Following Up: The CCP Virus is Making the Case for Free Trade Look Ever Sicker

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CBO, CCP Virus, China, Commerce Department, Congressional Budget Office, coronavirus, COVID 19, Financial Times, Following Up, free trade, GDP, Goldman Sachs, gross domestic product, Guggenheim, IMF, inflation-adjusted growth, International Monetary Fund, Morningstar, output gap, real GDP, Trade, Wuhan virus

A month ago, I put up a post claiming that the gargantuan economic losses stemming from the CCP Virus outbreak were shredding the standard economics case for free trade. Essentially, most economists have long insisted that the gains from trade always exceeded the losses that might be suffered by individual parts of the economy and their workers. (I purposely excluded the debate over whether more trade has exacted excessive non-economic costs, like eroded national security or more pollution.) Even better, the freest possible international trade flows would create enough additional wealth to permit generous compensation for these losers.

But I then documented that the virus-related hit to American economic output – which will clearly had stemmed from decades of freeing up trade and broader commerce with China – had already dwarfed the trade gains claimed even by cheerleaders for doing ever more business with the People’s Republic.

One month later, the China trade bonanza estimates haven’t gotten any better. But the projections of damage to the U.S. economy have greatly worsened.

My April 6 post cited two leading private sector forecasts of U.S. output losses for this year, measured in terms of gross domestic product (GDP) adjusted for inflation – Morningstar’s figure of $954 billion, and Goldman Sachs’ judgment of nearly $725 billion.

Since then, some official figures have been released, and most are bigger. For example, on April 29, the U.S. Commerce Department came out with its first read on real GDP for the first quarter of this year. Even though most of that January through March period preceded the onset of various shutdown orders across the nation, the Commerce statisticians still found that the economy shrank by 4.87 percent at an annual rate in price-adjusted terms. This means that if output kept falling at that rate for all of 2020, by year-end the economy would be $928.86 billion smaller than on New Year’s Day.

That’s still a smaller production plunge than estimated by Morningstar, but Commerce (as usual) never actually predicted that the drop-off would remain constant. Its annualized figures are simply notional.

A few days before, the Congressional Budget Office did engage in some prediction. Its expectation of constant-dollar GDP decline in 2020 was $1.27789 trillion. The International Monetary Fund’s (IMF) expectation for the U.S. economy was pretty similar – a $1.1253 trillion slump in inflation-adjusted U.S. GDP.   

As also noted in last month’s post, though, virtually everyone agrees that CCP Virus-induced damage will continue beyond 2020, and the way most economists try to quantify such losses is by calculating what they call an output gap. It’s an effort to specify how much lower output will be over a period of time as a result of a shock like the virus compared with how an economy would have performed had the shock never taken place.

The last time a major output gap-estimating exercise took place was in the aftermath of the Great Recession – caused by a shock resulting from the bursting of closely related credit and housing bubbles. As shown by the chart below (originally published in the Financial Times), a team at Guggenheim investments at least consider the gap to have started in 2010 (the first year after the recovery is generally thought to have started) at about $750 billion (according to my eyeballs). Thankfully, it proceeded to shrunk steadily thereafter. But the bad news is that it shrunk so slowly that the lost growth wasn’t made up for until 2018 – eight years later.

Nevertheless, if the Guggenheim economists are right, that output gap literally was nothing compared with the one that CCP Virus’ outbreak will open up. It starts this year at about $2.7 trillion (again, as my eyeballs see it) after factoring in price changes, and it closes at a rate no faster than that seen during the last economic recovery – which was historically sluggish. In other words, the decision to free up trade with China could cost the United States economy trillions of dollars of lost growth year after year for the foreseeable future.   

Maybe during this period, someone or some organization will come up with a study of the gains to America from freer trade with China that will claim purely economic benefits orders of magnitude greater than previously judged. In order to preserve a serious case that such trade expansion has turned out satisfactorily for the United States, they’ll have to.

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(What’s Left of) Our Economy: The CCP Virus is Also Killing the Economic Case for Free Trade

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CCP Virus, China, corona virus, COVID 19, economics, economists, free trade, GDP, Goldman Sachs, gross domestic product, health security, inflation-adjusted output, intellectual property theft, Morningstar, offshoring lobby, Oxford Economics, Trade, U.S. International Trade Commission, U.S.-China Business Council, USITC, World Trade Organization, WTO, Wuhan virus, {What's Left of) Our Economy

In a nutshell, the mainstream economics case for the freest possible flows of international trade holds that, whatever losses may be suffered by individual parts of the economy and their workers, overall national (and global) wealth will grow – and that that’s an unmistakable good. A logical follow-on is also important: Since overall wealth increases, so does the capacity to compensate those who have lost out from trade expansion.

True, this compensation may not be dispensed. But don’t blame greater trade, most economists would insist (with not inconsiderable justification). Instead, blame national political systems or societies that fail to take advantage.

Let’s assume all these claims for the economic case (as opposed to the longstanding national security or emerging health security cases) for free trade are true. It’s noteworthy, then, that it looks like they’ve been blown out of the water by the almost certain impact of the CCP Virus emergency on the U.S. economy. At least there’s now an impressive case that trade expansion with China, anyway, has started reducing the nation’s GDP (gross domestic product – the standard measure of the economy’s size).

After all, the virus originally broke out in China, and spread to the United States because of the mushrooming of economic ties between the two countries that freer trade and commerce with the People’s Republic has produced. Some might counter that virus impact has nothing to do with trade expansion with China per se, and instead is due to the disease itself. But given the evidence that China is pandemic prone (arguably because of safety and hygiene standards that remain dreadful throughout the country despite its phenomenal recent economic progress, along with its regime’s obsession with secrecy), and the related likelihood that this problem won’t go away, it’s getting harder and harder to argue that the bilateral trade and investment boom and pandemic threats have nothing to do with each others. In other words, it’s at least reasonable to contend that rising pandemic threats have been an integral feature of freer trade and broader commerce with China.

For some specific numbers (uncertain as they inevitably remain), let’s look at a recent examination of the CCP Virus’ likely economic impact from the investment research and analysis firm Morningstar. Its take on the subject is worth highlighting because it’s the most bullish I’ve seen,

According to Morningstar, the virus’ spread as such is going to reduce the U.S. economy’s size by five percent this year in inflation-adjusted terms (the most closely followed GDP figures). That would amount to a loss of nearly $954 billion. The firm doesn’t explicitly quantify the long-term hit to the U.S. economy. But based on its assessment of the long- and short-term tolls on the global economy, and its belief that these short-term losses in percentage terms will be about half those for the United States itself, it appears that Morningstar expects the inflation-adjusted GDP losses to be some two percent. Using 2019 as the pre-virus baseline, that adds up to $381.46 billion during the (unspecified) first year of long-term effects. But since the economy would be in growth mode by then (although from a lower starting point), the yearly losses in absolute terms would grow each year, since they would represent some two percent of an ever larger pie as long as they lasted.

And remember – these forecasts are on the optimistic end. Another financial firm, Goldman Sachs, anticipates that this year, real U.S. GDP will plunge by as much as 3.8 percent this year. If correct, the national output shrinkage would be nearly $725 billion. (Unlike Morningstar, Goldman doesn’t isolate the specific CCP Virus share of these losses, but if its methodology is comparable, it could top $1 trillion.)

So those are (admittedly ballpark) figures for China trade-related losses for the whole economy. Have the claimed or estimated economic gains been greater? Not even close.

During the late-1990s, when it appeared likely that China would enter the World Trade Organization (WTO), and therefore trigger a surge in its trade with the United States and the entire world, Congress asked the U.S. International Trade Commission (USITC) to model the economic effects of the kinds of major tariff cuts to which China would agree. In its 1999 report, the Commission forecast a “minor” lift to real GDP – meaning an ongoing boost of less than 0.05 percent annually on an ongoing basis.

In 1999, that would’ve meant a $63 billion constant dollar GDP gain for the first year following China’s entry

To be sure, the USITC also tried to estimate the impact of the elimination of the multitude of non-tariff barriers China has long thrown up to the outside world – rules and regulations, often developed and carried out in secret, that can block or slow the growth of imports more effectively than tariffs. The Commission’s findings suggested that success on this crucial front – also predicted by supporters of China’s WTO entry – would double the U.S. GDP gains produced by expected tariff cuts. If correct, the ongoing American yearly output increase would be 0.10 percent of after-inflation GDP, or $126 billion, in the first year after these reforms were made.

Because of subsequent GDP growth, these annual gains would increase in absolute terms, and over the nearly two decades between China’s year-end 2001 WTO entry and today, could easily total trillions annually.

But many of these China tariff and especially China non-tariff barrier promises are still unkept, as even the Obama administration – a strong supporter of U.S. participation in the WTO – admitted in its final report to Congress on the subject. Maybe that’s why the private economic research firm Oxford Economics (in a study for the U.S.-China Business Council, a major pillar of the U.S. corporate Offshoring Lobby) pegged the annual GDP gains of U.S. business with China at $216 billion as of early 2017. That’s not much of a compounding gain.

Moreover, consistent with Offshoring Lobby practices, the Oxford report completely ignores the economic impact of U.S. imports from China – which have greatly exceeded exports for decades. And since China’s WTO entry through last year, the growth of the goods trade deficit has been a vigorous 235.36 percent. Nor did I see anything in its study about China’s massive theft of U.S.-owned intellectual property. Estimates vary, but even these China pollyannas admit it could amount to $600 billion each year. 

As with pandemics, you could argue that intellectual property theft’s growth isn’t a built-in feature of trade with China or any other country.  But since China has been far more theft-prone than it’s been pandemic-prone, and since its thieving ways were well known to Washington as WTO entry was being orchestrated, these costs clearly belong in the “costs of free trade” category – at least with China.      

Finally, of course, these purely economic arguments for free trade overlook non-economic arguments for trade curbs and national self-sufficiency that have always been compelling and that the virus outbreak has now turned into slam-dunk winners. Think “national security” and “healthcare security” – unless you’re thrilled with America’s current dependence on foreign sources of vital medicines, their building blocks, and medical devices.

Predictions understandably are abounding the the CCP Virus emergency will change some lasting behaviors and ideas nationally and globally. If the above, arguably realistic, view of the economic case is correct, free trade practice and ideology belong near the top of this list.

(What’s Left of) Our Economy: State of the Union Fakeonomics on Immigration

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demand, economics, free trade agreements, Gillian B. White, Goldman Sachs, illegal immigration, Immigration, Jan Hatzius, Jobs, Obama, offshoring, State of the Union, supply, The Atlantic, TPP, Trade, Trans-Pacific Partnership, wages, workers, {What's Left of) Our Economy

The more I go over the economic thinking behind President Obama’s final State of the Union address, and some of the commentary it’s generated, the weirder both get. Here are two especially noteworthy examples, and they both flow from the president’s claim that: “Immigrants aren’t the principal reason wages haven’t gone up; those decisions are made in the boardrooms that all too often put quarterly earnings over long-term returns.”

Actually, Mr. Obama’s starting point is a straw man. I don’t know of anyone whose views have attracted significant attention who solely blames immigrants for wage stagnation. I don’t even know anyone who blames illegal immigrants. I do know lots of folks who believe that the levels (too high) and mix (too many uneducated and unskilled) of legal and illegal immigration have contributed meaningfully to this problem. But I guess States of the Union are no place for nuance.

Even stranger about the president’s contention, though, was his defense of mass immigration’s role in the American employment picture was its contrast with his treatment of trade deals like his Trans-Pacific Partnership and their own destructive impact on jobs and pay. This issue went unmentioned.

No one blames these agreements and related policies for the entire wage problem, either. But does the president genuinely suppose that trade deals, and the job and production offshoring to very low-wage countries they’ve encouraged, have been totally unrelated to the pursuit of those “quarterly earnings over long-term returns,” and by extension to wage woes? In fact, can he or anyone else reasonably doubt that these same shortsighted boardroom denizens have lobbied so hard to push these deals through Congress precisely because they help maximize short-term earnings so effectively at American workers’ expense?

Just askin’.

The second example of State of the Union-related economic weirdness comes from an Atlantic post making the case for the president’s views on immigration and wages. It was perfectly conventional – to the point of predictability – for Atlantic staffer Gillian B. White to trot out the usual studies showing that most economists strongly deny any immigration responsibility for U.S. wage stagnation.

What was a lot less conventional was her neglect of the obvious immigration- (and trade-) related implications of this point from another leading economist that she quoted and then paraphrased:

“‘The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment’” Jan Hatzius, the chief U.S. economist at Goldman Sachs wrote in a 2014 research note. That’s because many companies have learned to be leaner, they hire fewer employees, and still benefit from continually growing productivity. And because the country is still not at full employment, they can keep paying workers less. All of this serves to boost the company’s bottom line, while workers are unable to participate in those benefits.”

It’s clear to any thinking person that Corporate America has gotten much leaner (although this greater efficiency isn’t showing up in the productivity data any more). And it should be equally clear, as Hatzius notes, that this development has increased the supply of labor more than the demand for workers (the ultimate reason full employment hasn’t been reached), and therefore reduced the price of labor (as over-supply will do for anything in a reasonably free market, human or otherwise, that’s in surplus).

Hatzius wasn’t quoted on the link between this labor market mismatch and American immigration flows, but White is confident that “Obama is right” (about immigration – not trade, which she also ignores) and that “the level of wage dampening that immigration is actually responsible for in the broader scope of the problem pales in comparison to the wage suppression that has occurred since multi-billion dollar companies decided to prioritize rewarding shareholders first and workers last.”

Indeed, she states, the immigration effects are so slight compared with the supposedly entirely separate corporate governance and strategy changes that discussing the former is “a bit beside the point.”

But by definition, if she’s right, here’s what’s a bit beside the point, too: At a time of subpar employment levels that themselves are undermining workers’ bargaining power, the United States keeps admitting roughly one million legal immigrants each year. Moreover, it has enforced its borders so poorly that the illegal population stands at more than 11 million.

In turn, White’s reasoning implies, significantly reducing either the illegal population, or the legal flow (or both), and accordingly improving the labor supply-demand balance, would leave the bargaining power and wages of current, legal workers virtually the same.

It sounds like White doesn’t really believe that the laws of supply and demand apply to labor markets at all, or at least not to those with significant immigrant participation rates. Same for that majority of economists she cites. Who’s to say “No”? After all, economics isn’t a real science. But if this is the case, couldn’t these analysts declare their heresy openly, or at least tell the rest of us where supply and demand still matters, where it doesn’t, and why? While they’re at it, of course, they could let the rest of us in on what other venerable maxims of economics they’ve now decided we can do without – and when.

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

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

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

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

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

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

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

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

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

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

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

Following Up: More on Delusions of Immigrants Saving the Economy

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amnesty, bubbles, executive amnesty, Following Up, Goldman Sachs, home ownership, housing, illegal immigration, Immigration, mortgages, Obama, Open Borders, The Wall Street Journal, Urban Institute

Since I’m kind of (understandably!) fast tracked and trade policy’d out, I thought I’d shift this afternoon to another way the U.S. bipartisan political establishment is shafting Main Street America: Open Borders- and amnesty-friendly immigration policies.

These policies’ leading edges – consisting of President Obama’s recent executive immigration orders – are of course presently stuck in the courts, similarly to how the offshoring-friendly trade strategies also backed by the White House and Congress’ Republican leaders are now stuck on Capitol Hill. But “stuck” is hardly the same as “dead,” and therefore ongoing vigilance is needed – especially since most of the president’s liberal Democratic critics on trade policy are wholeheartedly with him on immigration.

A stout pillar of the liberal case for boosting immigration levels and amnesty-ing the illegal population already in the country (or otherwise creating a “path to citizenship”) is the idea that the youth and energy of newcomers is crucial to American hopes to solving any number of major economic problems – from slow growth to the entitlements crisis. This post from last September presents a sample of these claims.

As I pointed out, liberals’ optimism regarding immigrants’ prospects for attaining the American Dream clashes violently with their decided pessimism that it’s within reach of anyone not to the manor born. And now The Wall Street Journal has reinforced the case for bearishness. Earlier this week, correspondent Nick Timiraos reported on this conclusion of a recent study on the likely future of American home ownership:

“Last decade’s housing crisis could give way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing….Demographics tell the story. Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.”

Note in particular the timeframe: through “the next decade.” Also of interest is the attempt by some Goldman Sachs economists to find a silver lining in the numbers: “They noted in an April report that even though Hispanics, for example, have lower homeownership rates than non-Hispanic whites, those rates have been rising for the past four decades.”

This point is of interest because the reckless extension of mortgages to low-income Hispanics during the bubble decade was a major source of that period’s housing insanity. In other words, their rising home ownership rates were part of the problem with which the nation is still struggling.

The lesson remains the same. If you want to increase greatly the ranks of low-income Americans, and/or if you want new justifications (and new voters?) for more and bigger government welfare programs, you’ll keep favoring Open Borders-style immigration policies. If you want national prosperity to be built on a sustainable foundation, you’ll favor sensible restrictions.