(What’s Left of) Our Economy: Is The Wall Street Journal Now Getting Woke on China Trade?

Tags

allies, China, decoupling, dual-use technologies, health security, high tech goods, Huawei, investment, manufacturing, national security, technology, The Wall Street Journal, Trade, {What's Left of) Our Economy

Hell has frozen over! Death and taxes are no longer certain! Water is flowing uphill!

Those are just some of my calmer reactions upon learning that The Wall Street Journal editorial board has just endorsed the idea of a “partial decoupling” of America’s economy from China‘s.

Given today’s national mood, and the marked turn it’s taken against various domestic and international outrages committed by China, this may not sound surprising – especially if you (unlike me) haven’t immersed yourself in the trade policy wars Americans have waged against each in recent decades. But in a Mainstream Media long world filled with staunch supporters of the kinds of approaches to foreign trade and international commerce generally pursued by pre-Trump U.S. Presidents, the Journal‘s editorial writers have been far and away the staunchest. Indeed, their arguments usually read like they’ve been taken straight out of standard economic textbooks, without even paying lip service to real world complications.

Not that the Journal ever championed unfettered trade and commerce in war-time. (This exception was formally identified by the so-called Father of Capitalism, Adam Smith .) And not that it ever supported selling, say, weapons to the Soviet Union during the Cold War, or encouraging investment in North Vietnam during the 1960s and early 1970s.

But the editorial doesn’t describe today’s world in those terms. Instead, it notes that  “partial decoupling may be necessary to prevent China from accumulating more leverage to bully the free world.” and that “U.S. and allied dependence on Chinese technology in a crisis….could allow the Chinese Communist Party to disrupt or shut down parts of foreign economies—or use the threat as political leverage.”

And the Journal‘s editorial board is right. Those threats are more than serious enough to justify departures from conventional free trade and broader global economic policies – which understandably prize economic efficiency and low prices and individual economic freedoms during peacetime, but which have struggled to deal with those all too commonplace gray periods between tranquility and all-out conflict.

Yet however satisfying this apparent U-turn will be to the Journal‘s longtime trade antagonists (and take it from me – it’s really satisfying), for the sake of intellectual honesty, and of U.S. national interests, its editorial board will need to go much further. And so will other influential voices who are acting newly woke about the China threat, but who may mainly be looking for safe harbors during what they hope is merely a passing storm. Several reasons stand out, and all stem from the critical reality that no industry exists in isolation from other areas of the domestic economy – let alone other industries.

So to all the ostensible pragmatists who, for example have recognized – at least rhetorically – that national security needs to come before free trade and commerce, it’s high time to recognize the implications of a development you’ve long claimed to understand: that many products crucial for national defense also have major and even predominantly civilian functions, and that for such such dual-use goods and technologies (and not only semiconductors, but high-value manufactures of all kinds) strong domestic manufacturing bases are essential.

Moreover, maintaining strong domestic manufacturing bases requires maintaining robust production complexes for all the key parts and components of the final products.

These imperatives also apply to critical healthcare goods. For example, it doesn’t do much good to set as a goal making massive numbers of the most effective facemasks in America without also ensuring adequate domestic supplies of the raw materials and the machinery needed to make them. And currently, the global production centers are in China. Similarly, what’s the point of resolving to restore national self-sufficiency in ventilators when the nation remains woefully short of the circuit boards, sensors, computer chips, tubes, and numerous other parts they’re made of?

In addition, as pointed out repeatedly on RealityChek, the secure supply problem goes way beyond China. During the CCP Virus period, literally dozens of countries, including long-term treaty allies, have embargoed or curbed exports of healthcare equipment of all types. That is, as with war, there are few free traders during a pandemic.

The lessons of dealing with both China and the CCP Virus should be screamingly obvious: In their own ways, they both represent systemic problems, and therefore require systemic, not entity-by-entity or country-by-country, responses. Acknowledging these lessons will be the test of whether the Journal‘s editorial writers and others of their ilk actually are ready to play useful roles in developing realistic U.S. trade policies, or whether they’re simply posturing.

Following Up: Podcast Now On-Line of National Radio Interview on U.S.-China Decoupling

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China, decoupling, FDI, Following Up, foreign direct investment, investment, manufacturing, pensions, public employees, retirement, tariffs, The John Batchelor Show, Trade, Trump

I’m pleased to announce that the podcast is now on-line of my interview yesterday on John Batchelor’s nationally syndicated radio show.  Click here for a timely update on dramatic new evidence that the U.S. and Chinese economies keep steadily – and in some cases quickly – disengaging.

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

Making News: Talking U.S.-China Decoupling Tonight on National Radio

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China, decoupling, Gordon G. Chang, government workers, investment, Making News, pensions, The John Batchelor Show, Trade

I’m pleased to announce that I’ll be returning to John Batchelor’s nationally syndicated radio show tonight to discuss the latest twists and turns in U.S. policy toward China.  Because John and co-host Gordon G. Chang are pre-recording segments during this CCP Virus crisis, it’s still uncertain exactly when the interview will air.

But if you start listening live on-line to John’s show here at 9 PM EST, you’ll be sure not to miss an important, timely discussion of how fast the U.S. is disengaging economically (“decoupling,” as the term of art has it) from the People’s Republic.

As usual, I’ll post a link to the podcast of the interview as soon as one’s available.

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

(What’s Left of) Our Economy: No, the Fed Isn’t Terribly Worried About a Trade-Mageddon

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agriculture, consumption, Federal Open Market Committee, Federal Reserve, FOMC, inflation, interest rates, investment, Jobs, Mainstream Media, monetary policy, tariffs, Trade, Trump, {What's Left of) Our Economy

OK, let’s get away from John Brennan, and public view of Russia, and get back to something uncontroversial only by comparison – President Trump’s tariff-heavy trade policies. (Don’t worry – I’m sure I’ll get to the Trump-related Michel Cohen and Paul Manafort legal results as soon as I can figure out something distinctive to say about them.)

As known by RealityChek regulars, the national media has been filled with articles reporting that Mr. Trump’s actual and threatened tariffs on aluminum and steel, and on products from China, have already started backfiring on the U.S. economy in any number of ways: leading to job and production cuts in industries that use the two metals as key inputs, and creating major uncertainty throughout the economy among sectors dependent on Chinese products as parts, components, and materials for their goods, and on selling Chinese final products to consumers.

The official U.S. data on economic growth and employment, as I’ve reported, have shown that, so far, exactly the opposite has been true for the metals-using industries. Yesterday afternoon, another important indicator was made public that casts major doubt that the economy is currently experiencing a “trade-mageddon,” or is bound to any day now. I’m referring to the minutes of the July 31-August 1 meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) – the members of the central bank’s board of governors who vote on monetary policy.

Most Mainstream Media newspaper headlines claimed that latest version of these minutes – which contain separate detailed analyses of the nation’s economic and financial situation by the FOMC members and the Fed’s staff of economists alike – contained sobering warnings about the “escalating trade war” posing “a big threat” to the current American recovery. And the members (I’ll focus on their analysis, given that they actually decide on the Fed’s moves) did definitely express trade-related concerns. Here’s how they put it:

“all participants [FOMC members] pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks. Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households. Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains. Other downside risks cited included the possibility of a significant weakening in the housing sector, a sharp increase in oil prices, or a severe slowdown in EMEs [emerging market economies].

But here’s what the members also said:

>Despite the above concern about consumer purchasing power suffering from tariff hikes, “Indicators of longer-term inflation expectations were little changed, on balance.”

>Several members commented that “prices of particular goods, such as those induced by the tariff increases” would likely fuel some “upward pressure on the inflation rate” but that these pressures would be “short-term” and had multiple causes. Further, depressed agricultural prices – due partly to recent trade developments, as noted below – would exert downward pressure on domestic inflation.

>Despite concerns about the impact of trade-induced uncertainty, “incoming data indicated considerable momentum in spending by households and businesses” and that levels of household and business confidence (regarded as key forward looking economic indicators) remained “high.”

>“Business contacts in a few Districts reported that uncertainty regarding trade policy had led to some reductions or delays in their investment spending.” Yet “a number of participants indicated that most businesses concerned about trade disputes had not yet cut back their capital expenditures or hiring….” And the possibility that prolonged trade tensions would change this picture was only described as a possibility.

>Although “Several participants observed that the agricultural sector had been adversely affected by significant declines in crop and livestock prices over the intermeeting period,” some FOMC members observed that this deterioration only “likely” and “partly flowed from trade tensions.”

And perhaps most important, the FOMC members “viewed the recent data [including trade-related information] as indicating that the outlook for the economy was evolving about as they had expected” and that their stated determination to raise the federal funds rate gradually, in order to sustain the expansion but discourage economic overheating, remained fully intact.

As the Fed participants always say, their analyses and policy decisions will be data-dependent. But it’s clear that the real message of these minutes is that the data justify no trade war-related alarmism now, and little for the foreseeable future.

Making News: Back on National Radio Tonight Talking China, & CNBC Interview Now On-Line

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China, CNBC, George W. Bush, Gordon G. Chang, investment, Making News, national security, tech, The John Batchelor Show, Trade, Trump

I’m pleased to announce that I’m scheduled to return to John Batchelor’s nationally syndicated radio show tonight to help examine where President Trump’s economic conflict with China stands.  Click here to listen live on-line to what’s sure to be an informative discussion among John, co-host Gordon G. Chang, and me.  And our special focus will be U.S. efforts to restrict China’s access to cutting-edge (including  defense-related) technology.  The segment is slated to start at 10 PM EST.

As usual, if you can’t tune in, I’ll be posting a link to the podcast as soon as one’s available.

Speaking of podcasts (or podcast-like links), click here to see the video of my interview on CNBC Monday on U.S.-China trade tensions.  Especially interesting is that my interlocutor was a former top George W. Bush’s aide who was trying to claim that his administration handled China just swimmingly.

And keep checking back with RealityChek for news of upcoming media appearances and other developments.

 

(What’s Left of) Our Economy: Why the Trump-ers (So Far) Aren’t Wrong About the Dollar

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bubbles, consumption, currency, debt, dollar, exchange rates, finance, Financial Crisis, growth, inflation, investment, protectionism, Steve Mnuchin, Trade, Treasury Department, Trump, {What's Left of) Our Economy

The economics, finance, and business worlds are kind of up in arms over U.S. Treasury Secretary Steve Mnuchin’s suggestion earlier this week that a weaker U.S. dollar would be good for the American economy.

I say “kind of up in arms” because Mnuchin’s remarks were more nuanced than generally reported; because financial markets in particular seem to be on steroids and have barely reacted; and because he took pains afterwards to profess his confidence that, despite its recent falling value, nothing fundamental had changed to undermine the greenback’s historic appeal to investors. Indeed, just a little while ago, President Trump stated that he “ultimately” wants to see a strong dollar. 

I say “up in arms” to some extent because, the President’s newest words notwithstanding, no American Treasury Secretary has ever said anything remotely like this in public for decades; because Mnuchin’s original words looked suspiciously consistent with what the establishments in these interconnected economic worlds abhor as the Trump administration’s protectionist instincts on trade policy (because all else equal, a weak dollar promotes U.S. exports and curbs U.S. imports); and because dollar strength (and the big U.S. trade deficits it’s encouraged) has long been a cornerstone of the global economy, and a major growth engine for the numerous countries that rely on selling to Americans to promote their own output and employment. (Hence many of them fiddle around with their own currencies’ values to make sure they can sustain these strategies.) Many strong dollar proponents also claim that a weaker American currency could dangerously stoke inflation (especially by boosting import prices) and deter investment inflows into the United States.

But two crucial points are Missing in Action in the tumult sparked by Mnuchin’s remarks. One should be obvious but can’t be repeated often enough, especially in these current overwrought times: You can have too much and too little of a good thing. An overly weak dollar would cause major problems for the U.S. economy. So would an overly strong dollar. Therefore, the key is not to assume either extreme (especially in the absence of any evidence that they’re around the corner) but to figure out a dollar level that achieves the best combination of benefits.

The second has been much less much widely recognized even in calmer periods, but it’s closely related to my longstanding point about the importance of the quality of American growth. As I’ve written frequently, growth based largely on production and the growing incomes it generates place the economy on the soundest foundation. This approach may not always produce the fastest growth, but it fosters the growth that tends to last longest, and that’s least likely to inflate bubbles that then collapse into economic and financial crises).

Such disasters, as we should have learned, stem from growth largely based on borrowing and consuming – i.e., on shopping sprees that eventually can’t be paid for responsibly, and can only continue by racking up enormous debts. And other than legitimate (though clearly overblown nowadays) concerns about inflation, that’s a main reason why folks in finance – and everyone on their payroll in the U.S. government and the rest of Washington – like the strongest possible dollar. Until the merry-go-round stops, they make tons of money by lending to those borrowers.

Here’s where the dollar’s value comes in. A strong-ish greenback tends to result in that borrowing and consuming brand of growth. A weak-ish dollar tends to result in the healthier kind of growth. And as indicated by this chart showing the change in the dollar’s value (also called the exchange rate) against other currencies, only looked at over the shortest possible period could the dollar nowadays be called weak or even weakening. Over a much longer period, it’s obviously still well in “strong territory.” 

And it’s no coincidence, as I’ve also written, that although the U.S. economy seems to be making some slight progress toward creating healthier growth, it still has way too long a way to go – especially given that the current recovery from the crises and the painful recession that followed is now more than eight years old.

The lessons, then, look clear. If you only care about the fastest growth possible regardless of its makeup or the longer-term consequences, and/or if you think finance should be the dominant part of the American economy, you’ll join the chorus of critics scolding Mnuchin for even hinting that some further dollar decline wouldn’t be a disaster for the nation. If you’d like the economy to steer clear of near-meltdowns like the one experienced just about a decade ago, you’ll be applauding what still looks like a subtle call from him for a somewhat weaker dollar.

(What’s Left of) Our Economy: The Multinationals’ Supply Chain Hypocrisy

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creative destruction, globalization, investment, multinational corporations, NAFTA, North American Free Trade Agreement, supply chains, tax reform, Thomas Friedman, Trade, Trump, {What's Left of) Our Economy

It’s widely contended in coverage and commentary about President Trump’s efforts to renegotiate the North American Free Trade Agreement (NAFTA), some of his administration’s key proposals could disrupt the global supply chains that multinational companies from all over the world have set up in recent decades to produce their goods at the lowest possible total cost. The same criticism has come up in connection with a provision of the (current) Trump tax reform plan that would impose a levy on the cross-border purchases of goods purchases by these companies’ domestic operations from their foreign operations (e.g., parts and components of manufactures that are turned into final products).

On the one hand, this is all understandable. If new tariffs are approved to penalize production outside the NAFTA zone, or if new tax code provisions accomplish the same tasks, networks of factories and other facilities that multinationals have spent big bucks setting up could need to move – in the process saddling the firms with yet more expenses.

On the other hand, these claims make no sense at all – at least if you’ve taken seriously the conventional wisdom about multinationals that’s prevailed since these supply chains came into being. For this notion insisted that, because of the natural evolution of the global economy, and of business, and of the interaction between the two, these companies had become free to hopscotch around the world seeking countries to host their facilities that offered the most favorable business environments. And if those environments deteriorated, the “footloose” multinationals would simply pick up stakes and move to more inviting locations.

As a result, countries at the very least needed to keep on their economic policy toes. At most, they’d need to keep improving their business environments – because countries all over the world were competing for the precious capital, jobs, growth opportunities, and knowhow that they offered. The most vivid expression of this idea was the “Golden Straitjacket” theory advanced by New York Times uber-pundit Thomas Friedman. As he wrote, countries that ran their economies based on free-market (aka U.S.-style) rules and practices (roughly his definition of the Straitjacket) would be rewarded with abundant investment that would fuel their economic development and raise their living standards. Those that ignored these rules would be shunned.

Indeed, Friedman even colorfully called the sources of this capital “the electronic herd” – an image that connotes both high levels of mobility generally, and a strong inclination to move to greener pastures whenever they beckoned. (In fairness, this electronic herd, strictly speaking, referred to high flying financiers who commanded vast amounts of “hot money” – highly liquid capital that could be sent across borders with the click of a mouse. But for his Straitjacket theory to achieve its promised benefits, businesses in the less mobile real economy would need to adopt much the same model, too, and indeed pursue the opportunities created by the Herd, however fleeting they might be.)

And since Friedman is one of the world’s primo thought leaders, and since his influence largely depends on his access to what the captains of finance and industry think (or want us to think), you can be sure that the Golden Straitjacket analysis – and all its implications for trade policy and economic globalization writ large – was one that was adopted and actively propagated by the world’s political and business establishment.

But the outcries prompted by the Trump NAFTA and tax reform proposals point unmistakably to conclusions that hardly flatter the Straitjacket theory, either in its actual or publicly conveyed forms. The one that I believe conforms most closely to how the global economy actually works? As I’ve been documenting since my book The Race to the Bottom came out in 2000, contra Friedman – and the bipartisan globalist American leaders who drank and sold this kool-aid – governments all over the world, big and small, have long been attracting investment with a wide array of interventionist policies that combine mixtures of trade barriers sticks and subsidy carrots. That is, the Golden Straitjacket theory in all its forms was self-serving corporate garbage – a particularly cynical version of “Heads, I win. Tails, you lose.”

Of course, economies that attracted investment needed to be relatively well governed (at least for the multinationals’ purposes) and politically stable. But as long as the main effect of these national investment conditions was consistent with corporate cost-cutting, and resulting greater profits, the multinationals didn’t publicly protest being jerked around. Indeed, they complied with foreign governments’ dictates pretty meekly.

The only difference, then, that could be made by the Trump NAFTA and Republican tax proposals? The multinationals face being jerked around in ways that will likely narrow their profits. And since they naturally view that as anathema, they’re suddenly claiming that they can’t easily hopscotch across national boundaries very quickly after all.

That’s not to say that the companies are wrong in noting that supply chains will be shaken up if the Trump NAFTA and Republican tax proposals become policy. But remember – the multinationals have for decades been highly successful at moving these chains out of countries like the United States. Surely they’ll manage to move them back if need be just as successfully. And those that can’t meet this challenge? Anyone truly believing in capitalism and its virtues will be confident that others will emerge to fill the vacuum and service a near $20 trillion American market (in pre-inflation terms). Unless those “creative destruction” and entrepreneurship things are just fakeonomics, too?

(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.

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

Tags

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/)

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

Tags

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.