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

Tags

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

Tags

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

Tags

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

Tags

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

Tags

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.

Im-Politic: GE’s New Gift to the Trade Populists

Tags

2016 election, Bernie Sanders, Canada, China, Donald Trump, GE, General Electric, Im-Politic, India, investment, Jeffrey Immelt, Jobs, manufacturing, multinational companies, NAFTA, North American Free Trade Agreement, protectionism, reshoring, Saudi Arabia, scale, Trade

The maverick presidential campaigns of Donald Trump and Senator Bernie Sanders just got a major boost from an unexpected source: General Electric CEO Jeffrey Immelt.

Throughout this political year, the presumptive Republican nominee and the Democratic challenger have drawn scorn from the nation’s intertwined political class and business establishment for promising voters that their administrations will bring back to America significant numbers of manufacturing jobs that have been lost to foreign competition. But in a speech last Friday, Immelt (unwittingly, to be sure) made clear both that their ambitions are eminently realistic, and that his own giant company plans to adjust its production and employment policies in response to just these “protectionist,” “populist” pressures – which he noted are appearing all over the world.

Immelt’s apparent tone and much of his phrasing indicates that he intended his remarks – to the graduating class at New York University’s business school – as a ringing defense of GE’s contributions to both the U.S. and world economies so far; as a grim warning that shortsighted, misguided fears about the costs of trade liberalization and global integration were about to endanger the much greater good done by these developments; and as a defiant declaration that his company was positioned to thrive come what may from the world’s cowardly politicians.

Let’s leave aside for now his claims about the net effects of GE’s operations and about today’s version of globalization – although once more he provided a specific number for GE’s annual exports without revealing how much the company imports into the U.S. market. What was actually most remarkable about Immelt’s speech was how strikingly it contrasted with the picture of U.S. multinational companies that’s emerged and prevailed especially since the debate over the North American Free Trade Agreement (NAFTA) more than 20 years ago ushered in the current era of American trade policy.

As Americans and their leaders have constantly heard throughout this period, corporations – especially gigantic ones like GE – had become completely liberated from specific locations and their political authorities. Thanks to dramatic breakthroughs in transportation and communications, these firms could establish any kind of operation anywhere in the world that created a favorable business climate. And if any retrograde national governments tried to interfere, executives could flip them the bird, pick up stakes, and condemn their unfortunate citizens populations to isolation and impoverishment.

The resulting policy conclusion that the multinationals and their mouthpieces in politics and the media obviously have tried to reinforce is that the form of globalization that was emerging is inevitable – a product of progress itself – and that nothing would be more foolish and futile than for the public sector to get in the private sector’s way.

My book on globalization exposed these claims as nonsensical. My research – conducted back in the late-1990s – showed that even the leaders of smallish countries, notably in prospering East Asia, routinely established conditions on in-bound foreign investment from the multinationals as a matter of course. And when faced with requirements to share technology with local partners or use certain levels of domestic content or export specific percentages of their output, the companies routinely complied. And as has just been reported today, these practices are still standard operating procedure the world over.  

The only important economic power that has failed to use its leverage has been the United States, which is why its approach to globalization was forcing its citizens into a “race to the bottom.”

So it’s crucial to understand that what Immelt was telegraphing to his Friday audience was not only that the American political system seemed likely to present the multinationals with comparable requirements, but that GE, for one, had no choice to comply. In his words:

“[T]he globalization I grew up with – based on trade and global integration – is changing.

“As a business leader, it is difficult to decide when to defend the old way (what you were taught) or when to change based on what you see.

“With globalization, it is time for a bold pivot….In the face of a protectionist global environment, companies must navigate the world on their own.

“We must level the playing field, without government engagement. This requires dramatic transformation. Going forward:

“We will localize. In the future, sustainable growth will require a local capability inside a global footprint. GE has 420 factories around the world giving us tremendous flexibility. We used to have one site to make locomotives; now we have multiple global sites that give us market access. A localization strategy can’t be shut down by protectionist politics. …

“We will produce for the U.S. in the U.S., but our exports may decline. At the same time, we will localize production in big end-use markets like Saudi Arabia. And countries with effective export banks, like Canada, will be more attractive for investment. ”

And if GE perceives no choice but to reply “How high?” when governments say “Jump!” it’s likely that similar firms will respond similarly to more demanding American trade policies.

With his suggestion of fewer GE exports, Immelt clearly hopes to convey the idea that although GE may weather this policy storm just fine, Americans as a whole won’t – and that therefore the populist candidates’ promises about returning jobs and achieving other economic gains will backfire big time if they’re kept.

But iron global economic realities have always meant that the main beneficiary of less globalized, more localized production patterns will be the United States. For how many other economies have the scale to support the manufacture of hi value industrial products – like those in which GE specializes – without needing major access to export markets? Obviously, the answer is “Not many.”  The number of economies with the scale to support such production without exporting to the United States is even smaller.

That’s why Immelt’s vow to “localize production in big end-use markets like Saudi Arabia” is so manifestly un-serious. Saudi Arabia isn’t nearly big enough for GE to profit by producing, say, jet engines or turbines for power plants in the kingdom solely for the kingdom. Canada, which his speech also mentioned as an attractive future location for investment, doesn’t qualify, either – despite its “effective” export financing bank. After all, as Immelt has explained, in a world of increasingly localized production, export possibilities by definition shrink substantially.

As for India and China, also touted as ever more important centers of future GE output, the still super-low incomes of their populations will prevent companies like GE from enjoying the kinds of pricing power and margins that remain essential for justifying servicing only those national markets with domestic factories.  To be sure, individual companies might figure out the necessary formula. But even after several decades of record-setting growth, China still needs to export desperately – which explains why such success won’t be possible for most firms.

So whenever you hear or read some self-appointed expert insist that job reshoring promises are simply cynical political pandering exercises, keep in mind that not only do Trump and Sanders disagree. So does one of America’s biggest industrialists.

(What’s Left of) Our Economy: The Times’ Trade Deficit Pollyannaism

Tags

bubbles, business investment, capital flows, capital spending, China, competitiveness, currency manipulation, global division of labor, global financial system, investment, manufacturing, Neil Irwin, subsidies, The New York Times, Trade, Trade Deficits, U.S. dollar, {What's Left of) Our Economy

At least Neil Irwin’s New York Times article yesterday on the real meaning of trade deficits made two points rarely seen in journalistic examinations of the subject. He acknowledged that these shortfalls subtract from an economy’s size. (And should have added that worsening trade balances slow an economy’s growth – a big problem for the slow-growing United States these days.) And he noted that the foreign investment inflow triggered by deficits should be put to productive uses. Otherwise, it can create dangerously bubbly effects, as with U.S. housing and personal consumption during the last decade.

What Irwin didn’t discuss were the real-world obstacles created by trade deficits to using those capital inflows wisely, and unfortunately, they’re much more important and germane to policymakers and the public.

For example, let’s say that a country’s trade deficit is heavily concentrated in manufacturing (which America’s is). And let’s say that it partly reflects not only the dollar strength resulting from the central role played by the United States in the global financial system, but foreign countries’ policies of artificially undervaluing their currencies. If Washington didn’t respond adequately, wouldn’t many prospective investors balk at pouring money into domestic manufacturing for fear of having to compete not only with foreign companies, but with foreign treasuries? And wouldn’t a turn-the-other-cheek American policy toward other foreign subsidies produce similar effects?

Alternatively, a large manufacturing-centered trade deficit could inhibit productive domestic investment by killing off large numbers of manufacturing jobs – which have long been among the economy’s best-paying. Investors considering building new factories in America could understandably be dissuaded by the resulting reductions in family incomes – which could well ripple far beyond manufacturing as displaced industrial workers began competing for the jobs remaining in the service sector, and undermined its own wage growth.

Another live possibility: If U.S. trade deficits significantly reflected the offshoring activities of multinational companies, and American trade policy encouraged the supply of the high price U.S. market from much lower cost (and lightly regulated) foreign markets, wouldn’t many of these multinationals take the hint and send much of their capital abroad?

Nor are these scenarios hypotheticals. If you look at the business investment share of the U.S. economy, as pointed out by Dean Baker of the Center for Economic Policy Research (in a recent email), it grew steadily between 1950 (when it was 9.99 percent of pre-inflation gross domestic product) to 1980 (when it hit 14.21 percent). By 2007, the last year before the Great Recession struck, it had fallen back to 13.27 percent. Last year, it stood at 12.83 percent. (Unfortunately, the inflation-adjusted data only go back to 1999.)

Of course, such capital spending is driven by many forces. Baker, for example, emphasizes the destructive effects of financial deregulation, which greatly increased the rewards of short-term-focused speculative activity versus the longer-term gains generated by funding production and innovation. But can it be a total coincidence that domestic American business investment peaked just as imports – especially from predatory trading powers like Japan – were starting to make big inroads into U.S. markets?

Even more suggestive: Research published in 2014 by analyst Aaron Ibbotson of Goldman Sachs showed that U.S.-owned multinationals have not simply stopped or slowed investing in new plant and equipment. Instead, they’ve increasingly channeled such investment overseas, especially to emerging market countries like China, in order to supply their industrial needs.

Not that these are the only problems potentially and actually created by running trade deficits – especially big, chronic ones – that Irwin missed. For instance, when foreign interests buy American assets with trade surplus earnings, they buy control over the U.S. economy. This arguably is not a significant issue when the buyers are other private companies, or when they come from countries that are allied or friendly with the United States, or neutral. When a large and growing share of these acquisitions are made by China – which is neither friendly, nor private sector dominated – threats emerge ranging from market distortions (created by heavily subsidized financing arrangements) to national security dangers.

Irwin should have also mentioned that changing trade balances are crucial indicators of global competitiveness, and in fact signal which countries are likely to be major and minor producers of various goods and services. Indeed, the ostensibly most efficient possible global division of labor that results is a principal justification for encouraging trade. If manufacturing, to take one sector, is judged to create no special advantages for the American economy, then it’s fine to be indifferent to trade deficit signals that U.S. industry’s world-class status is at risk. If manufacturing is prized, then the deficit is indeed a valuable scorecard, and one that’s sending a troubling message.

Of course, Irwin’s column also argued that the strong dollar that puts constant upward pressure on the trade deficit creates major diplomatic and national security benefits for the United States, and there are respectable, if not dispositive, arguments to be made along these lines. But when it comes to the domestic growth, employment, and wage impact of trade deficits – not to mention the effects on all the productivity growth and innovation fueled by manufacturing – portrayals of these shortfalls as close-calls or nothing-burgers belong in a set of political talking points, not in a supposed economic primer.

(What’s Left of) Our Economy: RIP, Manufacturing Renaissance – & Reshoring – Claims

Tags

Asia, China, competitiveness, Deloitte, investment, local content, Manufacturers Alliance for Productivity and Innovation, manufacturing, manufacturing renaissance, MAPI, Mexico, multinational corporations, North America, Obama, offshoring, reshoring, TPP, Trade, Trans-Pacific Parternship, {What's Left of) Our Economy

Because manufacturers (and others) don’t always do what they say, surveys of their intentions on hiring and investment and the like should always be taken with a big boulder of salt – the more so since the questions are often asked and the answers given in a political and policy context. So when one of these surveys clashes with manufacturing reshoring and renaissance claims that America’s most powerful manufacturers – the offshoring multinationals – have been energetically pushing, they deserve special attention. That’s why it’s worth looking closely at a new sounding on where new factories are likely to be built from a major consulting firm and a leading manufacturers association.

As the nation has heard endlessly from the biggest names in American industry and their witting and unwitting political dupes, U.S. domestic manufacturing is either enjoying an historic comeback, or is on the verge of one. These boasts and predictions have become a little less common lately, as manufacturing data keeps disappointing, but they haven’t been recanted or simply dropped because they serve two powerful purposes.

First, at a time of continued U.S. economic weakness, contentions that American-owned manufacturing firms are boosting their U.S. production and employment counter fears and accusations that they have abandoned their home country wholesale. Second, a crucial feature of these renaissance claims – that China’s competitiveness has faltered so dramatically that American industry is actually abandoning the PRC and returning stateside – helps the multinationals defend the offshoring-friendly trade deals they worked so hard to pass by indicating that they did little, if any, long-term harm to the U.S. economy despite critics’ accusations.

It’s hard, however, to read the Footprint 2020 study just released by Deloitte and the Manufacturers Alliance for Productivity and Innovation (MAPI), and take any of the above seriously for one minute longer.

Take the reshoring narrative so central to the renaissance story. According to the Deloitte-MAPI report, “reshoring is a real phenomenon.” But get a load of this kicker: “[A] common misconception is it represents a return of previously offshored operations to US soil. In practicality, reshoring may include returning operations to Mexico. This offers greater access to the US market, but allows companies to maintain advantageous operating cost structures. Sixty-six percent of survey respondents offshored their operations in the past 20 years, and a third are now considering bringing them back to North America. These moves focus on primary production and assembly operations currently located in China, India, and/or Brazil. Mexico is the first choice destination to re-shore operations, followed by the US.”

To be fair, there is a respectable argument made that even reshoring (and other) investment in Mexico helps domestic U.S. industry, too. The supposed reason: Manufactured goods made in Mexican factories, especially if they’re owned or related to American firms, use much more in the way of Made in the USA parts and components than similar products made in Asia and elsewhere.

But this argument overlooks the reality that the U.S. content of America’s imports from Mexico has been falling, and that this trend will accelerate if Congress approves the Pacific Rim trade deal just concluded by the Obama administration. That Trans-Pacific Partnership (TPP) will make it easier for countries like Japan to send more goods, like automobiles from Mexican assembly plants into the United States that contain more parts and components from outside Mexico and “North America.”

The idea that investing in Chinese manufacturing doesn’t make much sense nowadays also takes a body blow from Footprint 2020. The study found that 98 percent of the companies surveyed plan to expand operations in countries where they’re already in business, either through adding on to existing facilities, or by opening new factories or labs or warehousing and distribution centers. The country that will get the biggest share of this new capital? China. (The United States is second.) Moreover, between the 2002-2007 period (before the financial crisis struck) and the 2010-2015 period (when the American manufacturing renaissance was supposed to have taken off), “North America’s” appeal to American-owned companies increased only slightly, while “Asia’s” (meaning largely China) nearly doubled.

Of course, for literally years, manufacturing renaissance claims have been steadily punctured by the most authoritative data available on production, trade balances, productivity, and wages. With hitherto cheerleading multinational manufacturers themselves now throwing cold water on this idea, too, it’s legitimate to wonder whether domestic industry is closer to suspended animation than to rebirth.