to lower their short-term goals and expectations somewhat. That greater realism – and sharper focus – will surely come a great deal faster if important institutions like the CBO and the NABE start paying them at least some attention.

Our So-Called Foreign Policy: U.S. Companies Keep Feeding the China Tech Beast

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Wow! This was quite the revealing – and disturbing – nugget buried in a recent New York Times article about American tech companies’ trials and tribulations in China! According to reporters Paul Mozur and Karen Weise, Microsoft’s “long-established research and development center has turned out valuable products and launched the careers of a generation of artificial-intelligence experts who have started important new companies in China.”

Mozur and Weise mentioned this Microsoft activity in order to make the important point that even companies, like the Seattle software giant, that have bent over backwards to remain viable in China by keeping Beijing happy in various ways seem to be fighting a losing battle. For even these firms are falling victim to China’s persistent desire to replace them in the country’s huge market with Chinese rivals.

But the reference to Microsoft’s artificial intelligence operations could well matter more to the United States because it underscores a point I made several years ago in a Bloomberg.com op-ed that bears on American national security: For decades, U.S. tech companies have been transferring to Chinese entities cutting edge knowhow that has greatly strengthened Beijing’s ability to endanger key American interests. It’s the price they need to pay to keep playing in the Chinese market. But whatever the commercial justification, and whether these transfers are voluntary, coerced, or somewhere in between (including the training of China’s tech workforce), they’ve too long been neglected by American policymakers.

My Bloomberg piece focused on technologies related to cyberhacking – where transfers ironically were coming back to bite the U.S. tech firms themselves. Since then, in several posts for RealityChek, I’ve covered tech transfer that’s handing China more conventional advanced defense-related knowhow. (See, e.g., here and here.)

But artificial intelligence-related operations push the threat to an entirely new level. For these capabilities will likely be the biggest game-changers in national security for decades, and Washington is already so alarmed by the progress China has made that many specialists worry that Beijing could soon forge ahead. Nearly as troubling: The more such tech American companies keep handing over to the Chinese, the closer China gets to self-sufficiency – the point at which it won’t need American assistance anymore.

The Trump administration rightly keeps calling attention to China’s growing technological prowess and the resulting dangers to the United States, and even many long-time supporters of the reckless pre-Trump China engagement policies are starting to agree.

But tariffs to punish predatory Chinese policies aimed at building tech dominance, and curbs on Chinese tech investments in the U.S. economy are necessary, not sufficient responses. The above linked Financial Times article indicates the administration now recognizes need to staunch the flow of advanced knowhow to China by American companies. But every minute new curbs are delayed, the United States will keep feeding the beast.

Im-Politic: Shutdown Lessons – So Far

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Since the fight isn’t over by a long shot, it’s chancy at best to try to figure out many of the biggest implications of President Trump’s decision to reopen the shut down parts of the federal government despite getting no new funding for a Border Wall or any new physical barriers aimed at strengthening border security. Still, here’s what looks reasonably clear at this stage of the struggle:

>First and foremost, the shutdown situation, context, and therefore even the verdict were set in stone more than two years ago by the Russia collusion/election cheating charges, by the opposition (mainly passive) to President Trump’s immigration agenda of the establishment Republicans still so prominent in Congress (and not just in its leadership) during the Trump administration’s first two years, and the resulting politics of impeachment.

That is, as I’ve written previously, from his first day in office, Mr. Trump needed to secure the protection of Congressional Republicans – including their establishment ranks. Therefore, he needed to prioritize their top issues, like Obamacare repeal and a tax cut heavily weighted toward business, rather than his top – populist – issues, like fixing America’s broken trade and immigration policies.

It’s true that in his second year, the President has ramped up the pressure on leading trade predator China and on other mercantile economies (with his steel and aluminum tariffs). But unlike the Border Wall, those measures didn’t require Congressional funding, or any form of approval from Capitol Hill. (The new trade deal with Mexico and Canada to replace the North American Free Trade Agreement seems to be moderate enough to at least have attracted mild endorsements from the Big Business-run Offshoring Lobby.)

And if establishment Congressional Republican leaders like former House Speaker Paul Ryan and current Senate Majority Leader Mitch McConnell weren’t going to go the mat for the Wall (which of course would also have required helping to persuade some moderate Democrats to come along as well) when the GOP controlled both houses of Congress, there was absolutely no way Mr. Trump could have generated Wall funding once the Democrats gained control of the House.

Incidentally, it’s being reported by at least one non-anonymous source with first-hand knowledge that the President himself provided some confirmation for this argument – by blaming Ryan for “having ‘screwed him’ by not securing border wall money when Republicans had the majority….”

>If you’re going to shut down the government, and especially if you’re planning to dig in your heels for the duration, shut down the right agencies. For example, if the issues are illegal immigration and law enforcement, don’t shut down the Department of Homeland Security – which is chiefly responsible for protecting the nation’s security in these areas. If you’re a Republican, don’t shut down the Agriculture Department, whose rural constituency is overwhelmingly Republican and conservative, and which was already unhappy enough with the President about China trade policies that had pretty much shut down America’s immense soybean exports to the People’s Republic. Also if you’re a Republican don’t shutdown the Federal Aviation Administration – because victims are especially likely to be businessmen and women and other relatively affluent voters – who provide lots of actual and gettable Republican votes.

>Consequently, the politics of shutdowns, and of some aspects of political populism, are becoming clearer than ever – especially if they’re long ones. And many of these should have been obvious from the start.

Most obvious, voters of all kinds – populists and non-populists alike – who are receptive to anti-government arguments get a lot less anti-government when the affected services affect them directly.

Less obvious, populist voters themselves say and act happy to see populist politicians act like disrupters when it comes to the mutually supportive networks of corruption and propaganda set up by establishment politicians, lobbyists, consultants, think tank hacks, and mainstream media journalists in the Washington, D.C. Swamp The same goes for establishment policies they believe have brought them nothing but trouble, like mass immigration, offshoring-friendly trade deals, and pipe dream foreign wars and similar ventures.

What they don’t want disrupted is the steady stream of government services that make their lives easier – and even viable in the first place.

>For reasons like the above, it’s unimaginable that Mr. Trump will follow through with his threat to shut down the government again if he can’t persuade Democrats to compromise acceptably on Wall funding. His best hope for some kind of partial win is to portray himself as the reasonable party, and the Democrats as the arrogant, rigid extremists.

>In that vein, expect continued, and even more frequent administration activity spotlighting crimes by illegal aliens – especially in the districts and states of key lawmakers. But success is also likely to require claims (which are entirely credible, in my opinion) that illegal aliens steal jobs from native-born Americans and/or drive down their wages, and that the leading victims include minority Americans.

>One particularly effective tactic would be for the administration to push for mandating that businesses use the E-Verify system to prevent illegal aliens out of the national job market. E-Verify is currently being used on a voluntary basis by many companies (not including most Trump-owned companies), and by all accounts is extremely accurate. (That is, it snares virtually no innocents in its electronic net.) But its use so far has been voluntary, meaning that companies that blow it off get legs up on their competition by virtue of easy access to bargain-basement illegal employees.

>Another potentially effective talking point that the administration has strangely ignored: focusing on the sheer numbers of foreigners who’d be likely to swamp U.S. borders – and the country’s asylum system – without more effective physical barriers. The administration and all of its spokespeople and media supporters should keep asking the question of Democrats: How many tens of millions of these would-be immigrants and asylum-seekers can the United States afford to admit?

>If these Trump efforts fail, declaring a national emergency looks like the President’s best bet to reestablish credibility with his base and perhaps with fence-sitting voters and Members of Congress, and even some legislative opponents.

Such a move could also go far toward putting the most politically damaging aspects of this issue behind him. After all, there’s little that opponents can do about such a national emergency declaration other than try to tie it up in the courts. And Mr. Trump could – credibly, in my opinion – respond by using information about illegal aliens crime to accuse them of endangering their countrymen and women’s security. So even if rulings by friendly judges hold up actual Wall construction, Mr. Trump’s political position could benefit.

>The President also could well be tempted to score political points by pressing harder to win some foreign policy victories. A China trade deal and significant progress in limiting the nuclear weapons threat posed by North Korea are the two most obvious candidates, but presidential over-eagerness could seriously undermine major American interests.

I’m most worried about the administration’s dealings with Beijing, given the talk out of China of ending the current trade conflict for the foreseeable future by buying lots more American goods and services. More Chinese imports from the United States would be welcome – no mistake about that. But not if the price is letting Beijing off the hook for its ambitions literally to steal and subsidize its way to global supremacy in key technologies that not so coincidentally have big defense implications.

>Finally, re shutdowns themselves, the policy of requiring furloughed workers to do their jobs without getting paid strikes me as completely unacceptable. In other circumstances like this, at home or abroad, these practices are called “forced labor” or “wage theft.” And they’re rightly condemned. Nearly as bad, these furlough practices help pro-shutdown politicians curry favor with their supporters while mitigating or at least postponing the harm to the public – including those supporters.

In other words, if you’re for a shutdown, make it a real shutdown. For any agency whose funding is cut off, the workers stay home – and the jobs they do don’t get done. If that means chaos ensues and public safety is put at risk, too bad for shutdown-ers. They’ll own it.

>Speaking of owning it, that’s the situation that House Speaker Nancy Pelosi now finds herself in not only regarding border security but every issue that comes up in national affairs. In particular, when you show you’ve gained enough power to win political battles, you also show that you’ve gained enough power to frustrate initiatives that may be unpopular among your caucus in Congress, or some of your caucus, but that may be popular with everyone else. So forget about the the idea that Pelosi is now free to conduct a campaign of all-encompassing resistance to the Trump agenda, and to dictate terms of those proposals that she is willing to consider.

>And finally, that’s one of the many reasons it’s way too early to predict how the shutdown fight will impact the next presidential election. The main additional reasons: There’s still a long ways to go before that campaign achieves critical mass, and any number of events could turn the political calculus upside down. And similarly, it’s glaringly obvious that the Trump era news cycle – along with the national attention span – is already the shortest in recent memory – and could well keep getting shorter.