(What’s Left of) Our Economy: More Evidence of Germany’s Stealth Protectionism

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Angela Merkel, consumers, consumption, developing countries, Financial Times, Germany, Global Imbalances, globalization, imports, Matthew C. Klein, protectionism, savings, taxes, Trade, Trump, value-added taxes, VATs, wage suppression, wages, {What's Left of) Our Economy

President Trump’s charges that the United States has signed terrible trade deals in recent decades, and that foreign economies have been the main beneficiaries, inevitably have triggered a potentially useful debate over which major countries are most open to trade and which are tightly closed. Unfortunately, such arguments won’t actually be useful until “open” and “closed” are properly defined, and a new Financial Times column on Germany’s economic policies nicely illustrates how remote that goal remains.

I’ve previously made the case that accurately measuring protectionism – and thus accurately gauging which countries are contributing adequately to global prosperity and which are free-riding – entails much more than adding up individual trade barriers. Such simple counts also mislead on the equally important question of which countries the United States can reasonably hope to trade with for mutual benefit, and which countries can’t possibly qualify.

And because Germany’s government has both taken trade fire from Mr. Trump and vigorously replied, I’ve used it to illustrate the above points. In a short op-ed for USA Today and a much more detailed RealityChek post, I’ve noted that, as with many other leading foreign economies, the main problem with Germany as a promising trade partner stems at least as much from its overall national economic strategy as from its specific trade practices. That is, countries like Germany, which heavily emphasize growing by saving, producing, and exporting, can’t possibly be good trade matches for countries like the United States, whose priorities have been the diametric opposites.

Of course, those national economic strategies manifest themselves in specific practices and policies. (How else could their focus be established?) But the links to trade flows aren’t always clear. For example, there’s widespread reluctance to acknowledge the trade impact of value-added taxes (VATs), which promote exports and penalize imports. The role played by other German policies, like suppressing wages or skimping on infrastructure spending, has been even less apparent.

What the new Financial Times post adds to the mix is a generally neglected form of wage suppression: Germany’s taxes on low-wage workers – which author Matthew C. Klein describes as “among the highest in the world” since at least the turn of the century.

These taxes inflict an outsized blow on Germany’s imports – and on the the world economy as a whole – in at least two important respects. First, economists tend to agree that the lower an individual’s or household’s income, the higher the share of that income will be spent (as opposed to saved). If they’re right, then these taxes ave been hitting Germany’s overall consumption and import levels especially hard. Therefore, these levies look like notable contributors to the bloated German trade and current account surpluses that are not only detrimental to America, but that could threaten the entire world’s financial stability.

Second, as supporters of pre-Trump U.S. trade policies constantly point out, much of what low-income consumers buy is produced and exported by low-income countries (e.g., apparel or school supplies or furniture). So since high taxes on low-wage workers in Germany prevent them from importing as much from the developing world as they could, third world countries need to focus more on customers in more promising markets – like America’s.

Germany and its leader Angela Merkel lately have been basking in the glow of praise from the political classes in the United States and abroad, which have anointed them as among the new, post-Trump champions of free trade and all its purported benefits. (China’s another alleged globalization champion, but that’s another story.) Its lofty taxes on low-wage workers add to the evidence that these titles are wildly premature.

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(What’s Left of) Our Economy: Smart Phones, Dumb Economy?

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cell phones, consumers, credit, CreditSesame.com, debt, deflation, inflation, Maria Lamagna, Marketwatch.com, millennials, smartphones, telecommunications services, {What's Left of) Our Economy

I’m always wary of drawing conclusions about the American economy from what I see in everyday life for reasons that should be obvious. All such anecdotes should be viewed suspiciously because individual observations or incidents are much more likely to result from randomness or unique circumstances than to reflect a genuine trend. And I’d be the last to claim that my own experiences have ever been representative of anything larger.

Still, it’s undeniably, and understandably, gratifying when some actual data seems to bear out something that’s had me (figuratively) scratching my head for some time. It’s the seeming tendency of folks who at least appear to be well into the lower depths of the “99 percent” of non-uber-wealthy Americans owning what look (to my admittedly non-expert eye) like state-of-the-art smartphones. Although all sorts of reasonable explanations are possible, a recent survey of consumer finances at least has supported my suspicion that something genuinely peculiar – and not so encouraging – really is going on here.

First, let’s examine some of the extenuating circumstances. Prices for smartphone services have been falling steadily – and steeply over the last few months, thanks largely to the spread of unlimited data plans. Just check out this chart:

Younger consumers in particular also have shown some tendency to value buying experiences (like the extraordinary connectivity provided by modern personal communications) over goods. Some of these millennials and others in the post-baby-boom categories (especially students) may be getting help from their families – and that doesn’t necessarily raise red flags. More disturbing, however, are the odds that many of the young are avoiding or deferring goods purchases (especially big ones they used to make in the twenties and thirties, like cars and homes) because they simply can’t afford them, and are therefore substituting relatively cheap indulgences like phones with every conceivable bell and whistle.

Nonetheless, that consumer finance survey – from the Credit Sesame website – sadly suggests that many low-income earners who use smartphones of some kind (it’s not possible to say that they’re the latest and greatest) literally can’t afford them. Instead, they’ve bought them with seriously over-extended credit.

According to Marketwatch.com reporter Maria LaMagna, Credit Sesame examined the finances of 5,000 consumers and found that those whose cell phone accounts are considered delinquent were carrying an average balance of $887. I couldn’t find any information about what percentage of the 5,000 consumers analyzed were carrying such cell phone debt, but here’s a reason to think that the share carrying significant amounts is pretty big: phone service companies don’t usually report customers’ payments histories to credit bureaus until the collections process formally begins. I also wish that the article indicated how credit card-related debt has changed over time.

But it’s hard to believe that a reputable site like Marketwatch would have reported these numbers had they been more the exception than the rule. And the amounts of cell phone-related debt are especially striking given how services are now cratering in price.

It’s entirely possible that cell phone debtors will take advantage of these price plunges to pay up and stay fully paid up. In principle, the companies could start cracking down, too. But there’s also a real chance that the debtors will simply start paying their minimums on time, and that the service companies – currently engaged in price wars determined to get and keep customers practically at all costs – will keep treating them leniently (and milking them as cash cows for as long as they can). Raise your hands if you think this is any way to run an economy for any serious length of time.

(What’s Left of) Our Economy: Let’s Get Real About Tariffs and Consumer Prices

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Arthur Taylor, automotive, Black Dog Manufacturing, Carlos Ghosn, consumers, economists, Fox Business, Maria Bartiromo, markets, Mitsubishi, Nissan, prices, Renault, tariffs, Trade, Trump, {What's Left of) Our Economy

Surely the most politically powerful argument against any American trade policies that involve tariff-ing imports holds that such moves will raise the prices consumers pay for goods and services directly and indirectly, imported and U.S.-made alike. That’s why the claim is made constantly both by domestic interests who favor the trade status quo (like offshoring-happy multinationals and retailers), and by American trade partners whose growth heavily depends on exporting to the United States. And let’s not forget most of the world’s economists. 

But now an admission has just come from a major multinational manufacturer that the real pricing impact of tariffs would surely be much less dramatic – to say the least.

The source is no less than Carlos Ghosn, who chairs both Japan’s Mitsubishi Motors and Nissan Motor Co., as well as France’s Renault. On a Fox Business program last Friday, Ghosn expressed his expectation that the global automotive sector would “adjust” to any new trade restrictions put in place by President Trump.

That’s not terribly newsworthy. After all, per the tariff critics, that could simply mean that Ghosn’s companies will raise consumer prices in order to compensate. Nor, given the corporate rush to curry favor with Mr. Trump, was it particularly newsworthy that Ghosn told anchor Maria Bartiromo that “All car makers today are paying attention to what the president is saying” (his words) and that “companies are looking at adding capacity and hiring more workers in the U.S. as a result of Trump’s plans” (as an accompanying Fox Business post put it).

What was terribly newsworthy was Ghosn’s prediction that “I don’t think anybody can sit comfortably with a price hike.” In other words, the head of an enormous worldwide automotive “alliance” has just made clear that new tariffs probably won’t lead to higher consumer prices – at least not on any sustained basis.

Ghosn didn’t specify why the industry would likely hold the line, but leading reasons aren’t tough to imagine. In particular, the U.S. automotive playing field would remain filled with players and therefore highly competitive, and American consumers these days don’t have access to infinite amounts of money, either in the form of paychecks or credit. If he’s right, then there’s no reason to suspect that these limits on pricing power are restricted to the auto industry.

Another business voice has just offered some other insights into why automatic price hikes can’t be assumed to result from tariff hikes. Arthur Taylor founded and runs Black Dog Manufacturing in Hyde Park, Utah, a producer of custom wood and metal fixtures and other products used by retailers and other vendors in malls and stores. He’s also one of the sharpest observers of the globalization and manufacturing scene I’ve met.

As Taylor reminded me in a Facebook message over the weekend, automatic price hikes can’t be assumed after tariffs because, contrary to what’s apparently believed by most economists (and argued by those business and other interests with big stakes in preserving the trade status quo), there is no pat formula businesses employ to determine the prices they charge. More specifically, they don’t use any of their costs – whether of labor, or of any domestic or foreign inputs – in any predetermined way to calculate what they charge to customers (whether individual consumers or other businesses).

Instead, “price is determined by what the buyer will pay and in business, the majority of our efforts are dedicated to getting the highest price we can for the volume we’ll accept.” In this vein, “Businesses always start with ‘how much can we get for this?’”

Of course, costs always factor significantly into pricing decisions. But they generally are not seen or treated by producers as considerations that either justify giving customers a break when they are low or falling, or entitle them to pass-throughs when they are high or rising. Rather, sellers make judgments about what buyers will pay. If necessary, they try to make the adjustments needed to produce revenues and profits that they and/or their investors consider acceptable. If their performance is unsatisfactory, sellers either try to make further changes in pricing or production techniques, or in their sales and promotional efforts; or they modify their revenue and profit expectations; or they conclude that their business is not viable and abandon the venture.

In other words, prices are produced by the functioning of an ultimately psychological system of value identification by both buyers and sellers that’s called a market. And one of the key elements of value identification for a seller has always been what a market will bear. Executives like Ghosn and Taylor recognize markets’ complexity and subjectivity, as well as their inescapability (that is, if markets are indeed viewed as the best basis for organizing economic activity).  Is it too much to ask that economists – and the politicians, journalists, and think tank hacks they influence – develop and/or purvey equally realistic views?

(What’s Left of) Our Economy: About that American Shopping Revolution….

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consumer spending, consumers, consumption, goods, Great Recession, holiday shopping, hotels, recreation, restaurants, services, shopping, spending, {What's Left of) Our Economy

The final figures for the last holiday shopping season are in, and they seem to confirm a trend that students of the retail industry – and lots of retailers themselves – claim is becoming dominant: Shoppers are spending more and more of their dollars on services – especially those that offer “experiences” – and fewer and fewer on goods.

This Washington Post article handily sums up the evidence – both the data and the views of various retail executives and consultants. Even more telling, it describes the very substantial store closings recently announced by like companies like Macys. Nonetheless, if you look at the U.S. government figures on how Americans spend their money (as opposed to what’s sold by stores), the only significant increase visible in that “experience” spending has come over the last year. And so far, there’s no sign that it’s come at the expense of goods purchases.

The spending figures are found on the Commerce Department’s Bureau of Economic Analysis website, and they’re not only broader than the retail sales numbers (which are kept at the separate Census.gov). They also come adjusted for inflation. They show that, through the third quarter of this year, spending on restaurants and hotels and other forms of accommodation rose by more in real terms (4.45 percent) than overall after-inflation personal consumption (3.15 percent). But spending on “recreation” was up only 1.49 percent. And purchases of goods increased a relatively healthy 3.91 percent – also considerably faster than purchases as a whole.

But maybe the shopping priorities shift only becomes apparent if you look at the entire economic recovery? Not according to these statistics. Since the last recession ended in mid-2009, restaurant and hotel spending has risen by 17.45 percent in real terms – faster than the advance in total personal consumption (14.85 percent). But recreation services spending has increased by only 12.76 percent. And real consumption of goods beat them both – up 23.21 percent.

Nor is there much reason to think that the Great Recession ushered in big change in American consuming away from goods. If anything, quite the opposite. Since it began, in December, 2007, all real personal spending has risen by 11.71 percent, with goods spending leading the way with an increase of 14.94 percent. Restaurant and hotel spending is higher by just 10.54 percent – barely better than the increase in after-inflation overall services spending of 10.17 percent. The figures for recreation services? A mere 7.28 percent improvement.

And revealingly, the growth disparity between goods and the other spending categories is wider still since the start of the century. Between 2000 and 2014 (the last full-year data available), adjusting for inflation, restaurant and hotel spending increased by 25.51 percent, recreation spending by 27.67 percent, while goods spending jumped by 44.16 percent. The goods rise was also much faster than that for services overall (27.60 percent).

These numbers, in fact, challenge not only the claims about changing shopping tastes in the United States. They challenge claims about the entire economy being dominated by services. It turns out that that’s mainly true on the production side – where measured by real value-added (a different but comparable gauge) inflation-adjusted services output was up 31.87 percent between 2000 and 2014. That’s nearly three times faster than the real goods production increase of 10.98 percent. That is, Americans still buy huge and smartly growing quantities of goods. But more and more of them come from abroad.

(What’s Left of) Our Economy: Has the Fed Gotten Savings Incentives Completely Wrong?

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Baby Boomers, banks, consumers, debt, deposit rates, federal funds rate, Federal Reserve, finance, Financial Crisis, housing, incomes, interest rates, recession, retirees, savings, savings rate, seniors, spending, The Economist, zero interest rate policy, {What's Left of) Our Economy

As many of you may know, the Federal Reserve yesterday raised the interest rate it directly controls above an effective zero level for the first time in seven years. So it’s especially interesting and important that a post from The Economist just before the rate hike made a strong case that one of the main rationales for keeping interest rates so low has backfired big-time on ordinary Americans and on the consumer spending still driving most U.S. economic activity.

Just after the height of the financial crisis, the Fed lowered its so-called funds rate to zero (actually, it was a range of zero to 0.25 percent) in part to make sure that the carnage that was spreading from housing to Wall Street and increasingly to the rest of the economy wouldn’t scare households into closing their wallets,and therefore choke off even more growth. The federal funds rate doesn’t directly set consumer borrowing rates – it’s the rate offered by the central bank to the country’s biggest banks. But the Fed was hoping that super-easy money would have twin stimulative effects.

First, when these banks’ borrowing costs fall, they can offer cheaper loans to both consumer and business borrowers and stay just as profitable. And the more affordable credit becomes, the more borrowers were expected to use. Second, the Fed was hoping that super-low rates would penalize saving. A rock-bottom federal funds rate would drive way down the returns on such popular consumer savings vehicles as money market funds and certificates of deposit and savings bonds, and convince Americans that they were better off spending existing savings and incoming income rather than receive literally no reward for thriftiness.

The Economist, though, has argued that the Fed’s penalize-savings strategy was misbegotten. And it looks like it should have been obvious even then. As the magazine points out, the biggest reason Americans save is to ensure a comfortable retirement. For any retirees or those nearing that age who already have substantial savings, even very low-yielding assets can together spin off enough income to ensure the golden years living standards they want.

But then ask yourselves how many Americans were in this situation when the financial crisis and recession struck. Inflation-adjusted incomes for the typical household had been stagnating. Thrift became a forgotten virtue; in part because of those stagnant incomes and in part because perpetually rising home values were hyped as an acceptable substitute, the nation’s personal savings rate hit historic lows and in fact briefly fell below zero. Then, of course, home values began cratering and the stock market went into free fall. So safe but low-yielding assets looked like the only viable savings game in town.

Unfortunately, the lower the return, the bigger the pot needed to guarantee that comfortable retirement. As a result, more and more of the aging American population has felt greater and greater pressure to salt away any new income not needed to cover ongoing living expenses.

Nor do you need to take The Economist‘s analysis on faith. For nothing has been clearer during this weak economic recovery than the continued consumer caution so responsible for holding it back. Many analysts attribute this behavior to a simple – possibly excessive – “once burned-twice shy” fear. But The Economist‘s treatment at least points to another important factor: For Americans with stagnant incomes and meager liquid savings – along with continuing debt – returning to pre-crisis and recession-level spending simply hasn’t been an option. In fact, evidence is accumulating that growing numbers of seniors, including recently retired baby boomers, are feeling these pressures, too – especially on the debt front.

Not that the Fed’s quarter-point rate hike will change matters much. In fact, signs haven’t even appeared yet that it’s a step in the right direction, as those banks that have raised the rates they’re charging for borrowers haven’t raised those that they’re paying to depositors. Until rates rise high enough to reward savings significantly again, most Americans will have ample reason to view recent Fed policies as lose-lose propositions.

Those Stubborn Facts: Why Even Richer Chinese Consumers Won’t Save the World

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China, consumers, global recovery, Those Stubborn Facts

Share of major China consumer goods markets where foreign brands lost share, 2014: 69.2%

Foreign brands’ share of China’s auto sales, 2013: 62.5%

Foreign brands’ share of China’ss auto sales, 2014: 59.0%

(Source: “Doughty but not superhuman,” The Economist, September 26, 2015, http://www.economist.com/news/finance-and-economics/21667927-chinas-consumption-boom-not-enough-succour-world-economy-doughty-not)

(What’s Left of) Our Economy: A Blame-the-Victim Theory of Trade Policy

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consumers, free trade, free trade agreements, lobbying, Mancur Olson, manufacturing, multinational corporations, productivity, retailers, Robert Samuelson, special interests, trade policy, Wall Street

Nationally syndicated economics columnist Robert Samuelson deserves a nice hand for identifying a possible cause for America’s pronounced productivity slowdown that’s been generally overlooked: the relentlessly growing power in national politics and policy of special interest groups. In a column earlier this week, he drew on the ground-breaking analysis of the late Mancur Olson to argue that the numerous successes achieved by smallish but narrowly focused and highly motivated lobbies in securing specialized favors for themselves from government have encouraged countless other interests to pursue the same strategies. The net effect is to diminish the total resources expended by the economy on production, and to increase the resources used for winning and keeping economically unproductive privileges.

I have several big problems with Samuelson’s discussion, though – and in fact with some of the leading examples used by Olson – and they all involve trade policy.

As Samuelson explains it, companies and workers pressing for protection from imports show exactly how the system now functions – and malfunctions. A winning campaign “saves jobs and raises prices and profits. But consumers — who pay the higher prices — don’t create a counter-lobby, because it’s too much trouble and the higher prices are diluted among many individual consumers. Gains are concentrated, losses dispersed.”

The problem is that, however compelling this sounds in theory, at least when it comes to trade policy, it produces a picture that is simply unrecognizable to anyone with any real familiarity with the subject. Perhaps the most important flaw is the implicit assumption that the freest possible trade always results in the best possible outcomes for the greatest number of Americans – and indeed for the economy as a whole – while calls for interfering with such trade flows always result from special interest pleading.

That’s a tough argument to make when you consider that the relentlessly rising trade deficits generated by the standard free trade approach have slowed the growth of this already sluggish recovery considerably. It’s even tough to make given that the income losses that can be blamed on this trade strategy – which were extremely broad-based – spurred Washington to fill the gap with easy money and the mammoth debt it brought, helping to trigger the financial crisis.

The big-small actor aspect of Olson’s theory doesn’t hold up, either in the trade policy sphere. For decades, the biggest winners by far in the nation’s leading trade policy fights have been big, offshoring-oriented multinational corporations and the often bigger Big Box retailers and Wall Street banks with which they’ve worked fist in glove. The ranks of smaller manufacturers were split, but those opposed to free trade agreements and related decisions were most often defeated. And the smaller companies that did indeed seek to throw sand in the fears of trade liberalization in fact were actually the ones trying to promote broader economic and national interests.

And the smaller retailers and other small service companies not directly affected by trade liberalization generally sided with the corporate giants – in order to win a few easy brownie and lobbying log-rolling points with them (as in “You scratch my back and I’ll scratch yours.”) So they were acting first and foremost on their own narrow interests as well.

As for consumers, who supposedly benefited from those lower prices, they have indeed been pretty disengaged from trade policy disputes. But their apathy powerfully enabled decisions that wound up backfiring on tens of millions of them disastrously, as the crisis increasingly cost them their jobs and their homes. So the Olson theory holds up in the sense that the gains from winning trade positions were highly concentrated – they overwhelmingly benefited the limited constituencies that worked so energetically and effectively to prevail. And the losses were indeed dispersed – among workers and especially among apathetic consumers. The results, however, so damaged the entire economy that its ability to recover fully remains in doubt.

There’s an especially crucial productivity angle that needs to be recognized as well: Surely one of the most effective ways to undermine an economy’s productivity growth is to send much of its most historically productive sector – manufacturing – overseas. So in that sense, the political and lobbying dynamics highlighted by Olson have backfired against the broad national interest as well.

In addition, these trends fed on themselves in a widely unrecognized way: The smaller domestic manufacturing’s physical footprint became, in terms of its share of the workforce and of economic activity, the fewer Americans directly experienced the damage caused by its shrinkage – and the clearer the path to victory for the offshoring/trade liberalization lobby. The latter also benefited from the increased concentration of manufacturing in smaller cities and towns and semi-rural areas. So factories and their workers literally became harder for the rest of the population literally to see and interact with.

Since I’m much less familiar with the lobbying and politics of numerous other economic issues, I don’t feel comfortable commenting on how well the Olson theory describes their workings. But if its tenets are as off-base in these areas as they are in trade policy, it’s easy to see how these ideas would be prized by business, political, and media elites with such a strong stake in blaming the victims for their own grievous policy blunders.

(What’s Left of) Our Economy: Why Increasingly Disposable Workers Become Increasingly Wary Consumers

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benefits, bubbles, consumers, debt, Employment, Federal Reserve, growth, incomes, Jobs, JPMorgan Chase, Robert Samuelson, salaries, savings, savings rate, spending, temporary jobs, volatility, wages, {What's Left of) Our Economy

After his last clunker attempting to debunk claims of a U.S. employment recovery led by lousy jobs, Washington Post columnist Robert Samuelson owed us a good piece. I’m pleased to say he’s delivered with this morning’s effort examining the roots of the consumer caution witnessed since the Great Recession ended.

First, however, let’s specify that “caution” is a relative concept here. Yes, Americans are spending much less of their income these days than they did during the bubble decade – when it hit all-time lows. In fact, in July, 2005, the personal savings rate, which measures that relationship, sank to 1.9 percent, and some news reports back in those days said that it actually went negative that whole year (though it seems that figure has been revised). All the same, even the 1.9 percent figure showing up in the government’s tables now is much lower than the 5.6 percent for last month reported this morning by the Commerce Department.

Yet although it’s clear that savings have been growing on a monthly basis since late 2013, they’re still not close to their highs earlier in the recovery, when the rate regularly hit high single digits. And for decades until the last massive spending and housing bubble, high single-digit savings rates were the American norm.  In other words, the nation knew how to expand the economy in ways other than launching shopping sprees.

Nonetheless, since U.S. growth is still so spending-heavy, any sign of slackening is at least a short-term cause for concern. And Samuelson’s column today presented a great explanation. On top of still being burdened by accumulated debts and understandably gun-shy after the worst economic downturn since the Great Depression, Americans are facing a labor market in which employers increasingly treat them as more disposable than ever before. Principally, more and more businesses are looking at their employees as variable costs, which they can and should reduce whenever possible even in normal times to boost profits, rather than as fixed costs, which they’re stuck with except when economic conditions worsen significantly.

The resulting move toward using temporary workers has lowered employers’ costs both by giving them more flexibility and by enabling them to use more workers who can’t command significant benefits. But as Samuelson observes, these trends also creates much more economic insecurity for those workers, and logically a greater reluctance to spend.

In addition, Samuelson points out, this insecurity is being reinforced by ever more flexible compensation practices. Fewer and fewer workers are earning wages and salaries that are regularly and predictably increased (when possible via some combination of their bargaining power and their employers’ finances). Compensation increases that are handed out increasingly consist of various one-time payments that don’t need to be added to base wage and salary structures, and therefore can be withdrawn at the drop of a hat.

I’d just add two points. First, it looks very much like increasingly flexible employment and pay practices by business are showing up in statistics on how much Americans are earning. According to a recent major study from JPMorgan Chase, between October, 2012 and December of last year, 84 percent of Americans saw their incomes change by more than five percent month-to-month. Even year-to-year, when smaller fluctuations would be the norm, 70 percent of Americans still experienced such large income swings.

Even more noteworthy, 26 percent of the 2.5 million Americans examined by JPMorgan Chase saw their incomes rise or fall (mainly rise, fortunately) by more than 30 percent between 2013 and 2014. Forty-four percent experienced swings of between five and 30 percent. And this volatility was somewhat greater among higher income Americans than among lower.

Second, although U.S. businesses may see their workers are increasingly disposable, the American economy can’t afford nowadays to see consumers – most of whom are workers – in this dismissive light. Indeed, as I’ve just written, personal consumption is just about as great a share of the economy these days as it was during the bubble decade.

Combine an economy that remains consumption-heavy with income sources that are becoming less and less reliable, and it’s no mystery why what meager growth the nation can still generate remains so greatly fueled by ever greater indebtedness – and why the Federal Reserve is so reluctant to end America’s addiction to easy money.

(What’s Left of) Our Economy: Expect Imports to Keep Preventing Lift-Off

Tags

consumer spending, consumers, demographics, Employment Cost Index, health care, imports, manufacturing, medical equipment, National Institutes of Health, personal income, pharmaceuticals, recovery, retirement, savings, subsidies, Trade, Trade Deficits, wages, {What's Left of) Our Economy

Three new government reports have put the spotlight back on American consumers, and especially on whether they can quicken a U.S. recovery that continues to disappoint the conventional wisdom (though not me!). I’m no expert on consumer trends. But I do feel confident that whatever new vigor American shoppers start showing will provide only a limited growth boost – because so much of what they buy will continue to come from abroad.  As a result, this spending will generate more production and job creation overseas than at home.

The three reports I’m talking about were:

(a) yesterday’s preliminary reading on first quarter gross domestic product, which showed the economy slogging along at a pathetic 0.25 percent real annual rate;

(b) today’s reading on first quarter employment costs, which showed a decent (at least by recent standards) gain in wages and salaries (numbers that aren’t adjusted for inflation); and

(c) today’s report on March consumer spending and incomes, which showed the former up and the latter flat month-to-month. That made for the first monthly fall in the personal savings rate since November.

These results all reinforce a picture of the economy that’s gained traction in recent months – of workers doing somewhat better after years of stagnant, at best, incomes, and in fact getting a nice filip from falling energy prices but remaining cautious shoppers nonetheless. As a result, most analysts foresee a solid increase in spending and therefore growth for the rest of the year, as Americans open their wallets wide again.

As ever, though, and especially in recent years, the fly in the lift-off ointment is imports, whose scale and robust growth has greatly weakened the longstanding relationship between what Americans consume and how fast the economy grows. For despite the endless talk of the United States being a “consumer-driven economy,” it’s production that fuels GDP growth, not shopping.

As I wrote yesterday, the trade shortfall has grown fast enough to take a big bite out of growth since the last recession ended, in the middle of 2009. But yet another news item today helps illustrate how the process works. It’s a Fiscal Times piece claiming that fully 20 percent of U.S. household spending now goes to health care services and medicines – up from six percent in 1960. According to another calculation, that works out to more than $8,000 for every man, woman, and child in the country.

Since most health care spending winds up on the services side, that’s actually good news as far as growth itself is concerned, since nearly all of these services are supplied domestically. Yet when it comes to health care products, it’s another story entirely – as can be demonstrated by looking at trade balances in these sectors.

In a phrase, they’ve worsened greatly since 2000. In fact, a $9.71 billion deficit more than quadrupled to $46.78 billion by the end of last year. Some health care-related products have excelled – e.g., surgical and medical equipment and laboratory instruments, which improved on smallish surpluses. But others, often thought to be among the nation’s technological and industrial crown jewels, have fallen flat on their faces – notably electro-medical equipment. At the beginning of the millennium, America ran a $1.21 billion trade surplus in devices like CAT-scan and MRI machines. But by 2014, this trade had turned into a $2.03 billion deficit. And the 800-pound gorilla in the health care manufacturing category is the pharmaceutical sector, which saw a $955 million trade shortfall balloon to $31.52 million during this period.

Even worse, demand for all these health care products is heavily subsidized by government. And the nation wouldn’t even boast a world-class pharmaceutical industry without the research and development performed by the federal government’s National Institutes of Health. So increasingly, Americans’ tax dollars are being used to create and expand markets for products supplied by foreign factories and workers, and in many cases to create products themselves whose manufacture is offshored by U.S.-owned firms.

To add insult to this injury, thanks to a combination of those government subsidies and an aging population (in many foreign countries, too), health care is among the most promising future manufacturing growth markets. If the vast majority of these products were made in America, the employment, wages, and output would stay in the United States, and fuel more growth that’s healthy. On top of a recovery that’s faster and more sustainable, the resulting health care manufacturing boom could take some of the expected economic and financial sting out of the nation’s looming demographic crisis.

But because of Washington’s indifference to where goods are produced, and widespread ignorance over what really fuels prosperity, much of this golden opportunity will be squandered, and health care will be yet another sector where America’s spending bucks keep generating less and less vital growth bang.

(What’s Left of) Our Economy: Will The Economist’s New Editor Bring More Intellectual Honesty on Trade?

Tags

bubbles, consumers, Financial Crisis, free trade agreements, Global Imbalances, globalization, Great Recession, Jobs, John Micklethwaite, NAFTA, Obama, offshoring, producers, The Economist, Trade, {What's Left of) Our Economy

The editor of the London-based Economist is leaving, something I normally wouldn’t write about except the magazine is one of the world’s most influential, and it has been a leading voice for trade liberalization since its founding (in 1843!). Most of all, if its departing chief is any indication, the publication hasn’t learned a blessed thing about how the distinctive form of freeing trade spearheaded by the United States since the early 1990s was instrumental in triggering the worst global recession since the Great Depression, and how it continues threatening an even worse replay.

John Micklethwaite, who has edited The Economist since 2006, allows in a farewell essay that “Globalisation has indeed brought problems in its wake.” But he insists that those difficulties have been more than offset by freer trade’s record doing “an incredible job of reducing want” and, in particular, of lifting nearly 1 billion people out of extreme poverty since 1990.

Yet Micklethwaite makes no mention of the role played by policy-induced trade flows over the last two and a half decades in inflating the credit and housing bubbles in the United States and other high income countries, and thus ensuring that, without remedial action, they would at some point burst with disastrous consequences for the entire world.

As I’ve mentioned before, the argument that what are called “global imbalances” helped set the stage for the crisis and its painful aftermath is well established in the ranks of the world’s leading economists. Micklethwaite knows it backwards and forwards; his magazine has even covered it. But it’s never informed The Economist’s widely cited and enthusiastic editorial paeans to trade agreements and related policy decisions that unmistakably helped light and added fuel to the fire. And this narrative is nearly unheard of at the level of America’s chattering class, its Mainstream Media, and its elected politicians – many of whom either rely on The Economist for this type of deep analysis, or pretend to.

That’s pretty scary given that President Obama and the powerful offshoring lobby are pushing for some of the most ambitious trade liberalization deals in world history. At the same time, it’s at least partly understandable, since it’s a difficult argument to make. So let me try to express it as simply as I can.

Since the pursuit of the North American Free Trade Agreement (NAFTA), starting in the very late-1980s, American trade policy in particular has followed a strongly offshoring bent. Its main purpose has been not to promote more sales of American-made products and services overseas. If that were the case, its main targets would not have been very low-income countries like Mexico and China and Central America and the Andean countries of South America and sub-Saharan Africa and Jordan and Vietnam. Their populations have simply been too poor for their economies ever to have become significant buyers of what U.S. workers turn out – at least on a net basis.

Instead, the purpose was to enable U.S. businesses, primarily big multinational manufacturers, to take advantage of the super-low wages and other costs and light regulations, in these countries, and turn them into bases for supplying the American market – with factories and workforces once located in the United States.

Why was this so unwise? And how did it help bring on the financial crisis? Because all the offshoring enabled by these trade deals took income and income-earning opportunities from populations that the world economy relied on to consume (Americans and to a lesser extent West Europeans), and transferred them to those very low-income countries. That is, enough productive power was sent to the third world to undermine American and European consumption power significantly. But third world incomes started from such a low base that the new wealth could not possibly turn these populations into major net consumers.  Indeed, as with the role of global imbalances, this income shift is now no longer controversial among economists who actually know the subject.

As a result, the world’s main consumers no longer earned enough to enable their consumption to sustain adequate global growth, and the world’s new producers were still far from being able to fill the gap. Governments in the high-income countries, especially in Washington, tried to paper over the problem with unprecedented flows of cheap credit – which inflated the bubbles. But the underlying source of instability remained wholly unaddressed, as made clear not only by the bursting of those bubbles, but by the inability of the United States and most of Europe to grow satisfactorily without them.

Micklethwaite evidently decided to ignore this issue when preaching the (unalloyed) virtues of freer trade. Let’s hope his successor at The Economist displays more intellectual honesty.