(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

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bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.

Making News: Podcast of Connecticut Radio Interview on Trade Policy and Financial Crises

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bubbles, Connecticut, consumption, credit, Financial Crisis, Global Imbalances, Larry Rifkin, Making News, Trade, Trade Deficits, Waterbury, WATR-AM

I’m pleased to present the podcast of my September 30 interview with Waterbury, Connecticut radio host Larry Rifkin on why wrongheaded U.S. trade policies could bring on a rerun of the 2007-08 global financial crisis.  Click on this link for a provocative conversation originally broadcast on WATR-AM about subjects completely neglected by the Mainstream Media –how huge American trade deficits and the flood of cheap credit they sent into the U.S. economy contributed to the spending and housing bubbles that eventually burst so disastrously, and how they’re building up again.

And be sure to keep checking in at RealityChek for news of recent and upcoming media appearances and other events.

P.S. Sorry for sounding a little out of breath at the beginning!  I’d just run to the phone to answer Larry’s call on time!

 

(What’s Left of) Our Economy: U.S. Growth Keeps Falling and Bubble-izing

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bubbles, Financial Crisis, GDP, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, recovery, {What's Left of) Our Economy

Since the government’s latest report on U.S. economic growth came out last Friday, it’s time to update RealityChek‘s monitoring of the quality of that growth – that is to say its makeup. This time, however, let’s do something a little different. Rather than simply review the figures on how dependent the economy has once again become on personal consumption and housing – the two sectors whose bloat led to the financial crisis in 2008 – at any given moment, let’s also look at exactly how much of the growth itself they’ve generated.

First, the stand-still numbers. They show unmistakably that the economy keeps creeping closer to being just as housing- and consumption-heavy as it was at the peak of the bubble in those sectors that le to that financial crisis and the Great Recession that ensued.

Peak bubble-ization occurred in the second quarter of 2005, when these two components of the gross domestic product (GDP) combined hit 73.27 percent. (As noted in this post, consumption and housing each peaked in different quarters.)

By the time the recession – the worst slump experienced by the nation since the Great Depression – had ended, in the second quarter of 2009, this figure had fallen to 70.94 percent, mainly because housing remained especially hard hit.

The new second quarter, 2016 number revealed in the Commerce Department data reported last Friday? 72.88 percent. That’s the highest level during this current recovery. (We’ll get the final revision, for the time being, next month.)

At the same time, the bad news doesn’t end there. For the economy is not only getting as bubbly as during the previous decade. It’s growing much more weakly.

The same troubling trends are apparent from the growth statistics themselves. From its second quarter, 2009 start through the second quarter of this year, the economy has grown in inflation-adjusted terms by $2.2146 trillion. But although 68.31 percent of economic activity seven statistical years ago was accounted for by consumption, these household purchases have spurred 75.91 percent of the real growth recorded since then. So consumption has clearly punched above its weight.

Housing has, too – to an even greater degree. Its share of real GDP had sunk to 2.63 percent as of the start of the recovery. But it’s been responsible for 9.56 percent of the economy’s recovery-era growth after inflation.

What happens when you put what I call this “toxic combination” together? At the recovery’s onset, as we say, they added up to 70.94 percent of real GDP. But their share of growth since then was much higher: 85.47 percent.

This method of examining American growth shows another out-performer, too: business investment. As RealityChek regulars know, its role during this recovery, and over a longer stretch, has sparked heated debate. But the controversy generally has revolved around why it’s been lagging. No need to weigh in on that subject here. For now, let’s note that although such spending – widely seen as a key to sustainable growth and prosperity – fell to 11.38 percent of real GDP at the recession’s end, it produced 24.42 percent of the real growth during this recovery. And let’s also recognize that in absolute terms, this part of the economy is still simply too small to have meaningfully slowed the revival of the toxic combination.

(Eagle-eye readers will note that these growth percentages add up to more than 100. That’s because other GDP components, notably trade and government spending, have subtracted from growth.)

If current trends continue (no guarantee, of course), sometime next year, the United States will have become even more consumption- and housing-heavy than it was at the height of the bubble decade. Will that milestone finally convince American leaders to pay attention to the quality of growth? Or will they wait until the economy crashes again?

Im-Politic: Anti-Trump Policy Experts Repeatedly Flunk the Expertise Test

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2016 election, Asia, bubbles, China, Council of Economic Advisers, Donald Trump, Federal Reserve, Financial Crisis, foreign policy, George W. Bush, Hillary Clinton, Im-Politic, Iraq war, national security, Paul M. Wolfowitz, Republicans, The Wall Street Journal, Trade

Lately, the Mainstream Media has been full of reports that major and minor American policymakers, especially including many Republicans, are flocking to the Never Trump camp. Too bad they invariably miss a crucial detail: Practically all these opponents of Republican presidential candidate Donald Trump have failed miserably when they’ve held policy jobs – as these three examples should make embarrassingly clear.

The most recent example was the widely trumpeted news that a former Deputy Secretary of Defense (the Pentagon’s number two job) named Paul M. Wolfowitz has said that “I might have to vote for Hillary Clinton” because he’s “uncomfortable” with Trump’s foreign policy positions. At first glance, this looks like trouble for Trump, since readers of these reports will quickly learn that Wolfowitz has held a number of senior national security-related jobs under Republican presidents (as well as serving as president of the World Bank). The obvious implication – this policy veteran is so alarmed by Trump that he is actively considering turning his back on his own party and supporting a Democratic candidate about which he claims serious misgivings, too.

What takes much more work to uncover is Wolfowitz’ role as a lead architect of former President George W. Bush’s invasion of Iraq in 2003.  

Now I’m someone who supported that Iraq war, too, and still thinks military action at that time was needed. But I’m in a very small minority. Most of the rest of the country – liberals and conservatives alike – now seem firmly convinced that the second Iraq war was both an unmitigated and unnecessary disaster in its own right, and a blunder that’s largely responsible for the bloody chaos that’s spread throughout the Middle East in recent year.

In other words, Wolfowitz’ record supposedly has been so catastrophic that you’d think Secretary Clinton would be rushing to reject his near-endorsement.  (This Reuters report was an admirable exception, and laid out Wolfowitz’ Iraq record.)  

The same argument can easily be used in connection with The Wall Street Journal‘s report this week that “no former members of the White House Council of Economic Advisers—spanning eight presidents—openly support Mr. Trump.”

Again, on the surface, this news looks devastating for Trump. After all, so many economists who have risen to the top of their profession oppose him! And they’ve served under so many presidents of both major parties! What thinking person therefore could even consider voting for Trump based on his views of the economy.

How about a thinking person who looks at the U.S. economy in recent decades and reasonably concludes “What a mess!” Bonus points if you recognize that even the last heralded period of prosperity – the 1990s – was underpinned by an interlocking technology and stock market bubble that was so unsustainable that a recession came when it burst by 2001.

Do you know how many of these anti-Trump White House economists warned of this downturn? Or more important, of the much worse 2008 financial crisis that largely resulted from a failure to correct the kinds of economic imbalances that began building in the 1990s? None. You don’t have to object to the very idea of “expertise” to realize that for all their credentials, in the most crucial respects, these folks don’t qualify.

And here’s something even weirder about this Journal piece: The very next day, the paper ran a long article with the following headline and subhead: “Years of Fed Missteps Fueled Disillusion with the Economy and Washington; Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.” As the piece polling the big shot economists noted, the White House Council of Economic Advisers on which they served has often been “a stepping stone to senior policy-making positions. Alan Greenspan, Ben Bernanke and Janet Yellen all chaired the council and later led the Federal Reserve.” Further, both Greenspan and Bernanke were both totally blindsided by the financial crisis in their years as central bank head, and deserve major blame for inflating the credit bubble that produced it.

Finally, in the middle of this month, eight (eight!) “foreign and security policy appointees in previous Republican administrations,” and whose work focused on Asia, penned an open letter declaring their own support for Clinton out of fears “that Trump’s combative, ignorant views can (and will, if he’s elected) inflict great damage on our country’s global position and on its economy.”

These former officials state that they “especially fear a Trump presidency’s impact on America’s future in Asia, where China’s influence in the region, now the global economy’s center of gravity, grows apace with the country’s power. Beijing’s worldview offers less liberty and more state and military control — attitudes which, coupled to an assertive chauvinism, directly challenges an open, rules-based order.”

And they praise their former boss, George W. Bush, for “reemphasizing Asia, setting out an American-led path for the region’s future” and President Obama (including his former Secretary of State, Hillary Clinton) for having “persisted with, and expanded, this important policy pivot.”

Of course, as I’ve repeatedly shown, the Asia approach praised by this octet (and others like them) has directly and greatly strengthened China’s economic and technological prowess, and therefore its military power. Just as important, all of these Asia specialists who are now so concerned with China’s backsliding on every conceivable front were among the folks who assured Americans that greatly expanding U.S. trade and other forms of economic engagement with the PRC would turn it into a “responsible stakeholder” in world affairs.

Their open letter amounts to an admission that their hopes were completely misplaced. And we should trust their judgment now?

Of course, not every former American diplomat or leading economist who supports Clinton or simply opposes Trump is a flaming incompetent. And even if they were, that wouldn’t logically lead to the conclusion that Trump and his backers and advisers have all, or any of, the answers.  

But the media really needs to stop equating public service, even at or near the very top, with respect-worthy knowledge or ability.  As suggested by that Wall Street Journal investigation of the Fed’s actual record, nothing is likelier to fuel even more public distrust of America’s leading institutions – including the Mainstream Media.

(What’s Left of) Our Economy: U.S. Growth Isn’t Only Worsening, its Quality Keeps Falling

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an economy built to last, bubbles, consumption, Financial Crisis, GDP, gross domestic product, housing, Obama, real GDP, recovery, {What's Left of) Our Economy

Although you wouldn’t know it from the candidates or the press coverage they’ve generated, one of the biggest questions facing America this election year is whether it’s learned the main lessons of the last financial crisis – and therefore stands a good chance of avoiding a repeat. Last week’s official data on U.S. economic growth shed new light on the answer, and the message they’re sending is “Hold onto your hats!”

The main problem: Along with its advance estimate on the economy’s overall performance during the second quarter of this year (which was feeble), the Commerce Department also released revisions for the past three years. They make clearer than ever that the current, historically weak recovery is getting just as dangerously bubbly as the previous decade’s expansion. As usual, the main evidence is the outsized growth of the two sectors of the economy whose bloat paved the way for that last meltdown – personal consumption and housing. In other words, the nation had been borrowing and spending way too much, and saving, investing, and producing way too little.

As the United States sailed toward its scary Lehman Brothers moment, that toxic combination hit a record for its all-time share of total American economic activity: 73.27 percent of the gross domestic product (GDP) adjusted for inflation. Consumption peaked at 67.84 percent during the first quarter of 2007, and housing topped at 6.17 percent in the third quarter of 2005.

During his first term, President Obama put it well: America needed to become “an economy that’s built to last.” The crisis and ensuing depression did reverse those worrisome trends. But the new GDP statistics show that movement back toward those levels lately has been even stronger than previously reported. And what have we heard from American politicians and journalists? Nada.

Prior to the latest release, the toxic combination was reported (by me) to have reached a recovery-era high of 72.31 percent. Now we know that the figure was actually 72.42 percent. And the new (initial) second quarter number? An even higher 72.85 percent. Worse, the growth gap separating consumption and housing from the rest of the economy – particularly genuinely productive activity, like business investment – has been getting wider.

Housing is still far below its bubble-era levels – standing at just 3.57 percent of real GDP in the second quarter after totaling 3.64 percent in the first quarter. But for most of the last two years, consumption has been even more economically predominant than during the last decade. As of the second quarter, it represented 69.28 percent of real GDP.

History of course never repeats itself exactly, so there could be some “unknown unknowns” out there that will once more spare the United States and the global economy from repeating the last financial crisis – or a full-blown collapse – despite the resurgence of low-quality growth. But what kind of country would place all its eggs in that basket?

(What’s Left of) Our Economy: Growth Keeps Getting Bubblier & Bubblier

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bubble decade, bubbles, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, personal consumption, {What's Left of) Our Economy

With the world economy having somehow survived Brexit – at least for now! – its economic focus should shift at least partly back to the United States this week. Unfortunately, major analysts and pundits are almost certain to keep ignoring a development that was reinforced by new data last week, and that poses a much bigger threat to the current recovery than the British public’s decision to leave the European Union: Eight years into this expansion, the U.S. economy’s structure looks ever more like its dangerously lopsided, bubble decade self.

We know this because last Tuesday, as Brexit fears were still near their peak, the U.S. government issued its final (for the time being) report on the economy’s growth for the first quarter of this year. As always, the headlines focused on…the headline figure – which revealed inflation-adjusted growth of a meager 1.07 percent during those months on an annualized basis.

At least as important, however, these gross domestic product (GDP) statistics also showed what the economy consists of, and the clear message is that it’s more housing- and personal consumption-heavy than during the run-up to the last, devastating financial crisis. Remember: Those sectors were the toxic combination whose reckless expansion ultimately triggered that near-death economic experience.

The historical GDP data makes clear that housing and consumption combined peaked at dominating American economic activity in the second quarter of 2005 – when they comprised 73.27 percent of GDP after inflation. Since the two chunks of the economy wax and wane at different rates, each of them maxed out at different times during the bubble decade – consumption at 67.84 percent of real GDP during the first quarter of 2007, and housing at 6.17 percent in the third quarter of 2005.

The most recent GDP figures show that housing has yet to regain those bubble-decade levels, or even close. As of the first quarter of this year, it stood at 3.44 percent of constant dollar GDP. But personal consumption’s share has hit an all-time record: 68.87 percent. Add them up and you see that the toxic combination accounted for 72.31 percent of all U.S. economic activity after inflation. That’s a post-crisis record.

But actually, matters nowadays could be even worse than while the bubble was inflating. For when housing hit its 2005 zenith (and consumption was robust, too), real growth was proceeding at a 3.34 percent annualized clip. When consumption peaked, in early 2007, growth was only 0.25 percent annualized. But when the toxic combination hit its 2005 all-time high, growth was 2.09 percent annualized.

In other words, at the start of this year, we just learned from the new GDP data, personal consumption and housing combined also were playing outsized economic roles in America. But they were helping to produce growth of only 1.07 percent annualized. In other words, nearly as much bubble-ization as took place before the financial crisis is spurring considerably less growth.

History never repeats itself exactly, so these figures don’t necessarily mean that America is inexorably moving towards Financial Crisis 2.0. But they indisputably demonstrate that the nation isn’t moving much – if any – further away, either.

(What’s Left of) Our Economy: The Times’ Trade Deficit Pollyannaism

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bubbles, business investment, capital flows, capital spending, China, competitiveness, currency manipulation, global division of labor, global financial system, investment, manufacturing, Neil Irwin, subsidies, The New York Times, Trade, Trade Deficits, U.S. dollar, {What's Left of) Our Economy

At least Neil Irwin’s New York Times article yesterday on the real meaning of trade deficits made two points rarely seen in journalistic examinations of the subject. He acknowledged that these shortfalls subtract from an economy’s size. (And should have added that worsening trade balances slow an economy’s growth – a big problem for the slow-growing United States these days.) And he noted that the foreign investment inflow triggered by deficits should be put to productive uses. Otherwise, it can create dangerously bubbly effects, as with U.S. housing and personal consumption during the last decade.

What Irwin didn’t discuss were the real-world obstacles created by trade deficits to using those capital inflows wisely, and unfortunately, they’re much more important and germane to policymakers and the public.

For example, let’s say that a country’s trade deficit is heavily concentrated in manufacturing (which America’s is). And let’s say that it partly reflects not only the dollar strength resulting from the central role played by the United States in the global financial system, but foreign countries’ policies of artificially undervaluing their currencies. If Washington didn’t respond adequately, wouldn’t many prospective investors balk at pouring money into domestic manufacturing for fear of having to compete not only with foreign companies, but with foreign treasuries? And wouldn’t a turn-the-other-cheek American policy toward other foreign subsidies produce similar effects?

Alternatively, a large manufacturing-centered trade deficit could inhibit productive domestic investment by killing off large numbers of manufacturing jobs – which have long been among the economy’s best-paying. Investors considering building new factories in America could understandably be dissuaded by the resulting reductions in family incomes – which could well ripple far beyond manufacturing as displaced industrial workers began competing for the jobs remaining in the service sector, and undermined its own wage growth.

Another live possibility: If U.S. trade deficits significantly reflected the offshoring activities of multinational companies, and American trade policy encouraged the supply of the high price U.S. market from much lower cost (and lightly regulated) foreign markets, wouldn’t many of these multinationals take the hint and send much of their capital abroad?

Nor are these scenarios hypotheticals. If you look at the business investment share of the U.S. economy, as pointed out by Dean Baker of the Center for Economic Policy Research (in a recent email), it grew steadily between 1950 (when it was 9.99 percent of pre-inflation gross domestic product) to 1980 (when it hit 14.21 percent). By 2007, the last year before the Great Recession struck, it had fallen back to 13.27 percent. Last year, it stood at 12.83 percent. (Unfortunately, the inflation-adjusted data only go back to 1999.)

Of course, such capital spending is driven by many forces. Baker, for example, emphasizes the destructive effects of financial deregulation, which greatly increased the rewards of short-term-focused speculative activity versus the longer-term gains generated by funding production and innovation. But can it be a total coincidence that domestic American business investment peaked just as imports – especially from predatory trading powers like Japan – were starting to make big inroads into U.S. markets?

Even more suggestive: Research published in 2014 by analyst Aaron Ibbotson of Goldman Sachs showed that U.S.-owned multinationals have not simply stopped or slowed investing in new plant and equipment. Instead, they’ve increasingly channeled such investment overseas, especially to emerging market countries like China, in order to supply their industrial needs.

Not that these are the only problems potentially and actually created by running trade deficits – especially big, chronic ones – that Irwin missed. For instance, when foreign interests buy American assets with trade surplus earnings, they buy control over the U.S. economy. This arguably is not a significant issue when the buyers are other private companies, or when they come from countries that are allied or friendly with the United States, or neutral. When a large and growing share of these acquisitions are made by China – which is neither friendly, nor private sector dominated – threats emerge ranging from market distortions (created by heavily subsidized financing arrangements) to national security dangers.

Irwin should have also mentioned that changing trade balances are crucial indicators of global competitiveness, and in fact signal which countries are likely to be major and minor producers of various goods and services. Indeed, the ostensibly most efficient possible global division of labor that results is a principal justification for encouraging trade. If manufacturing, to take one sector, is judged to create no special advantages for the American economy, then it’s fine to be indifferent to trade deficit signals that U.S. industry’s world-class status is at risk. If manufacturing is prized, then the deficit is indeed a valuable scorecard, and one that’s sending a troubling message.

Of course, Irwin’s column also argued that the strong dollar that puts constant upward pressure on the trade deficit creates major diplomatic and national security benefits for the United States, and there are respectable, if not dispositive, arguments to be made along these lines. But when it comes to the domestic growth, employment, and wage impact of trade deficits – not to mention the effects on all the productivity growth and innovation fueled by manufacturing – portrayals of these shortfalls as close-calls or nothing-burgers belong in a set of political talking points, not in a supposed economic primer.

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

Tags

bubbles, economic growth, GDP, gross domestic product, housing, personal consumption, real GDP, recession, Super Bowl, {What's Left of) Our Economy

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

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

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

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

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

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

(What’s Left of) Our Economy: Why the Latest World Trade Failure Should be Celebrated

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agriculture, Alan Greenspan, bubbles, China, Congress, developed countries, developing countries, Doha Round, Federal Reserve, Financial Crisis, George W. Bush, Global Imbalances, Information Technology Agreement, ITA, Obama, offshoring, poverty, Robert Zoellick, September 11, terrorism, TPP, Trade, trade law, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Trade policymakers have just uncharacteristically – and perhaps unwittingly – given the world economy an important holiday gift: a virtual decision to kill the so-called Doha Development Round of world trade liberalization talks.

This outcome of the latest meeting of the World Trade Organization (WTO) in Nairobi won’t make an active contribution to solving global economic problems. But it greatly reduces the odds that additional multilateral trade expansion will keep worsening the kinds of international economic imbalances that helped trigger the last financial crisis and keep threatening to set the stage for a new meltdown.

The Doha round (named after the capitol of Qatar, where it was launched) was a product of the September 11 terror attacks, but was whoppingly misconceived both strategically and economically. Though intended to spur the prosperity needed in developing countries ostensibly needed to reduce terrorism’s appeal, its founders – notably President George W. Bush’s administration trade chief Robert Zoellick – seemed unaware that dangerous extremism had never taken hold in most world regions where poverty was most desperate, e.g., rural India and rural China. Moreover, the round’s explicit aim of channeling most of its trade liberalization benefits to developing countries completely violated the core principles of genuinely free trade.

But those mistakes and their impact paled next to the damage likely from a treaty reflecting the Doha goals – ever greater global financial instability stemming from trade flows that fostered the offshoring of production, and therefore income-earning opportunities, to countries that would still long remain too poor to consume adequately, and away from the rich-country populations (especially America’s) whose purchasing power was still crucial for adequate global growth.

By the time the Doha talks were inaugurated, in 2001, years of NAFTA-style, offshoring-centric U.S. trade liberalization decisions capped by China’s admission into the WTO had already recklessly placed the U.S. and world economies on a completely unstable course. The Bush administration and the Federal Reserve under Alan Greenspan further greased the skids for crisis with two decisive moves. The former filled the resulting American income and growth shortfall with renewed, and record, federal budget deficits. The latter even more powerfully fueled consumption with prolonged (then) record low peacetime interest rates. For half a decade, the United States experienced an unprecedented burst of debt-led, bubble-ized growth. And then the entire global economy nearly collapsed.

Success at Doha was always bound to magnify world trade imbalances further and ensure even more badly lopsided growth by requiring the United States and other developed countries to open their markets much wider and faster than low-income countries. Particularly important were measures practically certain to gut the U.S. trade laws that shielded America’s domestic economy from foreign predatory trade practices like export subsidization and dumping. In fact, the inequities were so egregious that even America’s staunchly pro-trade liberalization agricultural sector, which has long wielded outsized influence in Congress, balked; its reservations began the Doha hold-up that eventually brought its demise.

Unfortunately, another recent international trade policy decision is likely to add to dangerously distorted global growth – the new Information Technology Agreement reached under WTO auspices, which eliminates tariffs on many tech products but does nothing about the non-tariff barriers and predatory commercial practices used so heavily by so many U.S. trade rivals. New financial pressures may also be fueled if Congress passes the Trans-Pacific Partnership (TPP) trade deal pursued so avidly by President Obama. As I’ve often explained, this agreement’s text does target non-tariff barriers, but creates no mechanisms even remotely capable of actually curbing their use. Therefore, it’s all but certain to create the trade deficit-boosting, finance destabilizing effects of the previous American trade agreements on which it’s modeled.

All the same, TPP ratification this year looks doubtful, given election-year opposition by major Republicans in Congress. Doha’s death would represent a second “do no harm” decision in a single year – certainly not enough progress on the trade policy front, but considerably better than nothing.

(What’s Left of) Our Economy: Big New Signs of Re-Bubble-Ization

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2016 elections, Allison Schrager, auto loans, balance sheets, Ben Bernanke, Bloomberg, bubbles, bubbles Federal Reserve, credit, credit cards, debt, Financial Crisis, Fox Business Debate, Goldman Sachs, housing, interest rates, leverage, loans, Matt Phillips, mortgages, quantitative easing, Quartz, revolving credit, Tracy Alloway, zero interest rate policy, ZIRP, {What's Left of) Our Economy

One of the more praiseworthy features of the Fox Business Republican debate was the discussion of the last mega-financial crisis and how to prevent a repeat. Although at their debate on CNN the Democratic presidential candidates were quizzed on the bubble and its bursting and possible remedies, the Milwaukee event marked the first time these subjects came up for the Republicans.

Better late than never, but that’s pretty strange given that the last bubbles inflated and the crisis broke out on the GOP’s watch. In fact, it’s downright disturbing. For a new meltdown remains by far the greatest economic threat to America’s future due to the Federal Reserve’s overly easy money policies – despite the latest reassurances from former Fed Chair Ben Bernanke that such warnings are ludicrous. Maybe not so coincidentally, two important new signs of re-bubble-ization have just appeared.

The first was reported by Quartz’s Matt Phillips, who pointed out that the Federal Reserve’s latest figures on Americans’ borrowing behavior showed that consumers in September took out an all-time record $28.9 billion in new loans in September. In the process, they broke a record set 14 years ago, and increased their credit outstanding by the greatest percentage since 1943 – when these records started to be kept. And even if you adjust for inflation, household borrowing is at lofty levels historically.

Many economists view such increases as a bullish economic sign – signaling that Americans are so confident about their future prospects (and repayment potential) that they’re willing to take on more debt. That may be true, but the data on wages and incomes strongly indicate that this confidence is really overconfidence. And if interest rates really are going to be raised by the Federal Reserve, even gradually, this overconfidence may be tomfoolery.

Also not so bullish – the makeup of these new loans. As economist Allison Schrager has sagely pointed out, not all borrowing decisions are created equal, even for individuals with comparable incomes. Some, like student loans, are arguably sensible investments in one’s own human capital and potential (though signs of diminished returns from a college education seem to be popping up everywhere). Others, like mortgages, are arguably sensible investments in an asset that could well appreciate in value (though the inflation and bursting of the housing bubble should have taught everyone that real estate is no longer a sure thing). And still other loans simply finance consumption – which lacks any capacity to increase one’s wealth.

Unfortunately, much of the September surge in consumer borrowing was in auto and credit card debt – which won’t bring any financial benefits.

The second sign of reb-bubble-ization was reported by Bloomberg News’ Tracy Alloway, who covered a Goldman Sachs study showing that leverage levels in Corporate America are at their highest levels in a decade – during the bubble years. In other words, thanks largely to the super-easy monetary policy pursued by the Federal Reserve since the crisis peaked, even though corporate profits have surged to new records, American business has gone on such a frantic shopping spree that its debt load has grown much faster. Indeed, according to Goldman Sachs, these debts are now at twice the levels they hit in the pre-crisis era.

Just as with consumers, rising interest rates could wreak havoc with the balance sheets of U.S. companies. And just as with consumers, relatively little of this borrowing is being devoted to strengthening these firms in what might be called the old-fashioned way – i.e., through the development of new products and services. Instead, much of this new debt has been used to fund mergers and acquisitions, and stock buybacks.

The Fox Business debate, however, does deserve criticism in one sense. It followed an entirely conventional course in focusing on crisis-proofing American finance by improving Wall Street regulation. Certainly such improvement has been warranted. But the financial crisis was rooted in weaknesses in the real economy. Until presidential candidates start presenting realistic plans for fostering more good jobs and the incomes they generate, and for spurring more production and the earnings they generate – which would reduce the need for binge borrowing in the first place – a new financial crisis looks much more like a matter of “when,” not “if.”