(What’s Left of) Our Economy: No Shortage of Steel Trade Fakeonomics

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Biden, Donald Trump, free markets, free trade, IHS Markit, National Bureau of Economic Research, productivity, Rajesh Kumar Singh, Reuters, steel, steel prices, steel tariffs, steel-using industries, subsidies, tariffs, Trade, {What's Left of) Our Economy

Here’s one likely byproduct of President Biden’s unexpected decision so far to maintain most of Donald Trump’s tariff-centric trade policies – including undermining the workings of the deeply anti-American World Trade Organization (WTO): shoddy or just plain incoherent attacks on these economic nationalist measures seem certain to be just as numerous as they were during the Trump years. Indeed, two have just been released.

In the shoddy category is a Reuters article from yesterday reporting that American manufacturers are suddenly very short of steel, that prices are therefore soaring to extortionate and profit-killng levels, and that the Trump steel tariffs – among the previous administration’s measure that Mr. Biden has so far decided to keep – are largely to blame. Even worse, the piece tells us (and entirely predictable according to standard economic theory), the protected U.S. steel industry is taking full advantage by keeping its own production low, and therefore maximizing upward pricing pressures and therefore its own profits.

Yet the statistical basis for these claims falls apart on close analysis. Author Rajesh Kumar Singh starts off by writing that

“Domestic steel mills that idled furnaces last year amid fears of a prolonged pandemic-induced economic downturn have been slow in ramping up production, despite a recovery in demand for cars and trucks, appliances, and other steel products. Capacity utilization rates at steel mills – a measure of how fully production capacity is being used – has moved up to 75% after falling to 56% in the second quarter of 2020 but is still way below 82% in last February.”

That’s not, however, what’s said by the Federal Reserve, the offical source of U.S. capacity utilization data. Its tables show that for iron and steel products, capacity utilization rates stood at 76.03 percent last February, and at 77.84 percent last month. Where I learned ‘rithmetic, that’s an increase. Moreover, since bottoming last May, just after the worst of the CCP Virus and shutdowns’ first wave, it’s up 56 percent.

Indeed, steel’s capacity utilization performance is especially impressive – and especially destructive to Singh’s article – given that from last February to this past January, capacity utilization in domestic manufacturing overall is down slightly (by 0.60 percent).

And what Singh somehow left out is that during that same period, different Fed tables show, while overall manufacturing production adjusted for inflation dipped by 0.75 percent, iron and steel products output was off by just 0.71 percent.

His reporting is no more responsible on U.S. steel prices. Yes, they’ve risen strongly lately. But that’s largely because they fell so steeply almost immediately after the tariffs went on, in February, 2018. As made clear by the (chartreuse?) line from the chart below, from the respected consulting firm IHS Markit, they’re still much lower than they were three years ago. Nor, contrary to another claim of his, do they look much different from Chinese and European prices.

In the incoherent category is a study released by the National Bureau of Economic Research (NBER), widely seen as one of the gold standard for American economics, whose main theme is that, contrary to the Trump administration’s claims, American consumers and businesses, not the Chinese or any other foreign countries, paid all the costs of the Trump tariffs.

I’ve repeatedly pointed out the lack of evidence for this contention. (See, e.g., here).  Today, however, I’m more interested in a finding made along the way by the three blue-chip economist authors: When it comes to steel, “The data show that U.S. tariffs have caused foreign exporters…to substantially lower their prices into the U.S. market.”

What they didn’t do is ask themselves why and, even more important, how this could be. That’s especially puzzling because the answer obviously is that foreign steel industries are subsidized by foreign governments. Consequently, they don’t face the same earnings pressures as their U.S.-owned counterparts, and can stay in business – and even ramp up production – despite major price cuts.

So the idea that there’s now or for decades has been free trade in steel has no basis in fact, and anyone who keeps ignoring this global landscape can’t possibly place any value on America retaining a steel industry worthy of the name – or on any definition of free trade that’s remotely reciprocal and therefore sustainable, not to mention one that serves U.S. economic interests realistically defined.

At least as important, as I’ve noted before, anyone blasé about huge quantities of artificially cheap foreign steel flooding into the United States can’t be serious about ensuring that the American economy is predominantly influenced by free market forces of any kind, or about understanding the central importance of productivity gains in spurring technological progress and even durable prosperity.

For the record shows that the recent wide availability of subsidized, cut-rate steel has provided the steel-using industries generally with a crutch that’s relieved them of the need to anchor satisfactory profits in ever-improving efficiency – and kneecapped their productivity performance. And since steel is hardly the only imported product subsidized by foreign governments, there’s no reason to believe that this kind of economic damage is limited to steel-users.

All the same, a continuing flood of trade and tariff fakeonomics may produce a silver lining.  As long as the Biden administration hews to the Trump line, at least the American people will still have an Executive Branch with an interest in pushing back strongly.     

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(What’s Left of) Our Economy: The Woke Street Journal (on Trade)?

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America First, free markets, free trade, Gerard Baker, globalization, Mainstream Media, The Wall Street Journal, Trade, {What's Left of) Our Economy

Since it’s already 11 AM as I begin writing, and the Biden presidential campaign still hasn’t released the full version of a broad manufacturing and economy blueprint scheduled to be issued today (as opposed to this summary), and since it’s still not clear when the document will appear, I’ll focus for now on a development that’s surely more startling, and possibly more important in the long run.

It’s a recent Wall Street Journal column and its viewpoint on trade policy, and it was so mind-blowing that my first reaction was that the author must be dropping acid.

More specifically, the piece was by Gerard Baker, who served as the Journal‘s Editor-in-Chief from 2013 to 2018, and is now an editor at large. That was clearly a demotion, but there’s no indication that the move stemmed from any unhappiness about Baker’s overall policy views. (He was thought by some to be soft on President Trump, but Trump trade policies were never brought up.) 

Yet on Monday, a publication whose editorial positions have from its beginnings practically been defined by all-but-uncritical worship of free markets and their international counterpart, free trade, ran a Baker piece making the following points:

> “The modern woke corporation publicly disdains and derides the values on which the nation—and its profits—were built, even as it pursues global opportunities at the expense of American communities”; and

> Cleaning out the “rot in American capitalism” must include “ensuring that corporations prioritize Americans over their globalist, progressive agendas.”

I know that I recently reported a big Journal position switch – opposing decades of pre-Trump policies that sought to tie America’s economy more closely to China’s. But much of the case made by the editorial board was grounded in national security – which is entirely understandable, but narrower than what Baker seems to be calling for.

After all, his new views didn’t mention national security at all. They were a full-throated demand that Washington’s international economic policies prioritize America First.

Baker isn’t the full editorial board. But neither is his column an example of the kind of tokenism that’s typically shaped Mainstream Media editorial departments’ (including the Journal’s) treatment of trade and related economic policy issues – interrupt a continuing flow of articles singing the praises of conventional trade and globalization policies with the occasional contrarian piece by a fringe figure (like left-wing consumer advocate Ralph Nader or far-right conservative Pat Buchanan), or every once in a while by a leading Democratic party trade critic like Ohio Senator Sherrod Brown.

The effect of these practices clearly was to foster the impression that for the most part only genuine oddballs could question the pro-free trade consensus. But even though Baker left his former position under something of a cloud, he’s not a professional gadfly. He’s a lifelong member of The Club. Just look at these credentials: the Bank of England, Lloyd’s, The Times of London, the Financial Times, the BBC. Even Oxford! So it’s tough to see his latest as anything but another significant (and welcome) straw in the wind.

In fact, it raises a fascinating question: Which part of the Journal will repudiate free trade idolatry fastest and most completely? Its highly and openly (and legitimately) opinionated editorial page? Or its straight news department, which like its counterparts elsewhere in the Mainstream Media, often act just as opinionated – but more subtly so?

(What’s Left of) Our Economy: Can Free Trade Nowadays Really Maximize Global Well-Being?

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China, East Asia, economics, free markets, free trade, globalization, Trade, {What's Left of) Our Economy

As nearly every economist worth their salt can tell you, as far as their profession is concerned, the prime end goal of liberalizing global trade as completely as possible is maximizing the entire world’s economic well-being. And theoretical, purely economic criticisms of the freest possible global trade have been dominated by questioning whether efforts to achieve this goal have truly have kept this promise, or are capable of doing so.

I don’t mean to minimize the importance of this debate, or others focusing on related but distinctive issues bringing into play non-economic considerations – like whether trade and broader economic policies need to broaden their definition of well-being to include goals like increasing feelings of happiness and security, or like fighting climate change and other threats to the environment, or like preserving America’s national security, or like ensuring that the economic well-being being created is more equitably shared.

But these days, it seems that American policymakers in particular need to ask themselves a more fundamental question: Assuming the goal can be reached, is the greatest possible worldwide economic (that is, material) well-being actually a goal that the global trading system should be trying to reach? And all peoples and governments of good will, not simply the United States, have a vital stake in figuring out the right answer – especially if they place noteworthy value on free markets.

The presence of the word “governments” in the previous sentence points to a central complication that the welfare-maximizing enthusiasts seem to be missing.

Specifically, no one of good will could reasonably oppose maximizing the economic welfare of all the world’s individuals (assuming, of course, that whatever non-economic challenges caused by high growth – e.g., environmental threats – aren’t ignored).

But even leaving aside strategic and national security considerations, the organization of the world’s individuals into governments creates a big problem with this objective. Specifically, many of these governments have organized their national economies in turn around principles and practices that have nothing to do not only with free trade, but with free markets or any aspect of economic liberalism themselves – the idea that individuals and other economic actors (like businesses) have the right to make the (legal) economic choices they regard as serving their own best economic and/or non-economic interests.

China is the obvious example. Its system holds that, even though at a very local or micro level, individual and other actors (because of the point I’m about to make, I’ve always hesitated to use the word “businesses” or “companies” to describe any Chinese goods- or service-producing entities) can be permitted to act on their own impulses, any such economic decisions with broader effects should be made or be subject to the control of the state. And all resources related to the economy are ultimately accountable to the state as well.

There’s no legitimate doubt that freer trade has helped lift hundreds of millions of Chinese out of poverty, and of course contributed to the economic well-being of myriad non-Chinese individuals and businesses and other entities that sell to this huge, burgeoning market, the growing prosperity of Chinese individuals. But there can also be no legitimate doubt that this free trade has also greatly strengthened a Chinese government whose practices clearly amount to a broad rejection of free trade and the rest of free market thinking.

Until now, it’s been easy to argue that whatever Beijing’s interventionist record, freeing up trade between China and the rest of the globe has improved the world’s wealth on net, even though China may have been the greatest beneficiary, and even though workers in high-income countries (to cite one prominent example) may have paid an economic price on net. 

But all this wealth creation unquestionably has strengthened this command-and-control Chinese system, its global footprint, and its influence over the world economy. If you believe in the virtues of free markets, how can this kind of development possibly keep increasing overall world economic well-being over any significant period of time (as opposed to spurring the kinds of brief boom periods that tend to become busts)? And if it can (and statist China has been a big global economic player for many years now), then maybe it’s time to rethink faith in free markets to begin with?

Of course, it’s important to keep in mind a long-time standard explanation of how China’s economic rise can be squared with support for continual global trade liberalization. It’s the confidence that more and freer trade with China will promote a liberalization of China’s domestic economy that will inevitably loosen the state’s grip trade and other foreign economic policies. But as known to anyone who’s been following China issues in recent years, Beijing has been reasserting control over much of the paltry amount of economic activity that it had previously ceded. Moreover, this trend didn’t begin with current leader Xi Jinping. So at the very least, the optimists are now under a heavy burden of proof to show that continuing to free up trade with China, or even fighting Trump-ian American backsliding, will maximize global welfare indirectly, by fostering Chinese internal economic liberalization.

Given China’s immense size, a China exception to the trade-spurring-welfare-maximization claim would be crucial enough. But it’s not just China. Economic intervention even dwarfing that practiced by the United States (including but hardly limited to the massive response to the financial crisis by the Bush and Obama administrations, and especially the still considerable stimulus supplied by the Federal Reserve) is common the world over. Gradations vary considerably, but fascinatingly, and perhaps revealingly, its strongest in East Asia, the region that, even leaving China out, almost everyone agrees has been the biggest net winner from trade liberalization going back to the early post-World War II period.

Unlike China, some of the leading East Asian beneficiaries of freer global trade, like Japan and South Korea, are U.S. security allies. But they conform with no reasonable definitions of free market systems, either. Should American policy, and the policies of other more market-oriented economies, support making these countries and their highly interventionist systems stronger, richer, and more influential as well?

China’s rise and increasingly anti-American actions on many fronts have prompted speculation that current bilateral tensions might eventually split today’s highly integrated global economy into separate, Cold War-like U.S.- and Chinese-dominated spheres. In fact, this may be a Trump administration goal. So far, this talk has emphasized the intertwined technology and national security reasons for pursuing this goal. But if free markets are all they’re cracked up to be, it may also be warranted for solely economic reasons.

(What’s Left of) Our Economy: Can We Get Real About China’s Trade Dumping?

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China, consumers, dumping, free markets, Martin Feldstein, prices, steel, subsidies, Trade, Trump, {What's Left of) Our Economy

In the spirit of the holiday season, rather than slam noted economist Martin Feldstein for producing yet another stale though dangerously misleading blanket warning against the horrors of trade protectionism, I’ll note that he’s just (unwittingly, to be sure) created a teachable moment about instances in which erecting trade barriers is absolutely necessary. Those instances concern a practice called dumping, and in particular when the culprit is a country like China.

In U.S. and world trade law, dumping consists of selling a product or service in a foreign market at prices deemed to be excessively low. (Their specific definitions differ – see here and here for how.) For someone not steeped in these subjects, it’s entirely reasonable to ask, “What’s the problem?” After all, if a producer wants to provide a major price break for his or her foreign customers, why should those customers look a gift horse in the mouth? But for a leading economic light like Feldstein – who has been a top presidential economic adviser (in the Reagan years), it’s hard to excuse his use of the term.

The reason is that the decision to dump can result from dramatically different circumstances with dramatically different stakes for the future of the kind of U.S. economy most of us presumably want to ensure. Feldstein suggests that dumping is basically no different from the kind of price drops businesses can put in effect when they’re so technologically advanced or otherwise efficient that they can undersell less competent rivals. But this example is completely irrelevant to dumping law.  Neither the U.S. nor World Trade Organization versions penalizes this kind of progress.

Feldstein might have added a common claim that, even when these international price differentials do exist, they’re no different than when producers (or service providers) decide to put their wares on sale in certain parts of the United States but not others – maybe as a special deal to jump-start business in a region they’re entering, or to energize business in a region where they’re lagging.

But although this argument against sanctioning foreign producers for dumping is more on target, it still misses the mark in a crucial respect: The dumping engaged in by countries like China is fundamentally different. And the reason is that it’s typically subsidized by foreign governments.

Such subsidized dumping is objectionable, and downright dangerous to the American economy, for several reasons that have somehow eluded Feldstein – and most of his fellow economists. Principally, it forces companies that operate in a free market setting, with all the constraints that imposes on pricing policies, to compete against companies that face no such constraints – or tend to enjoy the freedom to under-price for long periods of time.

If you’re fine (like Feldstein and other conventional wisdom-mongers?) with government-dependent entities (I hesitate to call them “businesses”) gaining the upper hand in the United States, then logically this isn’t a problem. If you believe that the American economy works best for all concerned when free market principles and practices are encouraged to the greatest extent possible, then you should be deeply concerned.

As a result, it should be easy to distinguish between bargain-basement pricing from companies that have either very patient founders or other shareholders, or lots of cash on their balance sheets, or both, from such pricing from entities that can keep drawing on foreign treasuries. The former, after all, stems from actors that are trying to judge the fundamentals of a market place, that “put their money where their mouths are,” and who will eventually be rewarded for being correct or punished for getting it wrong. The latter is a function of the decisions and priorities of foreign governments. And with a country like China, where the government maintains a whip hand over the economy, there can be no reasonable doubt which kind of pricing we’re dealing with.

All believers in free markets by definition agree on the superiority of the free market incentive system. But as often seems to be the case, they easily forget free market values, and the need to safeguard them, when it comes to international trade. (Monopoly and competition issues represent another example of this selective capitalism syndrome.)

That’s not to say that all government subsidies should be opposed. Many (like America’s minority- and women-owned business “set asides”) seek to promote important goals that societies have every right to prize. Others seek to promote important goals that societies literally can’t do without (like government support for defense industries). And even these wrinkles can have wrinkles. For example, many manufactured goods can be crucial for national defense even though they’re not weapons themselves, or even though they have many uses other than military. Steel, to which the Trump administration is considering extending major protection for just these reasons, is a newsy example.

So many dumping allegations and cases can be genuinely complicated, and understandably controversial. But even if you believe that systems of trade law can ultimately resolve these disputes in acceptable ways (I don’t), it should be clear that government-fostered dumping simply doesn’t belong in this category, and that government-run economies like China’s don’t deserve the standard legal protections (like presumption of innocence) when put in the dock.

What should be even clearer: Anyone not recognizing this basic dumping distinction should never gain the ear of those officially responsible for America’s well-being. But because it’s the holiday season, I won’t specifically recommend blackballing Martin Feldstein. At least not right now.

Those Stubborn Facts: From the World’s New Champion of Free Trade

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China, free markets, free trade, investment, state-owned enterprises, Those Stubborn Facts

Annual investment growth by Chinese state-owned companies,

2016: + c. 25%

 

Annual investment growth by Chinese “private” companies,

2016: + c. 3%

 

(Source: “Beijing Revs Up State Inc.,” by Ian Talley, The Wall Street Journal, March 20, 2017, http://blogs.wsj.com/economics/2017/03/20/beijing-revs-up-state-inc/)

Im-Politic: Why CNBC’s Bias isn’t Simply Partisan

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bailouts, Ben Carson, Bernie Sanders, Black Lives Matter, boardroom liberalism, capitalism, Clinton Democrats, CNBC, crony capitalism, Democrats, Donald Trump, free markets, globalization, Im-Politic, Immigration, Larry Kudlow, media, media bias, Noam Scheiber, Obama, Occupy Wall Street, Tea Party, Trade, Wall Street

Many of those nice enough to comment on my post yesterday on CNBC’s awful presidential debate performance have attributed the often abusive questions posed by the moderators as evidence of liberal/Democratic media bias. And that’s what some of the Republican candidates charged as well. My response? I wish the fundamental problem was that obvious – and therefore that correctable, at least in theory.

Instead, what the network’s evident mindset represents is the much more insidious development of a national political class homogeneous enough to share fundamental values, assumptions, and positions (with all too superficial variations) and powerful enough to ignore and, when necessary, keep out of the governing system against-the-grain views.

Part of this analysis reflects my own experience as a frequent CNBC viewer – and not only as background noise during the workday. I think the network’s coverage of finance, business, and economic headline developments is acceptable, and it at least mentions major breaking news in other spheres. Yes, I could watch Bloomberg, or Fox Business. But as my father used to say, we’re all creatures of habit, and my sampling of the newer competition has not yet persuaded me to change the channel permanently. Nor have I yet found any other continuous sources of reasonably serious hard news.

And when I hear or see the letters, “CNBC,” my first reaction isn’t “Democrats.” Quite the opposite. Even with the blatantly partisan Larry Kudlow gone from daily programming, the network clearly is tailoring its material towards the investment community and the steadily shrinking pool of American retail investors – groups not known for progressive leanings. In fact, with the latter ever more skewed toward the upper income strata, it hasn’t been surprising to see CNBC broadcast more and more segments that openly celebrate the “lifestyles of the rich and famous.” That’s of course on top of the broader tendency of the business press to create and glorify the “Superstar CEO” – a practice that (amazingly? or not?) has survived the financial crisis and ensuing recession.

When it comes to policy – overwhelmingly economic policy, of course – CNBC is firmly in the free market camp. Minimal taxation and regulation are constantly touted, as are free trade agreements, un- or barely fettered immigration policies, and the supposedly iron, unchangeable, undeniable realities that make them necessities – the historically inevitable and beneficent globalization of business; the equally inexorable triumph of capitalism worldwide; and the resulting supreme imperative of participating in and growing foreign market opportunities. And when the focus is domestic, CNBC therefore places on a pedestal “business-friendly” states, which unlike their more neanderthal (usually Democratic governed) counterparts are supposedly wise enough to spare companies of nearly all the costs of public goods and services – and to discourage unions.

It’s true that much else that’s central to CNBC’s worldview isn’t very consistent with free markets. But institutions like activist central banking are accepted not so much as regulatory exceptions to a more liberal rule, but as fixtures without which the economic landscape would be unrecognizable, and therefore literally inconceivable. Similarly, although the bailouts of non-financial companies were positively scorned, the bailout of Wall Street was (a little sheepishly) accepted because, well, it beat global destruction.

These exceptions to free market norms have convinced many that CNBC is extolling not genuine market capitalism, but crony capitalism, in which the biggest, most politically connected businesses manipulate government to serve their own selfish purposes and especially to marginalize newer, less influential competitors or even prevent them from forming. I agree that the network isn’t inclined to assail this form of corruption. (Of course the pugnacious Rick Santelli is a prominent exception.) But another implicit assumption needs to be added here to flesh out the full CNBC worldview, and it concerns the ostensible virtues of what I’ve referred to as “boardroom liberalism.”

This is a school of thought identified by New York Times reporter Noam Scheiber, and he put it better than I ever could:

“It’s a worldview that’s steeped in social progressivism, in the values of tolerance and diversity. It takes as a given that government has a role to play in building infrastructure, regulating business, training workers, smoothing out the boom-bust cycles of the economy, providing for the poor and disadvantaged. But it is a view from on high—one that presumes a dominant role for large institutions like corporations and a wisdom on the part of elites. It believes that the world works best when these elites use their power magnanimously, not when they’re forced to share it. The picture of the boardroom liberal is a corporate CEO handing a refrigerator-sized check to the head of a charity at a celebrity golf tournament. All the better if they’re surrounded by minority children and struggling moms.”

Scheiber used the term to describe the outlook of President Obama, and obviously it holds for Clinton-style Democrats, too. Just as important, because the most powerful ideologies and worldviews can accommodate a fair amount of diversity, it’s easy to imagine a conservative version of “boardroom liberalism,” and in fact, between the two of them, they dominate the perspectives of the establishment politicians, senior bureaucrats, media figures, and so-called policy intellectuals that in turn dominate American politics and discussion thereof.

In my view, this is the perspective that reigns at CNBC, and throughout the establishment media. And although it’s surely closer to the Democratic Party mainstream than to the Republican rank and file, and reserves special contempt for the Tea Party faction (as well as religious conservatives), it doesn’t hold much affection for Bernie Sanders and the Occupy Wall Street crowd, either.  (History-induced guilt typically inspires more indulgence for Black Lives Matter.)

I’m sure it’s clear why an ideologically uniform press corps is as big a threat to a democracy worthy of the name as an ideologically uniform party system. But an even greater danger is posed when the same precepts unite those media and political worlds – along with their colleagues in think tank ranks and academia. Conventional wisdoms become completely ossified and the decision-making apparatus becomes almost impervious to fundamentally new ideas – even in times of crisis.

When powerful challengers from utterly alien universes do loom on the horizon (e.g., a Donald Trump or a Ben Carson, Tea Party-ers uninterested in politically convenient compromises), all the major occupational groups and ideological sects comprising this polyglot establishment rush to join forces against the invaders. And they employ all the (predominantly verbal) weapons they can muster, ranging from slanderous invective to loudly professed indifference to chortling condescension to outright ridicule. This counterattack, moreover, is conducted with unusual vehemence when the outsiders make perfectly clear that they have no use, much less respect, for the conventional wisdom-mongers.

On the one hand, it’s comforting that a lively alternative media-verse has emerged in recent years – precisely in response to the power, intolerance, and resulting arrogance of the establishment. On the other hand, the establishment still seems firmly ensconced – in journalism and in both parties. Since it’s still early in the 2016 presidential cycle, this year finally being different can hardly be ruled out. But as Yogi Berra once said, “It gets late early out here.”

Im-Politic: Likely Hillary Challenger Should First Understand His Own State

Tags

2016 elections, Democrats, federal government, federal spending, free markets, Hillary Clinton, Im-Politic, Martin O'Malley, Maryland, private sector, recession, recovery

I’m all in favor of more competition for the upcoming Democratic presidential nomination, but I’m afraid that at this point, former Maryland Governor Martin O’Malley just doesn’t pass the laugh test. It’s not because O’Malley’s name recognition hasn’t yet moved even the smallest needle, though that’s clearly a big obstacle. Nor is it because I’m a Maryland resident, and am unable to list any O’Malley accomplishments other than non-stop tax increases. It’s mainly because O’Malley seems clueless about his own state economy’s heavy dependence on federal largesse – which doesn’t justify much confidence that he can address the nation’s main economic problems effectively.

O’Malley’s apparent delusions were on full display this morning on CBS News’ Face the Nation. Asked by host Bob Schieffer why he “would be a better president than Hillary Clinton,” O’Malley responded that while in office in Annapolis, “I guided our state through this recession and I did so with results that actually mattered. The highest median income in the country, a middle class that is upwardly mobile….”

Here, however, is what O’Malley didn’t mention: Like Virginia, Maryland weathered the recessionary storm relatively well because its location right next to the District of Columbia means that it benefits disproportionately from federal spending and employment levels. These of course are entirely different from the free market forces that have always been the main determinants of the nation’s economic performance and prospects.

In 2007, the year the last recession started (officially at its very end), combined federal government civilian and military spending as a share of Maryland’s economy was 11.50 percent. For the nation as a whole, the figure was 3.63 percent. (All figures are in current dollars.) The downturn ended in mid-2009, and it’s well known that ramped up federal spending moderated the slump. Its share of national gross domestic product rose to four percent from full-year 2007 to full-year 2009 – a 10.19 percent increase, even as the economy shrank by 0.51 percent.

Maryland’s economy fared much better in these years – growing by 4.49 percent. But that’s largely because its government-heavy economy became even more government heavy, with the federal share rising to 12.18 percent.

Once the recession ended, however, Maryland’s reliance on Washington kept growing, as federal spending as a share of its economy hit 12.79 percent by 2013 (the latest available data). Its economy expanded by 12.47 percent. Interestingly, the national economy grew much faster – by 16.56 percent, even as the federal spending share declined to 3.77 percent.

Campaign 2016 is still young, and O’Malley may indeed have brilliant ideas to restore the national economy (and especially its private sector) to genuine health, as opposed to its current easy money-induced buzz. But if he’s going to get any deserved traction, that’s a case he still needs credibly to make.

(What’s Left of) Our Economy: Japan Goes All In

Tags

asset prices, Bank of Japan, bubbles, currency, currency manipulation, dollar, Fed, Financial Crisis, free markets, Global Imbalances, investing, Japan, QE, stimulus, Trade, Trans-Pacific Partnership, yen, {What's Left of) Our Economy

I was already having a hard enough time trying to figure out whether to focus this morning on three big data releases or on some of the other economic and non-economic developments crowding the headlines – and then the Japanese government rocked the economic world with two mega-announcements.

So the Labor Department’s Employment Cost Index, the Commerce Department’s survey of personal incomes and saving, and the Chicago purchasing managers‘ new monthly sounding all will have to take a back seat to the Japanese central bank’s unveiling of a massive new stimulus program, and the Japanese government pension fund’s announcement that it’s going to start investing considerably more in stocks both in Japan and around the world.

There’s no need to review the most obvious implications of this news. Just Google “Bank of Japan” and “GPIF” (Government Pension Investment Fund). You’ll quickly see that the former’s decision to buy many more Japanese government bonds, along with stocks and other financial assets, is expected to boost the prices of the such assets all around the world, further weaken Japan’s yen, and fend off another bout of deflation — with all the damage that would do to the Japanese and global economies. Financial assets will also get a major lift – all else equal of course! – from the Japanese government employee pension fund (the world’s biggest public sector investor) shifting its strategy to buying more stocks in Japan and abroad.

To me, the less obvious implications matter more, especially these two:

First, one of the biggest long run dangers of the unprecedented central bank stimulus programs adopted to contain the financial crisis is that investment capital around the world will be spent badly. The idea is that if investors know that the Federal Reserve and the European Central Bank or the Bank of Japan will ride to their rescue with yet more credit if they make mistakes in allocating funds, the discipline that’s supposed to be one of the main virtues of free markets and capitalism will be badly eroded and possibly destroyed.

The crisis itself clearly was fueled in the first place by the glut of credit provided by the Fed in particular during the bubble decade. Super-easy money encouraged both Wall Street and homeowners to bid up the price of fundamentally unproductive assets like houses wildly beyond sensible levels. Government housing subsidies and implicit guarantees didn’t hurt, either.

The Fed doesn’t buy stocks but its Japanese counterpart has invested in exchange-traded funds and real estate investment trusts. Now the Bank of Japan will triple those purchases, along with boosting its bond buys. Is it remotely possible that this step will increase the efficiency of capital allocation in Japan, the United States, or anywhere?

In addition, the $1 trillion-plus Japan government pension fund, the world’s largest public investor, will more than double its holdings of Japanese and foreign stocks to 25 percent each. Of course, public pension funds have long been major players in financial markets. But U.S. funds hire private sector investment professionals to manage their portfolios. That hardly makes them perfect, but at least they have a history of responding in standard ways to market (and more recently, government and central bank) signals.

The GPIF’s portfolio, by contrast, is run by government bureaucrats. Moreover, they’re bureaucrats from the Japanese government, whose devotion to free markets has been historically difficult to spot. I’m someone who actually thinks that Tokyo has a good record of intervening in the economy, especially in manufacturing. But that doesn’t mean I have much confidence in it as a stock- or sector-picker – which of course is a different animal altogether from identifying approaches to nurture the long-term development of industries. Moreover, why would anyone hewing to the conventional wisdom about Japan’s allegedly disastrous penchant for “picking losers” believe that its leaders will now suddenly start making decisions that improve the efficiency of their own economy, let alone economies anywhere else?

The second less-than-obvious set of implications of Japan’s new policies concerns trade flows and trade policy. As widely recognized, the extra BOJ bond-buying has already brought the yen to roughly seven-year lows versus the U.S. dollar. The question Washington needs to ask is why it’s still pursuing a Trans-Pacific Partnership trade deal when the biggest economy involved in the talks so far outside the United States, which already has a strong record of protectionism, has just moved to cheapen the price of its exports and raise the price of its imports – and all for reasons having nothing to do with market forces?

Further, this latest instance of Japanese currency manipulation will likely affect trade flows more than Fed easing ever could – even if ZIRP and QE haven’t been accompanied by a stronger, not weaker dollar. For as defenders of this Japanese exchange-protectionism keep ignoring, the BOJ isn’t simply mimicking the Fed because monetary easing policies in a mercantile, production and export-led economy like Japan’s will always have fundamentally different – and inevitably more protectionist – effects than easing policies in a consumption- and import-focused economy like America’s.

Finally, even though Washington reportedly is more determined than ever to ignore foreign currency devaluations in the mistaken belief that its leading, and slow-growing, trade partners deserve such help, the much weaker yen is likeliest to spur similar moves – or the introduction of other beggar-thy-neighbor measures – in other mercantile, export-led economies in Asia, notably Korea and China.

Without a meaningful U.S. response – meaning a sharp turnabout in import- and deficit-friendly American trade policies – the inevitable results will be an even bigger U.S. trade shortfall, a consequently weaker American recovery, and reflation of the global imbalances that played such a prominent role in triggering the financial crisis to begin with. Unless, finally, this time, for reasons no one has yet identified, it really is different?

(What’s Left of) Our Economy: No, U.S. Trade Flows Didn’t Just Naturally Happen

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free markets, lobbying, NAFTA, offshoring, Trade, trade agreements, {What's Left of) Our Economy

The Washington Post’s Zachary Goldfarb deserves lot of credit for, if not debunking a popular myth, at least illuminating the difficulties of reaching clear cut conclusions. What a shame, though, that in the process, he wound up perpetuating another myth – and one that’s not only widespread but nothing less than pernicious.

The myth Goldfarb dissected concerned whether or not income inequality in America has increased under President Obama – a key issue not least because the president says he’s deeply committed to narrowing the rich-poor gap. Among the services Goldfarb’s article provided was reminding readers that although some of the forces affecting inequality (like tax policy) can be controlled or influenced significantly by presidents (and Congresses), others are largely beyond the reach of policymakers (like technological advance, and financial crises that began before one’s term in office).

The myth Goldfarb perpetuated? That globalization falls into the latter category, and is best seen as one of the “market forces” that will “continue to widen inequality” — but that will also eventually by definition deliver the best possible results for the nation and for the entire world. Although at one point, Goldfarb allows that presidents can “influence” globalization through “trade standards,” he consigns this possibility to de facto irrelevance by insisting that any policy changes “will operate with a huge lag.”

But there are at least two problems with this point of view. First, if by “trade standards,” Goldfarb means the worker rights and environmental requirements that have dominated media trade policy debates for so long, these don’t even begin to describe the levers Washington – and the nation’s most important economic interests – can use to shape trade flows. Trade agreements and related policy decisions regularly encompass nearly each and every economic issue contested in the domestic policy arena, along with many that aren’t – like currency manipulation. Moreover, trade policy battles are waged both domestically – among various industries and other interest groups – and internationally.

And anyone doubting that these struggles matters greatly both for the relative fortunes of different industries, and for major power relationships that shape the entire economy, wasn’t following the great legislative and lobbying trade battles of the 1990s. Multinational businesses in particular lobbied lavishly to push through the North American Free Trade Agreement and expanded trade with China in particular precisely because victory meant domination over smaller businesses (like suppliers) and over their own employees.

Meanwhile, Goldfarb’s contention that trade policy changes can only affect inequality patterns slowly overlooks how long America’s approach to the global economy has been in place, and how faithfully President Obama has continued to follow it for the past six years.

Americans can legitimately disagree over whether U.S. trade flows have widened or narrowed the country’s rich-poor gap, over how important the effect has been, and over how long trade trends take to produce whatever influence they have. What should no longer be remotely controversial is that these flows have reflected deliberate policy decisions at least as much as the natural evolution of the U.S. and world economies. As a result, contrary to what’s constantly repeated by the trade policy status quo’s supporters, U.S. leaders are anything but helpless to ensure that they advance dramatically different priorities.