Following Up: Why the U.S.-South Korea Summit Was Incredibly Weird II

Tags

Biden administration, burden sharing, deterrence, Donald Trump, Following Up, North Korea, nuclear weapons, semiconductors, South Korea, tripwire, Yoon Suk Yeol

Yesterday’s post described how the mounting policy challenges that framed last week’s U.S.-South Korea summit drove one major globalist pundit to write a column that was nothing less than bananas policy-wise. With major tensions almost inevitably appearing between major goals sought by the two countries, he insisted both that these frictions exist only because of American selfishness and, as is globalists’ wont, that all good objectives actually are easily attainable simultaneously in this instance.

Today’s subject is thinking that in its own way is just as off-kilter. Worse, it’s positively dangerous because it’s official thinking from both of the above capitals, and its only conceivable effect can be to turn the already tinderbox-y Korean peninsula even more potentially explosive.

The reasons? It’s resulted in President Biden and his South Korean counterpart Yoon Suk Yeol just having sent – unwittingly to be sure – a twin message to scarily belligerent and nuclear-armed North Korea that (1) they have no faith in the strategy followed by their alliance for decades to deter aggression from the North; and (2) they haven’t yet come up with anything besides transparently symbolic moves to address the problem.

What other conclusions can legitimately be drawn from the official description of the summit’s accomplishments? According to the White House, among other decisions, the two governments agreed to give South Korea a role (but not the final say) in the process of deciding whether Washington would use nuclear weapons in a new Korean War; to deploy American nuclear weapons delivery systems “more visibly” in the peninsula’s vicinity; and to give South Korea’s military more training in preparing for and coping with “nuclear threat scenarios.”

Viewed in isolation, there’s nothing necessarily wrong with any of these measures. But no one should forget the context – because North Korea certainly hasn’t. The United States, as I’ve explained repeatedly, has already for decades not only vowed to use nuclear weapons to defend the South if necessary. To strengthen the credibility of this promise, it’s also stationed tens of thousands of American troops right up against the Demilitarized Zone dividing the two Koreas – that is, right in the invaders’ paths. The idea is that a U.S. President would face no real political choice but to use nukes to save them from total destruction by the North’s vastly superior conventional forces – and probably go on to vaporize the North – and that these prospects would prevent any attack in the first place.

Again, that’s been the U.S. plan for decades. It may as well be written in stone. (Although former President Trump expressed major reservations during his first campaign for the White House.) But last week, Mr. Biden and Yoon made clear their belief that it’s no longer deterring North Korea effectively enough. Why else would the new steps have been announced at such a high profile meeting?

At the same time, why would any thinking person believe that consulting more systematically with the South and sailing nuclear submarines in Korean waters more often will put the needed extra fear of God into North Korea? Similarly, how could these measures resolve the doubts about U.S. reliability that even staunch backers of the alliance in its longstanding form fear are developing in the South. Such qualms could either lead it to conduct foreign policies more independent of America’s (especially concerning curbing China’s technology development), or to create its own nuclear forces, or both.

The problem with the first two potential outcomes is that, as explained in a post last week, South Korea’s semiconductor manufacturing prowess has turned its security into a genuinely vital interest of the United States’; and that North Korea’s own steadily improving nuclear capabilities mean that fulfilling the defense commitment could soon expose the U.S. homeland to nuclear-armed missile strikes. 

A South Korea deterrent would greatly reduce this danger, particularly if it led Washington to remove from the South the “tripwire” ground units whose mission is to boost the odds that a Korean military conflict becomes nuclear, and thus probably suicidal for the North . But the consequent shrinkage of U.S. leverage over the North could leave a gaping hole in Washington’s efforts to contain China technologically.

Couldn’t Washington push wealthy South Korea to create a strong enough military to deter much poorer North Korea without going nuclear? In principle, yes, but the South’s very importance to American well-being have created the conditions for continued free-riding, because by definition, Washington couldn’t afford to impose consequences for its refusal. And a South Korea capable of defending itself without nuclear weapons would be just as capable of defying U.S. wishes on China and other foreign policy fronts as one armed with nukes.   

Perhaps most disturbing of all, the new tweaks to U.S. Korea strategy amount to a tacit but obvious admission of weakness – which countries of course should never telegraph, especially when faced with a seemingly volatile adversary like North Korea, and especially when their leaders clearly have no clue how to escape or resolve in any satisfactory way the dilemmas confronting them. 

Which is why I’m now worried that, for all the justified fears that before too long the United States and China could go to war – which could escalate to the nuclear level – the situation on the Korean peninsula is becoming a bona fide national security nightmare, too.   

Advertisement

(What’s Left of) Our Economy: U.S. Worker Pay (Momentarily?) Tops Inflation

Tags

benefits, Biden administration, CCP Virus, Census Bureau, consumption, coronavirus, COVID 19, demand, ECI, Employment Cost Index, Immigration, labor force, labor market, labor shortage, Open Borders, Paul Krugman, production, productivity, recession, salaries, supply, Title 42, Trump administration, wages, workers, workforce, {What's Left of) Our Economy

American workers got some unambiguously good news this past week. Although it’s not all that high on the “good” scale. And it could well be short-lived.

Still, good is good, so it’s important to note that by one official measure, American workers’ earnings have at last caught up to the recent burst of inflation – and a little bit more. In the first quarter of this year, wages and salaries have risen by 0.1 percent over last year’s first quarter. (These are private sector wages and salaries, the ones economy watchers really care about. That’s because unlike public sector earnings, they’re driven predominantly by market forces, not politicians’ decisions.)

No, it’s not much, but it’s a better situation than prevailed as of the end of last year, when such compensation had fallen by 1.2 percent on year. In fact, these new results for the Employment Cost Index marked the first time since the first quarter of 2021 that, in real terms, wage and salary gains combined have moved back into the black.

This encouraging development, however, comes with two important caveats. First, when you add in the value of benefits and get numbers for total compensation for private sector workers, they’re still lagging inflation, and have since, again, the first quarter of 2021.

To be sure, by this gauge, workers are catching up. As of the first quarter of last year, total private sector compensation was down 3.5 percent on an annual basis, the worst such result in a data series going back to 2001. Now it’s trailing by just 0.2 percent. But it’s still trailing.

Second, although progress is being made on the earnings front, labor productivity growth remains weak. The best combination in terms of yielding sustainable prosperity is strong growth for both.

And like I hinted at the start, this progress may be just about over. Not only is the economy slowing – which will surely make employers more reluctant to hire than they have been, and thereby reduce the pressure they feel to keep and add workers by raising pay at whatever rate. A recession will of course leave workers with even less bargaining power.

But the supply of workers available to business, which had shriveled thanks largely to the effects of the CCP Virus, has rebounded past pre-pandemic levels. And much of this recovery stems from a strong rebound in net immigration inflows – which the U.S. Census Bureau believes have returned to pre-virus levels and to their levels before the advent of the Trump administration’s restrictive border policies.

Many immigration devotees, like Nobel Prize-winning economist and New York Times pundit Paul Krugman argue that the immigrant-driven loosening of the national labor market has kept employment up while preventing “runaway inflation” not by suppressing wages but by keeping production up – and thereby closing the CCP Virus-created gap between demand and supply.

But if you look at the economy’s growth over the year when immigration surged, that argument falls apart. It may become validated farther down the road, but in inflation-adjusted terms, but between the first quarter of 2022 and 2023, U.S. output rose a bare 1.56 percent Moreover, as I’ll be showing in a subsequent post, even this weak growth in the gross domestic product, along with the better performance of 2021-22, was led by unusually high levels of consumer spending, not by output.

As a result, the main effect to date of the immigration resurgence clearly has been undercutting wage pressures. And it’s certain to continue with the Open Borders-friendly Biden administration in office through the start of 2025 at least, with the pandemic-era Title 42 restriction program ending May 11, and the President so far deciding to respond with a plan featuring numerous provisions aimed at easing major current obstacles to legal immigration. 

So let’s all hope that American workers are enjoying this mini-near earnings recovery while they still can. For if they blink, they might miss it. 

Our So-Called Foreign Policy: Yes, America’s Europe Allies Really are Lagging in Decoupling from China

Tags

allies, Biden administration, China, decoupling, Emanuel Macron, European Union, foreign direct investment FDI, France, investment, Our So-Called Foreign Policy, Trade

Since French President Emanuel Macron’s boot-licking recent trip to China, something of a debate has broken out this past week over whether America’s European allies are moving fast enough to reduce their dependence on commerce with the People’s Republic – or as fast as the United States is. Here’s a claim that they are. And here’s one that they aren’t.

How to know for sure – or with some confidence? Maybe by looking at some numbers? So I did. And the two most important 30,000-foot measures of trade and investment show that the Europeans are lagging significantly – in absolute term and relative to the United States. In fact, both measures indicate that investment in and especially trade with China recently has become more important to the European Union (EU), not less.

The gauges I use are two-way trade as a share of the total U.S. and European Union economies, and direct investment in China as a share of their respective goss domestic products (GDP – the standard measure of an economy’s size). As is often the case, I use the numbers as percentages of their economies because they provide the context that the numbers themselves lack. And this practice is all the more important when trying to figure out matters like dependence or vulnerability.

Let’s start with the European Union’s two-way trade with China and use 2019 as the first year – since that’s the last full year before the arrival of the CCP Virus pandemic, which focused so much attention on over-reliance on China (or any single supplier) for products deemed unusually important. As can be seen, combined exports to and imports from the People’s Republic has grown much faster since 2019 than has the EU economy:

2019: 4.01

2020: 4.39

2021: 4.83

2022: 5.75

In fact, during this period, this trade relative to the EU economy expanded much faster than in the years before 2019. For example, in 2012, two-way Sino-EU goods trade already stood at 3.36 percent of the Union’s output.

(Both sets of figures are in euros before factoring in inflation. The 2012 and 2019-21 figures come from the reliable Statistia.com website here and here. The 2022 trade data come from Statistia. The 2022 GDP figure comes from taking the 2021 Statistia number and adding the 3.6 percent pre-inflation EU growth estimate provided by the Union’s statistical service Eurostat.)

Here’s how America’s annual bilateral goods trade with China as a share of the U.S. economy has changed from 2019 to 2022:

2019: 2.60

2020: 2.65

2021: 2.81

2022: 2.71

These percentages are up some during this period, but by much less than those for the EU. And in 2022, the share went down. Also of note: These numbers are lower in absolute terms than the EU’s. For comparison’s sake, the U.S. figure for 2012 was 3.30 percent. So the importance of China trade to the U.S. economy had been fading steadily before 2019, and has stabilized since. But may be declining once again. So the EU certainly looks like a laggard here.

(These U.S. pre-inflation trade and GDP data come from the standard Commerce Department sources.)

Turning to direct investment flows to China, here are the annual EU results as a percent of economic output:

2019: 0.05

2020: 0.04

2021: 0.03

2022: unavailable

Here, EU relations with China look to be decreasing. But one source pegs the 2021-22 increase at 92.5 percent – a near doubling! Since EU economic growth last year wasn’t remotely that strong, it’s possible that the Union’s businesses have just executed a major turnabout.

(The EU GDP data for 2019-21- this time in pre-inflation U.S. dollars – come from the World Bank. The 2022 figure comes from the St. Louis branch of the Federal Reserve.  The investment figures, also in in pre-inflation U.S. dollars  – including the claim of the big 2022 jump – come from the China-Briefing.com website.)

Their U.S. counterparts?

2019: 0.03

2020: 0.04

2021: 0.01

2022: 0.04

No clear trend here – but no evidence of a big recent pop. So let’s call this a draw at best. And overall edge to the United States.

(The 2019-21 investment and all the GDP data come from the Commerce Department.  The 2022 investment figure can be found in this New York Times piece.

Not that I’m completely thrilled with the U.S. performance. Except for the curbs on exports of goods and investments related to advanced semiconductors, the Biden administration seems wed to the notion that the United States can trim its China economic sails in a piecemeal fashion. But this approach suffers at least two major flaws.

First, as I’ve repeatedly argued, the threat from China is systemic. Therefore addressing product by product or industry by industry is likely to keep Washington straining to keep up with China’s progress.

Second, the piecemeal approach seems to assume that “strategic goods” exist in isolation, even though nearly all manufactured products are only the tip of a (yes, iceberg-like) supply chain.

In other words, if you want to boost America’s health security, you need to make sure that the domestic economy can not only turn out facemasks, but the materials from which they’re made, the machinery needed to manufacture them, and the parts and components of this equipment.

Does this mean that there’s no substitute for aiming to shut down economic relations completely, however gradual this effort may be to proceed? Doubtful, because so many of the goods supplied by China, like apparel and toys, are harmless (although their purchase does increase resources ultimately available to the Chinese regime).

But does it mean that much more energy and thought need to be applied to so-called “decoupling” by both the European Union and the United States? Undoubtedly.

Those Stubborn Facts: Yes, There Really is a Biden Border Crisis

Tags

Biden administration, Biden border crisis, border security, illegal aliens, Immigration, migrants, Open Borders, Those Stubborn Facts

Number of illegal southern border migrants released into the U.S. under President Biden: at least 2.021 million

Number of illegal southern border migrants that have evaded border agents under President Biden: 1.373 million

Total number of illegal southern border migrants that have entered the U.S. under President Biden: 3.394 million

 

(Source: “Biden’s Released at Least 2,020,522 Southwest Border Migrants. And probably a lot more – plus 1.3 million known ‘got-aways,” by Andrew R. Arthur, Center for Immigration Studies, April 17, 2023, https://cis.org/Arthur/Bidens-Released-Least-2020522-Southwest-Border-Migrants )

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

Tags

alliances, Biden administration, China, defense budget, Defense Department, inflation, Lippmann Gap, military, nuclear weapons, Our So-Called Foreign Policy, Russia, Taiwan, Trump administration, Ukraine, Ukraine War, Walter Lippmann

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

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

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

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

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

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

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

Do any of these strike you as safe enough bets?

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

aluminum, Biden administration, China, economics, free trade, inflation, mercantilism, metals, output, prices, protection, protectionism, steel, subsidies, tariffs, Trade, Trump administration, {What's Left of) Our Economy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Banking Crisis or Not, More U.S. Inflation’s Ahead

Tags

American Rescue Plan, banking system, banks, baseline effect, Biden administration, CCP Virus, consumer price index, core inflation, coronavirus, cost of living, COVID 19, CPI, election 2024, Federal Reserve, finance, gasoline prices, inflation, interest rates, monetary policy, oil prices, stimulus, {What's Left of) Our Economy

Soon Jews the world over will celebrate the Passover holiday by asking at the ceremonial dinner (seder) “Why is this night different from all other nights?” (The answer is easily Google-able.)

Today, those the world over who follow the economy should ask “Why is this morning’s U.S. consumer inflation report different from all other recent U.S. inflation reports?”

The answer? Because this morning’s report (which takes the story through February) won’t be the biggest development looked at by the Federal Reserve in its upcoming meeting when it decides where it will set the interest rates it controls.

Instead, the biggest development it considers will be the turmoil that’s been breaking out these last few days in the U.S. banking system, whose proximate cause has been the blazing pace with which the Fed has been raising the federal funds rate over the past year.

Not that the new figures for the Consumer Price Index (CPI) will be ignored. In fact, they were probably unspectacular enough (either in a good or bad way), to convince the central bank to either slow down the pace of rate hikes or to pause them altogether, for fear of igniting a devastating financial chaos. But were they really so so-so? Not the way I see it.

Indeed, the data made clear that U.S. prices remain way too high, and are rising way too fast, to please any reasonable person. And that’s true either when it comes to the headline inflation results, or to their “core” counterparts – which strip out food and energy prices supposedly because they’re volatile for reasons having almost nothing to do with the economy’s underlying vulnerability to inflation.

The monthly February headline figure came in at 0.37 percent – below the 0.52 percent recorded in February (and the worst sequential result since last June’s 1.19 percent), but still bad enough to push prices up by nearly 4.50 percent at an annual rate if it continues for a year. And price increases that strong would be more than twice the Fed’s yearly target of two percent – creating a situation that no consumers will enjoy.

Speaking of annual headline CPI, its actual rate as of February was 5.98 percent – a good deal lower January’s 6.35 percent and the best such figure since September, 2021’s 5.38 percent.

But as known by RealityChek regulars, here’s where some baseline analysis is needed. That is, it’s crucial to see whether these annual figures are following those for the previous year that were unusually low or unusually high. If the former, then a yearly inflation rate that may look lofty at first glance might just represent one-time catch up – a reversion to a long-term average from a weak anomalous read.

In fact, in my view (and that of the Fed and the Biden administration), it was catch up that generated the rapid price hikes of the early part of this current high inflation period. The main reason was a rebound from price stagnation attributable mainly to the arrival of the CCP Virus and all the havoc it wreaked on the economy generally and especially on the service sector that makes up most of it by far. So I agreed with then conventional wisdom that at that point, worrisome inflation was “transitory.” (See, e.g., here.)

After early 2021, however, circumstances changed dramatically. Of course the Russian invasion of Ukraine last February drove up gasoline prices – though they’d been rising strongly since the recovery from the devastating first coronavirus-induced economic slump and took another big leg up in late 2020. (See this chart.)

More important was the Biden administration’s continuation of emergency-type stimulus spending well after the pandemic emergency had peaked and a strong economic recovery was underway. The American Rescue Plan Act and other boosts in government spending ensured that consumers at all income levels would long be abnormally cash- and income-rich, and that their resulting spending would give businesses generally a new jolt of pricing power.

And for many months, the changes in the baselines for annual headline and core inflation have strongly supported that case that inflation has become more entrenched.

In this vein, the allegedly encouraging annual 5.98 percent inflation rate for February shouldn’t be seen in isolation. What also matters is that it followed a 2021-22 baseline figure of a scorching 7.95 percent. That’s a clear sign of business’ continued confidence in its pricing power. The baseline figure for that September, 2021 5.38 percent inflation rate was just 1.63 percent – well below the Fed target and a number that points to an economy that was still being held back largely because of a seasonal CCP Virus rebound.

Core CPI paints a bleaker picture even without examining the baseline effect. On a monthly basis, it rose for the third straight time, and the new figure of 0.45 percent was the highest since last September’s 0.57 percent.

As for the annual increase, that registered 5.53 percent. That was a tad lower than January’s 5.55 percent and the best such result since December, 2021’s 5.52 percent. But the baseline for the new February figure is 6.43 percent – considerably higher than the 6.43 percent for Januay. So that’s a powerful argument for a worsening, not improving, core CPI performance. And the case seems to be clinched that the baseline figure for that December, 2021 core inflation rate was a feeble 1.63 percent – well below the Fed headline CPI target.

Even before the February CPI report, I believed that inflation would keep heating up because most consumers still have plenty of cash (and therefore, don’t forget, credit), and because a combination of slowing growth (which, to be fair, we haven’t seen yet), and an approaching election cycle would keep politicians tempted to keep spending levels high in order to prop up the economy and keep voters happy. Moreover, I’ve never bought the argument that the Fed would keep fighting inflation vigorously enough to tighten monetary policy enough to cut growth rates dramatically – much less risk a recession – going into the high political season.

Now with banking system troubles added to the mix, the idea that continued strong interest rate hikes seems completely fanciful – along with any realistic hopes that inflation will soon fall back to acceptable levels.

Glad I Didn’t Say That! The U.S. Is and Isn’t America First-y on Green Energy Subsidies

Tags

subsidies, supply chains, America First, Glad I Didn't Say That!, John Podesta, green energy, Biden administration, clean energy, Inflation Reduction Act, Jennifer Grandholm, climate, European Union n

“We don’t want to see any trade rivalry. And we’re in discussion with our [European Union] counterparts about how to make sure we can [build clean energy supply chains] in a way that lifts all.”

–U.S. Energy Secretary Jennifer Grandholm, March 9, 2023

 

“We make no apologies for the fact that American taxpayer dollars ought to go to American [clean energy] investments and American jobs.”

– White House Senior Advisor for Clean Energy Innovation and Implementation John Podesta, February 24, 2023

 

(Sources: “US energy secretary offers olive branch to EU in green subsidies row,” by Derek Brower, Financial Times, March 10, 2023, US energy secretary offers olive branch to EU in green subsidies row | Financial Times (ft.com) and “US makes ‘no apologies’ for prioritising American jobs, clean energy tsar tells EU,” by Aime Williams and Derek Brower, Financial Times, February 24, 2023, US makes ‘no apologies’ for prioritising American jobs, clean energy tsar tells EU | Financial Times (ft.com) )

Our So-Called Foreign Policy: On Chinese Spying and Dual Loyalties

Tags

academics, Biden administration, China, China Initiative, Chinese Americans, civil liberties, DOJ, dual loyalty, espionage, FBI, German-Americans, higher education, immigrants, Israel, Italian-Americans, Japanese internment, Japanese-Americans, Jews, Justice Department, Our So-Called Foreign Policy, profiling, spying, students, The New York Times, World War II, Yudhijit Bhattacharjee

As an American Jew, I’m extremely aware of the dangers of accusing members of various U.S. identity groups with ancestry from or associated with foreign countries of “dual loyalties.” The worst example of the injustices that can result was the World War II-era internment policy – which punished legal immigrants and even American citizens simply based on the assumption that anyone of Japanese descent could be spying for a wartime enemy.

(German- and Italian-Americans came under suspicion, too, but were placed in camps much more selectively than Japanese-Americans.)

Especially in the U.S. context, the dual loyalty charges levelled against Jews has come from those who claim that when they lobby for or just favor pro-Israel policies, they’re prioritizing the interests of the Jewish State over those of the United States. (For some typical – and unusual – recent examples see here.)

More recently, individuals of Chinese descent living in America have come under the microscope due to concerns about wide-ranging spying campaigns conducted by the People’s Republic. And because the targets have ranged from U.S. citizens to legal immigrants to Chinese nationals resident here as students and on various academic exchange programs, critics have claimed that racial profiling and dual loyalty overreach have marked the responses of American law enforcement agencies.

Indeed, these charges – along with contentions that valuable scientific progress is at risk – have been so persuasive to the Biden administration that last February, it shut down a Justice Department program begun during the Trump years to cope with the alleged threat.

But as a New York Times Magazins article today has made clear, despite the dangers of broad-brush approaches, something like the Justice Department’s disbanded “China Initiative” is absolutely necessary to safeguard U.S. national security adequately.

As explained in this detailed Times report on the FBI’s China-related counter-espionage work (and it’s worth quoting in full):

“…China has sought to exploit the huge numbers of people of Chinese origin who have settled in the West. The Ministry of State Security, along with other Chinese government-backed organizations, spends considerable effort recruiting spies from this diaspora. Chinese students and faculty members at American universities are a major target, as are employees at American corporations. The Chinese leadership ‘made the declaration early on that all Chinese belong to China, no matter what country they were born or living’ in, James Gaylord, a retired counterintelligence agent with the F.B.I., told me. ‘They started making appeals to Chinese Americans saying there’s no conflict between you being American and sharing information with us. We’re not a threat. We just want to be able to compete and make the Chinese people proud. You’re Chinese, and therefore you must want to see the Chinese nation prosper.’

“Stripped of its context and underlying intent, that message can carry a powerful resonance for Chinese Americans and expatriates keen to contribute to nation-building back home. Not all can foresee that their willingness to help China could lead them to break American laws.”

Keep in mind, moreover, that Times reporter Yudjhijit Bhattacharjee is by no means unsympathetic to the profiling and dual loyalty issues, as he wrote in the very next sentence,

“An even more troubling consequence of China’s exploitation of people it regards as Chinese is that it can lead to the undue scrutiny of employees in American industry and academia, subjecting them to unfair suspicions of disloyalty toward the United States.”

But however – genuinely – troubling they are, if you’re worried about Chinese spying and national security, and you acknowledge that much of Beijing’s strategy is based on an attempt to blur the distinction between Chinese nationals and Chinese-Americans, and that the latter can be all too susceptible to these appeals, what’s the alternative to casting a wide net? Pretending that there’s nothing to see here?

Which brings up another disturbing finding of Bhattacharjee’s: The claim of one FBI agent he interviewed that “When… agents go out to talk to companies and universities about the threat…skeptical listeners ask for the evidence that proves the theft of trade secrets is part of a campaign directed by China’s government.”

Given unmistakable evidence of decades of massive Chinese theft of U.S. and other foreign intellectual property, China’s systematic disregard for other long agreed-on global trade rules it’s promised to respect, and its increasingly hostile and expansionist foreign policies, what aside from willful ignorance – or on the part of universities, a naive faith that even a regime so repressive and belligerent would never dream of corrupting the global March of Science – could explain this skepticism?

Obviously no country with what I called yesterday a healthy sense of self-preservation could possibly base its China counter-espionage policies on such assumptions. Nor could any country with inevitably limited national security resources and a consequent need to set priorities.

So even though critics of the China Initiative were right in pointing out that some of those it had prosecuted have been acquitted, and even though that danger of overreach is always present, the Biden administration was seriously mistaken in not only closing down the China Initiative but sanctimoniously declaring that it’s completely scrapping any practices smacking of “standards based on race or ethnicity.”

And if China Initiative critics want to boost the odds of counter-espionage campaigns choosing their targets accurately, they might try getting their own heads out of the sand by helping the government less reluctantly and scrutinizing their own China ties with more realistically and vigiliantly.

Our So-Called Foreign Policy: Is America Really Back with Anyone?

Tags

allies, America First, Biden, Biden administration, developing countries, Donald Trump, Gallup, globalism, liberal global order, Our So-Called Foreign Policy, polls, public opinion, Ukraine, Ukraine War

As RealityChek regulars might have noticed, I haven’t been writing about too many polls lately. The reason? As I explained at the end of last year (here and here) , most were badly off-base on crucial issues that shaped the results of the U.S. midterm elections – especially abortion.

But some new Gallup findings (on a non-political issue) merit an exception. Not that this survey, like way too much polling on foreign policy, hasn’t suffered major problems of its own. All the same, since the claim that “America is back” has been foundational to President Biden’s approach to world affairs, it’s striking that Gallup on Friday reported results suggesting that fewer Americans believe this than they did during the Trump administration.

I write “suggest” because the wording of the relevant question is pretty vague. “In general,” respondents were asked, “how do you think the United States rates in the eyes of the world — very favorably, somewhat favorably, somewhat unfavorably or very unfavorably?”

Of course, this could mean anything from “as a reliable ally” to “as a great place to live,” to “the world’s strongest (or wealthiest) country.” If true, though, whatever the criteria, these Gallup data indicate deep public’s skepticism that Mr. Biden has achieved one of his central foreign policy goals: reversing a dangerous erosion of America’s international popularity stemming from the “America First-style policies pursued by his predecessor.

As the President sees it, this boneheadedly selfish posture threatened to destroy the network of international institutions and above alliances that – consistent with the globalist approach to world affairs he has always supported – considers crucial ingredients for foreign policy success.

But Mr. Biden hasn’t convinced many Americans of these related propositions, reports Gallup. During time in the White House so far, between 48 and 49 percent of American adults said that their country is viewed either “very favorably” or “somewhat favorably” “in the eyes of the world,” with the “verys” coming in at just seven percent in early 2021, 2022, and 2023 alike.

The total unfavorablys ranged from 50 to 51 percent in these years, with the “very unfavorablys” standing at 14 percent, 16 percent, and 17 percent in 2021, 2022, and 2023, respectively.

Although not terrific, these numbers are hardly a disaster, either. But the funny thing is that they’re a good deal worse than the results recorded during the presidency of America First-y, selfish, xenophobic etc Trump.

In Trump’s first year as President (2017), the share of respondents stating that the United States was viewed either “very” or “somewhat favorably” by the rest of the world totaled only 42 percent – a big drop from the 54 percent reported in the final year of Barack Obama’s administration (2016). But in the next three Trump years, the overall favorably percentages rose to 55, 58, and 60 percent.

Moreover, the “very favorably” responses in 2018, 2019, and 2020 stood at seven, 12 and 13 percent, respectively. – also higher than those of the Biden years.

Also awfully interesting: During Trump’s four years in office, the share of American respondents telling Gallup that they believed foreign leaders “had respect” for him increased from 29 percent to 37 percent. The third reading for Biden’s administration showed that 37 percent of respondents also believed that foreign leaders respected him. But that 2023 result is down from 58 percent in early 2021, at the outset of his presidency.

In addition, these Gallup statistics need to be seen in some noteworthy context. For on top of that evidence that Americans aren’t impressed with the payoff of Mr. Biden’s globalist campaign to repair a national reputation supposedly shredded by Trump, there’s considerable evidence that the rest of the world isn’t, either.

The most revealing sign is the international reaction to the President’s efforts to rally global support against Russia’s invasion of Ukraine. Long-time security allies, even in neighboring Europe, continue free-riding, with this widely followed scorecard revealing that overall U.S. aid to Ukraine still exceeds that provided by all European Union countries combined. Developing countries, meanwhile, keep displaying indifference – at best – despite Mr. Biden’s repeated insistence that global security, prosperity, democracy, and the liberal global order are all stake.

In other words, as opposed to taking seriously the evident Biden assumption that popularity matters decisively in international affairs, practically every other country is acting as if its own particular national interests are paramount. That can only reasonably be read as a major hint that this administration should stop harping so much on America being back (especially for others’ benefit) and revive more of an America First mindset.