(What’s Left of) Our Economy: America’s Now Struggling to Sustain Even Unhealthy Growth

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consumption, economic growth, Financial Crisis, personal savings, recession, recovery, savings rate, {What's Left of) Our Economy

Don’t blink! As revealed by government data released yesterday, the U.S. personal savings rate has been vanishing so quickly lately that, before too long, you might miss it entirely. And here’s the kicker to this latest evidence: Although, as I reported on Monday, the American economy is just about as consumption-heavy as during the run-up to the financial crisis, all the resulting spending is now generating growth that’s not only subpar by historical standards, but shockingly weak.

According to the Commerce Department, the savings rate for the last three quarters of national economic activity (through the second quarter of this year) has sunk below four percent of disposable personal income for the first time since the first quarter of 2008. The latest nadir of 3.6 percent was hit in the fourth quarter of last year, and represents the lowest such level since the fourth quarter of 2007 (2.8 percent). If those dates sound familiar, they should. That’s when the last recession officially broke out. As of the second quarter of this year, the rate bounced back a bit to 3.8 percent.

These are a pretty far cry from the worst savings rates in U.S. history. During the previous (bubble) decade, this figure bottomed out at 2.2 percent (in the third quarter of 2005). But the latest numbers are a much further cry from the double-digit levels that were common from the early 1950s through the early 1980s.

After the last recession began, there was some evidence that Americans were learning the lessons of over-spending and socking away more of their incomes. By the second quarter of 2008, the savings rate jumped from 3.7 percent in the first quarter of that year to 5.7 percent. It rose steadily even after the recovery began in the middle of 2009, and actually hit 9.2 percent in the fourth quarter of 2012. Savings didn’t stay nearly that high, but still generally remained well above five percent through the early part of last year. Since then, however, they’ve slid pretty rapidly downhill.

Throughout the recovery, shortsighted economists and other observers actually have bemoaned these signs of consumer caution as unnecessary restraints on economic growth that were preventing the expansion from achieving a satisfactory pace. I disagree, because as I wrote on Monday, the nation needs a sustainable basis for growth, to improve its long-term economic health, even more urgently than it needs faster growth. But what’s especially troubling about the recent drop in the savings rate is that it’s shown no ability to generate what’s seen as respectable growth at all.

In fact, over these last three quarters of weak personal savings rates, the economy grew in real terms by just 1.8 percent, 1.2 percent, and 2.6 percent (the preliminary figure for the second quarter of this year). Those results aren’t even impressive by the low bar set by the current expansion. And they’re positively abysmal when compared with the performance registered between the early 1950s and 1980s, when double-digit savings rates were no obstacle at all to real growth rates of between five and ten percent!

Of course, America’s growth rises and falls for many reasons part from savings and consumption rates. Moreover, the economy of that 1950s-1980s period was very different structurally from today. One example: Military spending played a much bigger economic role during those Cold War decades, and generated abundant production, as well as employment. At the same time, for most of that era, women had not entered the labor market in great numbers, meaning that households generally speaking were living off a single paycheck and benefits package. And still both growth and family incomes were by and large stellar.

The current situation, though, is unmistakably sobering. In recent decades, America has substituted borrowing and spending for saving and producing as its main engines of growth. Now even the unhealthy growth recipe has not only helped trigger a terrifying financial crisis and deep recession. But seven or eight year after those crises were overcome, the spendthrift approach seems close to exhaustion. In sports, those playing a losing game are usually encouraged to change it. How much longer before Americans and their leaders take the hint?

Making News: New Articles Appear on Marketwatch and Lifezette

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alliances, allies, Financial Crisis, Global Imbalances, Lifezette.com, Making News, Marketwatch.com, North Korea, nuclear weapons, South Korea, tariffs, Trade, trade wars, Trump

I’m pleased to report the publication of two new op-ed pieces over the last week.

Today, Marketwatch.com published my column explaining why President Trump should portray any new hard line trade moves as doses of tough love needed to ensure sustainable worldwide growth, rather than narrow-minded America First-type measures.  Here’s the link.

And last Thursday, Lifezette.com ran my call for a thoroughgoing overhaul of the U.S. security alliance with South Korea – before North Korea becomes unmistakably able to strike the American homeland with nuclear weapons.  Read the piece at this link.

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

 

(What’s Left of) Our Economy: Where Trump Deserves High, Low, and “Incomplete” Marks on Germany Trade

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advanced manufacturing, automotive, commodities, comparative advantage, Financial Crisis, Germany, Global Imbalances, Great Recession, innovation, manufacturing, productivity, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

As I’ve suggested, President Trump has big, valid points to make about Germany’s auto trade with the United States. Not only does America run an enormous deficit with Germany in vehicles and parts, but claims that Germany deserves great praise from Washington because it makes so many vehicles in the United States are completely unjustified. For they overlook its companies’ very low levels of U.S. content and only very modest improvement on this score. That is, German vehicles are overwhelmingly screwed together in the United States, and therefore add much much less value to the American economy than autos made with domestic parts.

The trouble is that America’s troubles with German trade policies greatly transcend the automotive industry and, to a great extent, Germany. I’ve previously written that there’s a fundamental problem that both the administration and it’s critics are missing:  Germany’s economy, like China’s and many others around the world, is simply not structured in such a way as to make mutually beneficial trade with the United States possible.

But there’s another big U.S.-Germany trade issue that needs highlighting, along with a major danger that Bonn’s approach to trade is creating for the entire world – at least in the medium or long-term.

That other U.S. Germany trade problem has to do with the makeup of bilateral commerce. If you look at the nature of what the United States trades most successfully with Germany and vice versa, you find that the former category contains a mix of high value manufactures and commodities, while the latter is dominated by advanced industrial goods. Here are lists of the sectors in which America last year ran its biggest trade surpluses and deficits with Germany. (To the surplus list should be added – prominently – aircraft, which are not counted accurately in the U.S. International Trade Commission database I’m relying on.)

Top ten U.S. trade surpluses with Germany: 

glass products 

tree nuts 

soybeans 

computers 

non-costume jewelry 

non-anthracite coal & petroleum gases 

fin-fish products

computer parts 

surgical appliances and supplies 

pulp mill products 

 

Top ten US deficits with Germany

autos and light trucks 

pharmaceuticals

goods returned from Canada 

motor vehicle transmissions and transmission parts

aircraft engines and engine parts

construction machinery

miscellaneous general purpose machinery 

miscellaneous basic org chemicals 

miscellaneous engine equipment 

motor vehicle parts

These results are disturbing because, contrary to the superficial conventional wisdom, if you take seriously standard trade theory and its core concept of comparative advantage, sectoral trade balances matter tremendously. For the main idea behind the freest possible international trade is structuring the world economy so as to enable those countries most proficient at producing various goods and services to dominate their output. So surpluses and deficits in different industries show which countries are passing and failing this test – and thus which countries look likely eventually to control worldwide supplies of the sophisticated goods that create so many high wage jobs and foster so much innovation and productivity growth.

Since the U.S.-Germany data aren’t U.S.-global data, in theory they could be anomalies. In other words, Americans could be doing better with the world as a whole, and therefore, the nation’s prospects in high value industries could be a lot brighter. Unfortunately, that’s not the case at all. The makeup of U.S.-Germany trade isn’t terribly different from the makeup of U.S. global trade, in that America’s trade winners are, again, a mix of commodities and high value goods (again, including aircraft), and its losers are nearly all advanced sectors.

Top ten US surpluses globally

petroleum refinery prods

soybeans

special classification goods

plastics materials andcresins

waste and scrap

corn

liquid natural gas

semicaonductor manufacturing equipment

non-poultry meat products

turbines and turbine generator sets

 

Top ten US deficits globally

autos and light trucks

crude oil and natural gas

goods returned from Canada

broadcast and wireless communications equipment

computers

pharmaceutical products

telecommunications equipment

audio and video equipment

aircraft engines and engine parts

games, toys, and children’s vehicles

Yet Germany also is contributing significantly to a major trade-related threat that threatens the entire world, not just the United States. I’ve repeatedly spotlighted blue chip academic research concluding that unprecedented global imbalances centered on American trade shortfalls were instrumental in setting the stage for the last global financial crisis and the painful recession that followed. Worse, evidence keeps accumulating that international commerce is becoming worrisomely lopsided again, and that Germany’s overall international surpluses – currently the world’s largest – have generated much of the problem.

Indeed, a valuable reminder came in this morning’s Washington Post:

“[G]ermany is one of a number of countries, including China, Japan, and South Korea that are now saving far more than they are either consuming or investing….At some point, the world will be unable to absorb the capital surpluses of Germany, China and others, leading to another painful correction that might undermine the liberal order.”

Interestingly, Germany itself has indirectly acknowledged these risks, and hinted that it recognizes some responsibility to get the surpluses down. Unfortunately, Berlin has demonstrated few signs of following through. So although some of President Trump’s focus on the German trade issue seems off target, it’s also clear that the sense of urgency he’s brought to the issue, from both an American and global standpoint, is not only appropriate, but necessary.

(What’s Left of) Our Economy: New Peterson Pro-Globalization Study Only Deserves a “Nice Try”

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China, Financial Crisis, Gary C. Hufbauer, Global Imbalances, globalization, Great Recession, Larry Summers, manufacturing, Peterson Institute for International Economics, productivity, secular stagnation, technology, Trade, trade agreements, trade liberalization, trade policy, World Trade Organization, {What's Left of) Our Economy

The Peterson Institute’s new study of the benefits to Americans of globalization apparently leaves no doubt that the nation should promptly forget about any retreat from conventional trade liberalization policies and resume its aggressive pursuit of new trade agreements like the Trans-Pacific Partnership (TPP). Or does it? A close reading of the report reveals gaping holes in these claims.

According to authors Gary C. Hufbauer and Zhiyao Lu, between 1950 and 2016, “trade expansion” has enriched the overall U.S. economy by $2.1 trillion, and boosted America’s output per head and per household by just over $7,000 and $18,000, respectively. Even better, lower-income households probably gained the most (since the greatest trade liberalization progress has been made in the goods that comprise so much of their consumption).

Yet the phrase quoted in that previous paragraph points to the first big hole in the Peterson findings. “Trade expansion’s” benefits, the authors specify, entails much more than either signing new trade deals or otherwise reducing trade barriers. It also includes “technological advances in transportation and communications [that] have drastically slashed the economic distance between countries.”

Of course, there’s been a lot of the latter over the last 66 years. What share of expanded trade’s benefits has come from trade liberalization policy decisions and what share from that technological progress? Darned if the authors know.

The long time frame, in turn, reveals a second major problem with the central argument. Obviously over that last two-thirds of a century, the world economy, and America’s position in it, have changed in numerous and fundamental ways. One prominent example: For the first roughly three post-World War II decades, the United States was the only fully intact developed country. How could trade liberalization not have been a major net benefit? America produced countless products that the rest of the world desperately needed. And none of its important industries faced significant import competition until the 1970s. That doesn’t sound much like current circumstances.

And in fact, Hufbauer and Lu acknowledge this problem, noting, for example, that “compared to previous decades, increased trade since 2003 has not delivered substantial gains.” At this point, however, their analysis gets dicey. For example, they speculate that that low recent payoff resulted partly from “the lack of fresh policy liberalization on a large scale (the failure of the Doha Round)….” But that period actually saw a hugely important liberalization initiative completed – China’s accession to the World Trade Organization. And don’t forget the numerous free trade deals signed by the George W. Bush and Obama administrations, including with South Korea’s very large economy.

Moreover, although Hufbauer and Lu rightly note that the financial crisis and Great Recession also have marked the post-2003 period, they claim that “The decade that experienced the greatest gains from increased trade was 1970 to 1980.” That decade witnessed no less than two recessions (three if you count the 1980 downturn).

Undaunted, the authors contend that returning to the trade liberalization policy course will result in even more American wealth creation. But here’s where their discussion of the post-2003 period fails badly – and unmistakably. They never mention that, thanks largely to that aforementioned boost to incredibly lopsided U.S.-China the first decade of this century produced the greatest U.S. trade deficits and associated global economic imbalances in world history. They ended in the financial crisis and the nation’s worst economic downturn since the Great Recession.

Since America’s main trade partners – including China – seem either just as export-dependent, and/or just as import-and consumption-phobic as ever, it’s difficult to understand why a return to conventional trade diplomacy, combined with the cumulative and often lagged impact of past deals (as noted by Hufbauer and Zu) wouldn’t end in near-catastrophe again.

Another big problem: Former Treasury Secretary and chief Obama economic adviser Larry Summers, along with many others, worry that the United States has fallen into an economic trap they call “secular stagnation.” They speculate that the nation has become so incapable of generating healthy growth that it’s grown dependent on blowing up credit and consumption bubbles to at least produce (misleading) signs of economic life – and that these bubble’s inevitable bursting keeps creating financial crises and serious slumps. Do Hufbauer and Zu believe that the sandbagging of domestic manufacturing (which hasn’t grown in real terms since 2006) due to import competition and offshoring isn’t partly to blame? 

Finally, and similarly, American leaders have finally recognized that the economy is experiencing a major productivity growth slowdown. Can trade liberalization’s real economic impact be measured without considering the effect on productivity of allowing all that trade damage to manufacturing, which historically has led the nation in productivity growth?  

It’s definitely encouraging that a major think tank like the Peterson Institute is looking in detail at globalization’s impact on America’s economy.  Let’s hope that its next effort reflects some actual thinking.  

(What’s Left of) Our Economy: The Good Economic News that Trump Has Missed

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bubble, bubble decade, business spending, CNBC, Commerce Department, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, investment, Jeff Cox, personal consumption, real GDP, Trump, Wilbur Ross, {What's Left of) Our Economy

Here’s how badly the latest figures on U.S. economic growth (for the first quarter of this year) have been misunderstood: Even the Trump administration, which has displayed no hesitation to take credit for good economic news even when undeserved, failed to note a big possible silver lining.

As noted in last week’s coverage of these figures on gross domestic product (GDP), the inflation-adjusted growth figure reported by the Commerce Department in its initial read for the first quarter was a measly 0.69 percent. That’s the worst such performance since the 1.19 percent annualized contraction in the first quarter of 2014.

So it’s not entirely surprising that Commerce Secretary Wilbur Ross seized on this discouraging news to emphasize that “We need the President’s tax plan, regulatory relief, trade renegotiations and the unleashing of American energy sector to overcome the dismal economy inherited by the Trump Administration. Business and consumer sentiment is strong, but both must be released from the regulatory and tax shackles constraining economic growth.”

But especially given the rise in sentiment noted by Ross, it’s at least somewhat surprising that he didn’t make more of the strong rise in business spending revealed in the new GDP report. For it lends significant support to President Trump’s claim that his election is already liberated many of the “animal spirits” – i.e., a surge in business optimism – often needed to spur more hiring and especially more corporate spending on new plant and equipment.

For example, in absolute terms, such business spending rose sequentially by 9.1 percent at an annualized rate in the first quarter. That’s the fastest rate since the fourth quarter of 2013, when it jumped by 9.2 percent.

At the same time, back at the end of 2013, the economy expanded at a 3.90 percent real annual rate. In the first quarter of this year, after-inflation growth was only 0.69 percent annualized. So business spending punched far above its weight as a growth engine. As RealityChek regulars know, that’s an encouraging indication that the nation’s growth recipe is becoming more production oriented, and therefore healthier and more sustainable in the long run.

In fact, higher business spending accounted for all of the first quarter’s growth. (Other sectors of the economy contributed to and subtracted from the overall result, too, but their net effect was zero.) As a result, its relative contribution to expansion was its strongest since the first quarter of 2014, when such investment boosted real GDP by 0.84 percentage points but the economy actually contracted at a 1.19 percent annual rate.

And on a standstill basis, business investment in the first quarter represented its highest share of real GDP (13.34 percent) since the third quarter of 2015 (13.48 percent).

Not that one quarter’s results – which will be revised twice more in the next two months alone – are anywhere close to definitive. But the Trump administration had much more to crow about than it seemed to realize.

At the same time, the new GDP data showed that the economy remains way too personal consumption- and housing-heavy – the toxic combination whose bloat so powerfully inflated the bubbles that produced the previous decade’s global financial crisis.

As previously reported on RealityChek, at their pre-crisis peak, in the second quarter of 2005, the combined consumption and housing share of real GDP hit 73.27 percent. The comparable first quarter total was 73 percent even – not much lower. And that share was up slightly from the fourth quarter’s 72.95 percent.

So the United States is still a long way from achieving former President Obama’s goal of creating “an economy that’s built to last.” But from what we know of the first quarter’s growth this year, the economy made some progress that’s worth noting.

P.S. Partial credit for this post goes to CNBC’s Jeff Cox, whose report here first called my attention to the good business spending results.

(What’s Left of) Our Economy: Why Trump Needs to Care About Growth’s Quality and its Rate

Tags

Financial Crisis, GDP, gross domestic product, housing, personal consumption, real GDP, recovery, Trump, {What's Left of) Our Economy

President Trump promised on the campaign trail that his presidency would deliver annual four percent (adjusted for inflation) growth to the U.S. economy – a performance that would considerably improve upon the average of 3.5 percent America achieved between 1950 and 2000. Jason Furman, former President Obama’s chief White House economic adviser, says that’s probably bunk. (See the previous link.) He adds that “most economists” are skeptical – and that even the Trump administration seems to be dialing back that promise. 

I have no idea whether Furman and the rest of the skeptics are right. (If most of them had come close to predicting anything like the financial crisis, their judgments would deserve to be taken much more seriously.) What I do know is that both the growth pessimists and the growth optimists appear to be ignoring a far more important question – will whatever growth is experienced by the economy be high-quality or low-quality?

That subject matters – and matters decisively – because one of the biggest lessons the nation (and world) should have learned from the financial crisis is that low-quality growth tends to produce disastrous results if it’s low enough and lasts long enough. And the latest figures available from the U.S. government (which will be updated next week) make clear that the nation’s growth has continued to return to the patterns that prevailed during the run-up to the 2007-08 calamity.

The incriminating data, as I’ve written repeatedly, are those that specify the share of the nation’s gross domestic product (GDP) adjusted for inflation that’s made up by personal consumption and housing. Their bloat played a central role in triggering the crisis, and in tandem, their economic prominence peaked in the second quarter of 2005 at 73.27 percent of real GDP. Individually measured, consumption’s share of real GDP peaked in the first quarter of 2007 at 63.27 percent, and housing’s share peaked at 6.17 percent in the third quarter of 2005. (In other words, it’s clear that the housing market was showing signs of trouble way before its bubble actually burst.)

And where did those numbers stand as of the end of last year (our latest figures)? Personal consumption was actually higher than at that bubble decade top: 69.36 percent of real GDP. Housing was only at 3.55 percent – meaning that it’s still recovering from catastrophe. In toto, though, this toxic combination represented 72.91 percent of real GDP. That’s not too far off that bubble-era peak. And their combined role keeps rising.

Furman’s former White House boss deserves credit for recognizing the fundamental problem. Barack Obama spoke repeatedly of the urgent need to create “an economy that’s built to last.” Not to cast blame, but clearly, that didn’t happen on his watch. Indeed, when the current economic recovery began, in the middle of 2009, the toxic combination represented 70.99 percent of real GDP.

Once that recovery showed even the most meager signs of genuine life, Americans stopped hearing much from the previous administration about the quality of growth. And I can’t find any mentions of it from Mr. Trump or his aides. For their political sake, and the nation’s economic sake, that needs to start changing now.

(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.

Im-Politic: Bubble Kool-Aid is Spreading Through the US Electorate

Tags

2016 election, Democrats, Financial Crisis, Great Recession, Im-Politic, Immigration, politics, private sector, Republicans, The New York Times, Thomas Edsall, Trade

It’s becoming increasingly and understandably popular to predict that 2016’s rock-em-sock-em presidential election could spark a major realignment in American politics. In particular, it’s nearly impossible to see how the current Republican Party survives the insurrection led by its presidential nominee, Donald Trump.

Less apparent but no less important are the big shifts that are already taking place, as a new New York Times article unmistakably demonstrates. The piece, by Thomas Edsall, also shows that both major parties show signs of historic change, and unwittingly reveals that Democrats in particular are increasingly backing a model for the economy that has already failed catastrophically.

Edsall’s analysis relies on several recent polls and additional academic research, and although I have no illusions about the reliability of such surveys, especially when they’re looking at broad trends as opposed to political races, they’re difficult to dismiss. When they generally track one another, their credibility seems particularly high.

These studies and findings come from the Pew Foundation, the Brookings Institution, The Johns Hopkins University, the University of Virginia, and the Public Religion Research Institute – an impressive range of sources. The headline on Edsall’s story spotlights the trend he views as most important: American politics is experiencing a “great inversion” of the “New Deal order among white voters.” Specifically,

“From the 1930s into the 1980s and early 1990s, majorities of downscale whites voted Democratic and upscale whites voted Republican. Now, looking at combined male and female vote totals, the opposite is true.”

Couple this with the Democrats’ mounting support among minority Americans and immigrants and their offspring – who are acutely aware of the economic and social progress made since their parents’ days, or who compare life in the United States versus the circumstances in their home countries – and the party’s political prospects definitely seem on the upswing.

Whether a new age of such Democrats’ dominance will be good for the country is a separate issue, and here the developments described by Edsall are positively depressing. The main reason: The Democrats’ mounting belief in addressing some of the economy’s prime failings with bigger government handouts rather than with needed improvement in the structure and workings of the private sector.

For example, according to the University of Virginia report, even the white “social elites” who are trending Democratic strongly believe that “the system is rigged in favor” of the wealthy (by a 3 to 1 margin) and that Wall Street and big business “profit at the expense of ordinary Americans….” (by a 6 to 1 margin).  Nothing of course intrinsically wrong with that.

But here’s their solution: “[B]y better than 2 to 1…the government ‘should do more to improve the lives of ordinary Americans.’” Further, there’s compelling – though not conclusive – evidence that support for more government activism extends only to more generous import supports and actual subsidies, rather than reforms that could actually improve job availability and pay in the private sector.

Principally, the Virginia data show very strong support for more lenient immigration policies among the elites. And although this study contains no data on trade policy, the Public Religion Research Institute has just confirmed what numerous other polling groups have found: Many more rank-and-file Republicans have become more skeptical about the U.S. approach to globalization than Democrats. So although in recent decades, Democratic members of Congress (as opposed to Democratic presidents) have led the opposition to new trade agreements and similar policy decisions, they’re looking increasingly out of step with their constituents.

There’s no question that continually rising floods of imports and immigrants would serve the short-term interests of the elites who keep flocking to Democratic ranks. What’s not to like about cheaper and cheaper consumer goods, not to mention nannies and janitors and gardeners? So much the better if millennials – who for the most part lack any experience with or memory of the industrial economy and its blessings for working people – can be seduced by the false promises of prospering through waiting tables, developing killer apps, or taking on ever more gig work. And if low-income working class minorities believe that government largesse will adequately substitute for the destruction of factory jobs and the all the gainful employment they create outside industry – well, jackpot!

The problem, of course, is that the United States tried this formula for economic health during the 2000s. And it’s still living with the destruction wreaked by the financial crisis and Great Recession that inevitably resulted from neglecting two vital and connected needs: producing everyday goods and services at home, and generating adequate wage and salary income. Instead, the nation drank the kool-aid that it could borrow and spend its way to durable prosperity.

It’s been bad enough, in other words, that America’s political, economic and business establishments haven’t learned the lessons of the previous decades. Now it looks like their cluelessness will be reinforced by those groups on the rise in the U.S. electorate.

Following Up: Why Economists & Establishment Media Should be a Little More Humble on Trade

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Adam Davidson, Donald Trump, economics, economists, Federal Reserve, Financial Crisis, Following Up, Global Imbalances, Great Recession, Janet Yellen, Korea, Peter Navarro, The New Yorker, TPP, Trade, Trans-Pacific Partnership

A fascinating and revealing coda has just been provided to my brief brush with fame last week, when The New Yorker deemed my views on trade issues not worthy of consideration.  And the source was, of all people, Fed Chair Janet Yellen.

As I wrote on October 13, in a profile of Donald Trump economic adviser Peter Navarro, New Yorker writer Adam Davidson made clear that he considered one glaring weakness of the Republican candidate’s views on trade and other economic policies to be their lack of support among professional economists. As a result, Davidson was completely unimpressed when Navarro noted that I have endorsed them in general – since I lack an economics degree. Nor was his interest piqued when I reminded him by email that my predictions about the outcomes of major trade policy initiatives, like admitting China into the World Trade Organization, were much more accurate than those of most Ph.Ds .

Enter Chair Yellen. In a speech in Boston the very next day, she focused on “some ways in which the events of the past few years [since the outbreak of the financial crisis and Great Recession] have revealed limits in economists’ understanding of the economy….” And despite her understatement, these limits look awfully important. The subjects to which they apply include how demand influences supply, the makeup of the groups of actors economists study (which these scholars’ models assume are completely homogeneous), how finance affects the real economy, and “what determines inflation.”

Indeed, Yellen’s list raises the question of where economists’ knowledge really is solid – at least in terms of ideas that affect economies’ performance in the real world. And so does the economy’s abysmal performance on net since the outbreak of a near-financial cataclysm that virtually none of its members foresaw.

Yellen did add an international question that she believes deserves much more research: how changes in American monetary policy affect the rest of the world and then feed back to the United States. But even though other aspects of the nation’s relationship with the global economy strictly speaking don’t fall under the Fed’s purview, she still might have noted that major gaps still exist in her profession’s understanding of international trade.

Even more disturbing: Although the trade-fueled global imbalances that built up during the bubble decade have been identified as bearing great responsibility for the crisis’ outbreak, as Davidson’s attitude suggests, international commerce is the one area of economics where no significant thinking has been called for at all since the disaster. Indeed, judging from the reactions to Trump’s trade proposals, the conventional wisdom is more entrenched than ever.

Of course, none of this is to say that economists know nothing useful, whether on trade or elsewhere. But with evidence that those global imbalances are once again nearing pre-crisis peaks (albeit with a somewhat different composition), and with President Obama seemingly more determined than ever to win passage of a trade agreement (the Trans-Pacific Partnership) modeled on a Korea deal that has supercharged the U.S. merchandise deficit, you’d think that both economists and journalists would react to proposals for fundamentally new approaches with at least minimal humility.

(What’s Left of) Our Economy: New Yorker Coverage that Follows the Crowd

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Adam Davidson, China, Donald Trump, economists, Financial Crisis, Mainstream Media, media, Peter Navarro, The New Yorker, Trade, {What's Left of) Our Economy

Since yesterday brought my first appearance in that supposed paragon of journalistic excellence, The New Yorker, it’s important to present all the context that staff writer Adam Davidson left out, and that was somehow ignored by the magazine’s legendary but evidently slipping fact-checking staff.

The occasion was a Davidson article on Peter Navarro, the University of California, Irvine economist who has been a leading adviser to Republican presidential candidate Donald Trump. Davidson’s main theme was that the input on China-related trade issues being provided to Trump by Navarro (a professional and personal friend of mine for several years) is “wrong and dangerous.” Major evidence for this proposition, according to the author, was his failure to find more than one other professional economist who shares these positions.

While researching the piece, Davidson asked Navarro for some examples to the contrary, and in an email response, Navarro suggested that the author “Start at least with Peter Morici and Alan Tonelson, two leading authorities.” Davidson pointed out (correctly), “I know Alan and he is not an academic economist. I will reach out to Peter Morici. Please do let me know of other academic economists, by which I mean PhD economists who have published peer-reviewed journal articles.”

Navarro contended in a rejoinder on which I was copied, “Tonelson is a fine economist.” I certainly appreciated the vote of confidence, but felt obligated to confirm to Davidson that “It’s true that I do not hold an economics degree. Nor do I write for peer-reviewed scholarly journals.” But I also added three points that I thought created at least some credibility, noting “At the same time, I wasn’t completely blindsided by the financial crisis” – unlike virtually all of the PhDs in whom Davidson places such stock. To document the claim, I provided a link to this article I wrote in early 2006.

In addition, I observed “Nor did I predict that liberalizing trade with China would prove an unalloyed success for the American economy” – unlike virtually all of the PhDs in which Davidson places such stock even though they proved sadly mistaken on this point as well.

Finally, I told Davidson, “Although I don’t know the full scope of your planned article, I do hope if appropriate it makes note of the many Ph.D. economists down the — literally centuries — who have dissented from Smithian-Ricardian trade theory in whole or in part, from Mill to Keynes to Samuelson.” (Abundant material along these lines can be found in a book review I wrote for The New York Times in 1996 of a history of the idea of free trade which unfortunately is not on-line, but which a friend did find in the Times‘ own archives. I would be happy to furnish a copy to anyone interested.)

I never heard back from Davidson on any of this, and learned yesterday when his article came out that his only apparent interest was my acknowledgment that I lack an academic degree in economics. In particular, he judged my track record in predicting damaging consequences from China-related and similar recent trade policy decisions as far less important than my lack of a Good Housekeeping Seal of Approval from a profession that as a whole has been whoppingly and even disastrously wrong on the most important issues it claims to analyze effectively.

Davidson is hardly alone in this media practice of worshiping the authority of a discipline that has been seriously discredited recently by the real-world standard of results. But it was more than a little dispiriting to see that this version of the herd instinct has even spread to The New Yorker – yes, The New Yorker.

Finally, for truth-in-advertising purposes, I have been asked to do research on trade policy by both the Trump and the Bernie Sanders presidential campaigns.  I have not endorsed either candidate for president, though I do support many of Trump’s proposals and have criticized others as being overly timid.