(What’s Left of) Our Economy: More Evidence of Germany’s Stealth Protectionism

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Angela Merkel, consumers, consumption, developing countries, Financial Times, Germany, Global Imbalances, globalization, imports, Matthew C. Klein, protectionism, savings, taxes, Trade, Trump, value-added taxes, VATs, wage suppression, wages, {What's Left of) Our Economy

President Trump’s charges that the United States has signed terrible trade deals in recent decades, and that foreign economies have been the main beneficiaries, inevitably have triggered a potentially useful debate over which major countries are most open to trade and which are tightly closed. Unfortunately, such arguments won’t actually be useful until “open” and “closed” are properly defined, and a new Financial Times column on Germany’s economic policies nicely illustrates how remote that goal remains.

I’ve previously made the case that accurately measuring protectionism – and thus accurately gauging which countries are contributing adequately to global prosperity and which are free-riding – entails much more than adding up individual trade barriers. Such simple counts also mislead on the equally important question of which countries the United States can reasonably hope to trade with for mutual benefit, and which countries can’t possibly qualify.

And because Germany’s government has both taken trade fire from Mr. Trump and vigorously replied, I’ve used it to illustrate the above points. In a short op-ed for USA Today and a much more detailed RealityChek post, I’ve noted that, as with many other leading foreign economies, the main problem with Germany as a promising trade partner stems at least as much from its overall national economic strategy as from its specific trade practices. That is, countries like Germany, which heavily emphasize growing by saving, producing, and exporting, can’t possibly be good trade matches for countries like the United States, whose priorities have been the diametric opposites.

Of course, those national economic strategies manifest themselves in specific practices and policies. (How else could their focus be established?) But the links to trade flows aren’t always clear. For example, there’s widespread reluctance to acknowledge the trade impact of value-added taxes (VATs), which promote exports and penalize imports. The role played by other German policies, like suppressing wages or skimping on infrastructure spending, has been even less apparent.

What the new Financial Times post adds to the mix is a generally neglected form of wage suppression: Germany’s taxes on low-wage workers – which author Matthew C. Klein describes as “among the highest in the world” since at least the turn of the century.

These taxes inflict an outsized blow on Germany’s imports – and on the the world economy as a whole – in at least two important respects. First, economists tend to agree that the lower an individual’s or household’s income, the higher the share of that income will be spent (as opposed to saved). If they’re right, then these taxes ave been hitting Germany’s overall consumption and import levels especially hard. Therefore, these levies look like notable contributors to the bloated German trade and current account surpluses that are not only detrimental to America, but that could threaten the entire world’s financial stability.

Second, as supporters of pre-Trump U.S. trade policies constantly point out, much of what low-income consumers buy is produced and exported by low-income countries (e.g., apparel or school supplies or furniture). So since high taxes on low-wage workers in Germany prevent them from importing as much from the developing world as they could, third world countries need to focus more on customers in more promising markets – like America’s.

Germany and its leader Angela Merkel lately have been basking in the glow of praise from the political classes in the United States and abroad, which have anointed them as among the new, post-Trump champions of free trade and all its purported benefits. (China’s another alleged globalization champion, but that’s another story.) Its lofty taxes on low-wage workers add to the evidence that these titles are wildly premature.

Im-Politic: Beyond the (Poll) Numbers on Immigration

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culture, Democrats, economy, Gallup, Im-Politic, immigrants, Immigration, Jobs, polls, Republicans, taxes, Trump, wages

Do apparently clashing poll results on immigration mainly signal that polling companies don’t know what they’re doing? That Americans are fundamentally conflicted on the issue? Or can sensible, and even obvious, reasons be identified for the seeming gap if you just do a little extra thinking? Examining three recent Gallup soundings convinces me that it’s the latter.

On the proverbial one hand, two new Gallup surveys about immigration appear to show that Americans have become much keener on immigrants – possibly including illegal immigrants, though Gallup hasn’t drawn this distinction. On June 29, Gallup reported that a record (post-1993) share of Americans (49 percent) now agree that “immigrants mostly help the U.S. economy by providing low cost labor.” Moreover, except for a drop in the very late 1990s and early 2000s, this number has been rising – though since 2005, the increase has been gradual.

Forty percent of respondents agreed that immigrants “most hurt the economy by driving wages down for many Americans.” In contrast to the trends for those expressing favorable opinions, the share of Americans worried about immigrants’ wage-related economic impact has decreased pretty sharply since 1993 (when it stood at 64 percent), and especially since the early 2000s (when it peaked at 65 percent).

Also encouraging for proponents of more immigration or more lenient policies towards illegal immigrants: a poll the day before showing that the percentages of Americans viewing immigrants as a plus rather than a negative for the country on economic and non-economic grounds had grown impressively between 2007 and 2017. Interestingly, though, even in 2017, the only category in which a majority of Americans emphasized the positive impact of immigration was in “food, music and the arts” (57 percent – up from 40 percent in 2007). Only ten percent of Americans said that immigration had worsened matters on these scores.

On “the economy in general,” only 45 percent in 2017 saw immigrants “making the situation in the country better” (up from 28 percent in 2007). And only 23 percent and 20 percent believed that immigrants had improved the national situation when it comes to “taxes” and “job opportunities for you and your family” – up from 19 and 11 percent, respectively, in 2007.

As for those who believed immigrants’ effects were negative, 30 percent agreed with that proposition regarding the overall economy, 41 percent went along on the subject of taxes, and 28 percent expressed this view on the job issue. (The remainder of respondents stated that immigrants weren’t having much effect in any of these areas.)

As Gallup noted, positive answers to these questions in 2017 were generally at their highest levels since the firm began asking them in 2001. And despite the high negative numbers, a strong argument can be made that the considerable indifference expressed can be seen as an endorsement of immigrants’ growing numbers overall, given the emotional resonance of the issue.

Yet a June 7 Gallup survey created a substantially different picture. It reports that the shares of Americans believing that immigration “should be decreased” has kept falling since the mid-1990s (from 65 percent to 35 percent). But it was still bigger than the growing share believing that immigration “should be increased” – which has risen from the high single digits from the mid-1960s to 24 percent nowadays. Thirty five percent of Americans want “immigration to be kept at its present level,” and this number has stayed pretty stable – with some fluctuations – since the mid-1960s.

And here’s a surprise: Over the past year, the share of Democrats and Democratic leaners who favor decreasing immigration has actually risen slightly (from 20 to 23 percent) while that of Republicans and Republican leaners has shrunk from 60 percent to 48 percent. It’s true that the share of Democrats and leaners favoring greater immigration levels rose slightly as well. But it still stands at only 33 percent. (The rest expressed satisfaction with current levels.)

In this survey, Gallup analysts ventured an explanation for the unusual finding for Republicans; the GOP shift:

“could reflect a sense of political victory among Trump supporters who believe the president is fulfilling the immigration-related promises he made on the campaign trail. Republicans could, thus, feel more satisfied with the current status of immigration than they did during the height of the presidential election. Also, some Trump supporters might believe immigrants are being more thoroughly vetted by the Trump administration.”

I wish that Gallup had been as analytically ambitious in interpreting at least some of the growing popularity of the immigrant population according to the many indicators. One explanation that seems pretty obvious to me: It’s been influenced pretty considerably by the phenomenal growth of the country’s immigrant population. Indeed, since 1960, it’s more than quadrupled in absolute terms (to an estimated 41.3 million as of 2013). And from 1970 to 2013, immigrants increased their share of the American population from 4.7 percent to 13.1 percent. So more of the respondents being reached by Gallup are immigrants themselves, or their children.

It’s true that throughout American history, immigrants have shown a striking tendency to oppose more immigration once they’ve become established in their new homeland – usually for fear of facing new economic competition. But one of the most important and distinctive aspects of American immigration policy in recent decades has surely undercut this form of nativism – the focus on family reunification. That is, it’s likely that many recent immigrants favor more immigration because they view it mainly as a chance to bring in not additional low-wage workers, but close relatives. At the same time, we’ve got statistics strongly indicating that Hispanics’ views on immigration don’t necessarily dovetail with this observation.

So it seems that the most useful bottom line is that polls continue to be important sources of information about major political, social, economic, and other trends, but that to gauge public opinion accurately, you need to keep looking beyond the raw numbers.

Im-Politic: Fakeonomics on Illegal Immigration From CNN

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California, CNN, illegal immigrants, illegal immigration, Im-Politic, Immigration, Octavio Blanco, Sanctuary State, taxes, welfare

When I was learning the journalistic ropes, one of the first lessons taught was never to present a piece of information totally devoid of context. So, for example, if you were writing about how much a national economy grew during a given time period, you’d also include something about how that growth compared with that country’s past performance, or with the performance of other countries. How else could the reader take anything useful away from such a report?

Apparently, however, CNN doesn’t always follow this practice. Or maybe more accurately, it doesn’t follow this practice when it covers immigration issues, and especially when even minimal context would cast doubt on widespread claims that America’s illegal immigrants are so valuable that Trump-like restrictionist policies are tantamount to economic suicide. How else could one interpret the May 18 post by Octavio Blanco on new legislation aimed at establishing California as a sanctuary state?

Blanco, for example, properly reported the claim of the bill’s sponsor that the illegal workforce “contributes some $180 billion to the state’s GDP.” I’d have liked some verification of this figure, or even a source, but at least Blanco associated the contention with a figure who’s clearly taken one side of the issue.

Other omissions are less justifiable. Is this a net figure? That is, does it include any costs resulting from the state’s illegal workforce, or families of these workers? The author doesn’t say. And what about some perspective about that $180 billion figure? Obviously the legislator who fed it to Blanco hoped to convey the impression that it’s a staggering sum. Yet it begs the question of how big that state GDP actually is. According to the U.S. Commerce Department, last year, it was a little over $2.6 trillion (unadjusted for inflation – and that took me four seconds to look up.) So if the $180 billion is unadjusted for inflation as well (something else the author doesn’t tell us), the illegal immigrant share is about 8.2 percent.

That still sounds like a lot. Except as the author also notes, another source pegs illegals as nearly 10 percent of the California workforce. So even if the $180 billion figure is accurate, that would mean that the state’s illegal workers are punching below their weight in terms of productivity.

That, however, wouldn’t be the last word, either. The $180 billion figure would be more impressive if it was a growing share of state output, and less impressive if it was shrinking or stagnant. But Blanco’s article gives readers no way to know.

Another statistic cited by Blanco sheds a little light on these questions, but not nearly enough, because it suffers the same shortcomings. The author reports that a “Washington, D.C.-based research group,” the Institute on Taxation and Economic Policy (ITEP), has determined that “In 2014, almost $3.2 billion of California’s state and local taxes came from undocumented immigrants….”

Again, that “billion” word sounds like a major sum – but sharp-eyed readers might notice something that’s apparently eluded Blanco. If both ITEP and the lawmaker who introduced the Sanctuary State bill are right, then the tax revenue generated by California’s illegal workers amounts to about 1.78 percent of their contribution to the state economy. That looks distinctly unimpressive.

Just as unimpressive: the share of the state’s total annual tax haul represented by illegal immigrants, if ITEP is right. For according to the state government, the $3.2 billion claimed by ITEP for 2014 would come to 4.83 percent of personal income tax revenue. Remember – this is from nearly 10 percent of the state’s workforce, so that’s disproportionately low.

A least as important, when talking about illegal immigrants – the $3.2 billion figure is clearly not a net figure, in terms of the impact of this population on the state’s resources. Specifically, it omits illegal the use of state services by illegal immigrants and any family members who are legal (e.g., anchor children). This issue will keep looming larger and larger as the state pushes to extend eligibility for welfare and other state resources to illegals – which has already happened with in-state tuition to and financial aid for California public universities.

It’s true that income tax revenue isn’t the sum total of state tax revenue. The state government says the share was 65 percent in 2014. The remainder comes from corporate income taxes, sales taxes, and an “other” category. Illegal workers (and their families) are probably paying some of those types of taxes, too, but the article doesn’t provide any information on that score, either.

Give Blanco some credit: He reports that “not everyone agrees on the sanctuary state bill.” If only his article focusing on the legislation’s economic impact gave readers any sense that not every fact portrays it as an economic winner, either.

Our So-Called Foreign Policy: Why Establishment Thinking About Containing China Remains Far from Serious

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allies, American Enterprise Institute, Asia, burden sharing, China, Daniel Blumenthal, defense budget, East Asia, entitlements, foreign policy establishment, free-riding, Japan, Our So-Called Foreign Policy, RealClearPolitics.com, South Korea, taxes, tech transfer, Trade

Congratulations to the American Enterprise Institute’s Daniel Blumenthal for coming up with some genuinely new insights into the U.S.-China balance of power and especially its relationship with the evolving economies of the two countries. Unfortunately, Blumenthal’s new essay for RealClearPolitics.com also shows that gaping blind spots remain in establishment thinking about the China challenge its members claim to be analyzing seriously.

For the purposes of this post, let’s grant Blumenthal’s mainstream assumption that it matters greatly to the United States which great power dominates East Asia politically. I disagree, but the point here is that if America does want to fend off a China challenge, greater policy changes will be needed than Blumenthal and other conventional wisdom-mongers seem ready to contemplate.

The author’s main theme is that the United States has no legitimate reason to doubt its economic capacity to prevent China from becoming Asia’s kingpin, and his new wrinkle involves measuring economic power by looking more at national wealth, and less at national economic growth. Since the U.S. wealth levels are both much greater than China’s, and since the gap has just resumed growing according to statistics he cites, America can easily afford the military forces needed to put China back in its place. And he blames China’s recent and impressive catch-up on this score on Americans’ recent (Blumenthal doesn’t specify the time frame) political decision to skimp on military spending while continue to devote exorbitant sums to entitlement spending – which has indeed long dominated the budget outlays (along with, as he’s noted, interest payments on the resulting ballooning national debt).

According to Blumenthal, Americans and their leaders as a result have chosen to elevate “the intergenerational transfer of wealth” over national security. Strictly speaking, he’s right. But other interpretations of national priorities seem just as legitimate.

For example, as the author briefly notes, the U.S. population is aging. So a major national retirement funding challenge will face even the most defense-minded politicians. That doesn’t let American leaders or the recipients of these entitlements off the hook in terms of making sacrifices needed to safeguard national security. But it’s bound to raise the question of whether the burden of sacrifice should be limited to middle class Americans. The great increase in national wealth mentioned by Blumenthal makes clear that the nation has many other resources on which it can draw to fund a bigger military – especially since the private economy’s wealth has led the surge. In other words, why not tax the rich or corporations more heavily to pay for new personnel and weapons?

One obvious rejoinder is that modest levels of taxes on wealthy Americans and on American companies are needed to ensure the economic growth needed to keep national wealth levels robust. But even accepting the doctrinaire trickle-down economics underlying this assumption, should upper-level individual incomes and business profits be completely exempted from any responsibility to pay for the military? If so, why? And wouldn’t that policy greatly loosen the relationship between national wealth and military capability emphasized by Blumenthal?

The author also neglects another big pool of resources that can be brought to bear on countering China: the wealth of America’s regional allies. Stunningly, after decades of American pleading for greater burden-sharing, countries with a far greater stake than the United States in resisting Chinese regional domination continue free-riding on U.S. defense guarantees. Why should American entitlements recipients see any reduction in benefits before Japanese and South Koreans pay at least as much for their own security (relatively speaking) as the much more geographically distant United States does? And their contributions could be immense. Japan alone, for example, is the world’s third largest national economy (behind the United States and China, respectively). 

Finally, as with nearly all the rest of the establishment, Blumenthal completely neglects the opposite side of the U.S.-China defense resources equation: The decisive extent to which American economic policy continues enriching China, and therefore continuing to enable it to afford lots of both “guns and butter” (as economists and political scientists have dubbed military and social spending). Thanks in part to literally trillions of dollars of earnings from the trade surpluses it’s long run with the United States, the Chinese pie keeps expanding strongly (that’s the economic growth whose importance Blumenthal softpedals). As a result, more new resources are generated for whatever priorities or combination of priorities the Chinese government chooses.

Even worse, as I’ve long noted, recklessly lax tech transfer policies on America’s part have for decades given the Chinese much of the knowhow needed to turn out increasingly advanced weapons and other military systems. Some signs of official concerns about this outflow have appeared in Washington lately, but U.S. leaders (and the rest of the establishment) remain woefully behind the curve.

When America’s East Asia security strategy stops bolstering the Chinese threat it depicts as such a huge concern, when it insists that local countries act like they have at least as great a stake in remaining independent of China as does the United States, when the wealthiest Americans are required to devote more of their recent immense windfalls to the common defense, and if all of those changes still leave China closing fast on the combined forces of the United States and its neighbors, it would become legitimate to ask Main Street Americans to start shouldering greater burdens. Until then, the U.S. working and middle classes will be entirely justified in demanding that the nation’s Asia strategy pass a minimal seriousness test first.

Im-Politic: Americans are Far from Bitterly Divided on Everything

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Affordable Care Act, border wall, climate change, criminal illegal immigrants, Democrats, deportations, Gallup, illegal immigration, Im-Politic, infrastructure, Mexico, Obamacare, polls, regulations, Republicans, tariffs, taxes, TPP, Trade, Trans-Pacific Partnership, United Nations

America today is deeply divided on the new Trump presidency and many substantive issues. But the message sent by a new Gallup poll is that there’s considerable consensus when it comes to identifying the nation’s major challenges. And although polls have recently gotten a deserved black eye over their election performance, this fundamental finding tracks intriguingly with that reported (by a different organization) that I wrote about a little over a year ago.

Gallup sought Americans’ views on which of President Trump’s campaign promises they believe that it’s “very important” for him to keep. Here are the top four – which were also the only choices that topped 50 percent:

>”Enact a major spending program to strengthen infrastructure” 69 percent

>”Reduce income taxes for all Americans” 54 percent

>”Establish tariffs on foreign imports” 51 percent

>”Deport the more than 2 million illegal immigrants who have

    committed crimes” 51 percent

At least as interesting, three of these four stated Trump priorities enjoy strong bipartisan support:

>infrastructure: 68 percent of Democrats, 71 percent of Republicans

>tax cuts: 46 percent of Democrats, 62 percent of Republicans

>tariffs: 45 percent of Democrats, 62 percent of Republicans

The exception – interestingly – is

>deport criminal illegal immigrants: 33 percent of Democrats, 70 percent of         Republicans

Now here are the Trump priorities that Gallup found Americans regard as least important (note – which does mean that they oppose them):

>”Cancel billions in payments to UN climate change program” 30 percent

>”Withdraw from the Trans-Pacific Partnership” 26 percent

>”Build a wall along the border with Mexico” 26 percent

>”Require that for each new federal regulation, two must be

    eliminated” 23 percent

Just FYI, the administration has already announced officially that it’s pulling out of the Pacific trade deal.

And guess what? There’s a great deal of bipartisan consensus on the relative unimportance of these matters, too:

>UN climate change payments: 23 percent of Democrats, 38 percent of Republicans

>Trans-Pacific Partnership: 19 percent of Democrats, 32 percent of Republicans

>border wall: 12 percent of Democrats, 38 percent of Republicans

>regulations: 14 percent of Democrats, 31 percent of Republicans

Finally, I couldn’t help but notice that the most divisive Trump priorities, according to Gallup, are the aforementioned deportations of criminal illegal immigrants and…repealing Obamacare. A total of 46 percent of Americans told Gallup this move was “very important,” but although 68 percent of Republicans were on board with scrapping the Affordable Care Act quickly, only 26 percent of Democrats agreed.

I know that the president has his own pollsters – and of course his own opinions. But I wouldn’t be entirely surprised if their list of top White House priorities didn’t wasn’t very similar to those identified by Gallup as the public’s. Nor would I be surprised if achieving these goals – and softpedaling many of the others – made for a great first 100 days.

Following Up: Where Trump on Trade Falls Short

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2016 election, advanced manufacturing, apparel, Donald Trump, Follwing Up, Hillary Clinton, inflation-adjusted growth, Made in Washington trade deficit, multinational corporations, NAFTA, North American Free Trade Agreement, offshoring, offshoring lobby, recovery, regulation, Rust Belt, steel, subsidies, taxes, The Race to the Bottom, Trade, Trade Deficits, trade law, World Trade Organization, WTO

Donald Trump has just given a deadly serious, detailed, and common-sensical speech about the need for overhauling American trade policy, and the establishment media has decided to respond largely by dredging up the fatuous observation that the presumptive Republican presidential nominee himself produces his name-brand apparel overseas.

Before dealing with some of the genuine – though anything but fatal – shortcomings of Trump’s trade speech, let me (again) dispose of this ignorance-based cheap shot: The very trade policies that Trump has been attacking have practically destroyed the domestic U.S. apparel industry. When Trump claims that it’s nearly impossible to make garments in this country profitably anymore, he’s absolutely right. Indeed, the Federal Reserve’s industrial production data show that, since the North American Free Trade Agreement went into effect in January, 1994, and launched the current, offshoring-focused stage of U.S. trade policy, domestic garment output is down nearly 83 percent in real terms. That’s a bloodbath.

Yes, that means that some companies still produce clothing in the United States. But it also means that the biggest money in the industry has taken the hint that opening the American market to competition from penny-wage developing countries with no meaningful environmental or worker safety regulation has been an invitation to shut down or join the party and offshore. Any journalist who fails to mention these facts is either clueless or trying to sell you a bill of goods.

At the same time, since most of the public isn’t well informed about trade and manufacturing specifics, either. And since a torrent of such slanted coverage – which has been echoed by Trump’s presumptive November rival, Hillary Clinton – can definitely affect voter judgment, Trump needs to make it as difficult as possible for opponents to portray him as a know-nothing or a hypocrite on what he clearly sees as a core issue. This is where his Tuesday speech – which overall, I liked – fell somewhat short. Here are some important examples:

>Trump deserves a lot of credit for pointing out that misguided policies have killed not only employment – especially in trade-sensitive manufacturing – but growth throughout the economy. But he left off the table eye-opening figures on just how great the trade toll has been. As I’ve documented, during this feeble economic recovery alone, the growth of that portion of the trade deficit directly influenced by trade policy (what I call the Made in Washington trade deficit) has so far slowed this already feeble expansion by some 20 percent. That’s more than $400 billion after inflation, and he should have defied anyone to insist that huge numbers of jobs haven’t been destroyed as a result.

>The likely GOP standard bearer also rightly blasted American political and business elites for pushing these damaging policies. But explaining exactly why will not only educate the public – it will further infuriate voters. As I’ve written repeatedly, and most comprehensively in my book, The Race to the Bottom, the offshoring focus that has dominated U.S. trade policy since the early 1990s resulted from American multinational corporations realizing that expanding commerce with low-income countries would enable them to improve their own (though not the nation’s) competitiveness and boost profits by supplying the high-price American economy from super-low cost and largely unregulated production sites.

In other words, for all the talk about gigantic, rapidly growing third world markets, post-NAFTA trade deals weren’t mainly about expanding American exports – and therefore growth, employment, and wages. They were mainly about expanding U.S. imports from the multinationals’ new foreign production sites. That is, big American business wanted Americans to keep playing their roles as consumers of the products they made. They just didn’t want them to keep playing their roles as producers of these products. You don’t think a critical mass of voters would be outraged to hear this?

>Trump’s vow to file suits in the World Trade Organization to open foreign markets to U.S.-origin goods and services and halt predatory foreign trade practices is completely inadequate. As I’ve also written, the WTO is far from a U.S.-like trade court where objective magistrates render impartial justice. It’s an anti-American kangaroo court numerically dominated by foreign trade powers whose overwhelming interest lies in keeping the U.S. market much more open to their goods and services than their markets are to U.S. exports. That’s largely why even when the United States does win WTO cases, the process takes so long that American interests have been dealt decisive setbacks.

In fact, that’s also why the Offshoring Lobby pushed so hard back in the 1990s for U.S. Entry into the WTO. They knew that it would give predatory foreign trade powers substantial legal immunity from American efforts to deal with illegal subsidization, dumping, currency manipulation, and the like – and that the factories they moved and built abroad would benefit from these market-distorting practices at the expense of domestic American producers and their workers.

In other words, Trump shouldn’t be arguing for working through the WTO. He should be promising to seek an American withdrawal.

>Trump’s related promise to file more suits against predatory foreign traders in the U.S. trade law system is sorely inadequate for three main reasons. First, as suggested above, the WTO nullifies most of America’s legal authority to use such unilateral mechanisms. Second, the domestic trade law system is almost as slow-moving as the WTO. And third, this legalistic set of procedures is by definition piecemeal and reactive. If Trump thinks that American trade law can help make the U.S. economy great again in his lifetime, he’s dreaming.

>I recognize that the steel industry has acquired iconic status in American culture and politics. It also remains incredibly important economically. But Trump’s exclusive reliance on steel’s recent woes to illustrate what’s wrong with American trade policy unfortunately reinforces the wrongheaded conventional wisdom that trade policy critics are naively obsessed with reviving so-called Rust Belt industries.

What Trump should have added is that manufacturing sectors running sizable trade deficits also include semiconductors, electro-medical devices, all categories of machine tools, farm machinery, construction equipment, ball bearings, telecommunications equipment (not including smartphones), and pharmaceuticals. Believe me, I could go on. And that’s not your classic Rust Belt stuff. Are all these domestic producers hopelessly uncompetitive, Trump should ask? Or are global trade markets unmistakably rigged even against American-made products falling into any knowledgeable definition of advanced manufacturing?

>Trump clearly felt the need to throw some red meat to traditional Republicans and conservatives by also promising to boost the productive sectors of the American economy by getting rid of “wasteful rules and regulations” and cutting taxes in order to “make America the best place in the world to start a business, hire workers, and open a factory.”

Of course, there’s an important, legitimate debate about the proper scope of regulations and the proper level of taxation for both corporations and individuals. Think though, of the outreach potential to independent and even many Democratic voters had Trump added something along these lines:

“But we also have to remember that many of our regulations also serve the vital purpose of protecting us from dangers like polluted air, water, and land; and unsafe food and workplaces. By freeing America’s domestic companies of the need to compete against rivals free to ignore these goals, we preserve regulations reflecting values we should be proud of, and ensure that we remain a genuine first world country.”

And let’s not forget arguments made in Trump’s tax plan (though in a form that’s surely vastly overstated) but neglected in this speech: All else equal, the faster the economy’s real (as opposed to bubble-ized) growth, the stronger its ability to generate the tax revenues that are both politically acceptable and needed to finance true national needs and popular national desires in a responsible way.

Again, I really do believe that this Trump speech was the best Americans have heard on trade in decades. But that bar has been abysmally low. If Trump wants to make America “Greater Than Ever Before” ensuring that his trade positions fit this description will help a lot.

(What’s Left of) Our Economy: De-Industrialization’s Toll in Pennsylvania

Tags

budgets, China, demographics, Jobs, manufacturing, Pennsylvania, Pottstown, taxes, The New York Times, Thomas Edsall, wages, {What's Left of) Our Economy

If you’re having your doubts that the woes of U.S. manufacturing can translate directly into a weaker overall economy, shakier finances, and more hardship for individual Americans and their families, take a look at today’s New York Times feature on the decline of Pottstown, Pennsylvania. Just as important, take a look at the Keystone State overall – whose troubles and closely related de-industrialization mirror those of Pottstown.

As reported by correspondent Thomas Edsall, this once-thriving community in the southeastern corner of the state, has since the 1970s seen the manufacturing that fueled its economy “collapse in the face of foreign competition.” Largely as a result, although its population has remained stable going back to 1950, its employment base has contracted by more than 23 percent during those decades. Nowadays, it suffers from a poverty rate that’s a staggering 27.7 percent.

But don’t get the idea that Pottstown is an island of misery in an otherwise prospering Keystone State. Research cited by Edsall claims that 27 of Pennsylvania’s cities are “financially distressed,” and that they contain 40 percent of the state’s population. Indeed, Pennsylvania is heading towards its second straight state budget crisis, as its leaders grapple with a deficit expected to hit $1.8 billion.

No doubt, Pennsylvania’s woes stem from many sources, but flagging manufacturing looks like it’s taken a big toll – along with misguided trade policies. Let’s see what’s happened since the end of 2001, when China was admitted into the World Trade Organization, thereby essentially became immune from U.S. (and other foreign) actions meant to retaliate against its protectionist practices, and began flooding American markets with job- and growth-killing exports.

Between 2002 and last year, manufacturing shrank slightly as a share of the U.S. economy in real terms from 11.98 percent to 11.93 percent. And especially important for the nation’s tax base and therefore financial health, just over 3.3 million manufacturing jobs – which pay above average wages – were eliminated (though not all because of Chinese competition). That came to 21.18 percent of the January, 2002 national manufacturing workforce.

Moreover, those manufacturing wages have gone practically nowhere when you adjust for inflation. We don’t have figures for white collar manufacturing employees going back to 2002, but the data for production workers and other non-supervisory workers shows that real wages rose less than one percent during that 13-year period!

From 2002 through 2015, Pennsylvania manufacturing fared even worse – shrinking in absolute terms by 13.40 percent, and declining from 16.50 percent of the state economy in constant dollars to 12.14 percent. On the employment front, the state lost 27.36 percent of its manufacturing jobs. I wasn’t able to find a time series for Pennsylvania’s inflation-adjusted manufacturing wages. But in pre-inflation terms, since 2007 (the earliest figures available) they’ve been rising more slowly for all manufacturing workers than manufacturing wages nation-wide, according to the Labor Department. This industrial contraction and its employment fallout certainly hasn’t made it any easier for Pennsylvania to pay for state services in a financially responsible way.  

Pennsylvania is often described as a state with special problems – especially a population that’s both old and aging faster than the nation’s as a whole, and high individual and corporate tax rates.  But there can’t be any doubt that the shrinkage of manufacturing, a source of disproportionate productivity gains and innovation, as well as high wages, has made its challenges far more formidable.  And it’s hard to imagine that the same doesn’t hold for the nation as a whole. 

 

  

(What’s Left of) Our Economy: The Establishment’s Dead-End Thinking on Trade

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2016 election, Ben Bernanke, China, Donald Trump, Financial Crisis, Global Imbalances, imports, Iowa Caucus, Jobs, Josh Barro, Michael Pettis, NAFTA, North American Free Trade Agreement, Steven Rattner, tariffs, taxes, The New York Times, TPP, Trade, Trans-Pacific Partnership, transfer payments, wages, {What's Left of) Our Economy

The new year has brought a positively weird confluence of events in the trade policy world. On the one hand, a spate of Trans-Pacific Partnership (TPP) endorsements by the Offshoring Lobby and a big study on its effects from a major Washington, D.C. think tank suggests that a strong campaign to push the Pacific Rim trade deal through Congress is in the works. On the other, recent weeks have also seen a flurry of acknowledgments from national policy mainstays that the U.S. trade strategy on which the TPP is based has backfired powerfully.

Stranger still (or not?), these expressions of buyers’ remorse make clearer than ever that the country’s economics and business establishment has no realistic ideas for solving the serious problems they admit their favored trade measures have created.

The most glaring example comes from Ben Bernanke. As I’ve written, the former Fed Chair is one of the economics profession superstars who has linked the last financial crisis to the buildup of historic trade-centered imbalances in the global economy. Given the rebound during the current economic recovery in both the Chinese trade surplus and the American deficit at the heart of the previous meltdown, you’d think that Bernanke would be thinking seriously about how to prevent a rerun. But you’d be wrong.

New York Times economics writer Josh Barro has just reminded us that Bernanke rejects out of hand widespread calls to punish China and other countries that have long manipulated their currencies to steal growth and jobs from countries like the United States – and which, in the case of China, are still realizing the trade benefits of long years of manipulation that have distorted price structures to its advantage. But the only response he suggests is rightly dismissed by Barro as “asking nicely.” In Bernanke’s words:

“countries do respond I think to diplomatic overtures and to pressure from their trading partners when what they’re doing is perceived as, you know, counterproductive to the global economy.”

Barro’s article also shows that many of the second thoughts voiced lately on trade policy have been sparked by another new study – this one on the impact of greatly expanded U.S.-China trade– and by Republican presidential front runner Donald Trump’s (so far short-lived) call for a 45 percent U.S. tariff on imports from China. Such measures of course are still taboo throughout the policy community. But are we hearing about any good alternatives? Not judging from the debate so far.

Michael Pettis is one of the world’s genuinely knowledgeable observers of China and the founder of a must-read blog on its economy. But his solution to China’s dangerous mercantilism mirrors Bernanke’s almost to the word. After telling Fortune magazine that his “really big concern [about the weak world economy nowadays] is that we’re going to see a soaring trade deficit in the U.S. which could derail the U.S. economy, which is the only bright spot right now,” Pettis was asked if American leaders should “enact protectionist policies to prevent a soaring trade deficit.” His answer:

“The best thing would be for the world to get together and say we can’t allow [1930s-style trade wars] to happen, it would be incredibly stupid.” He then added, “But I’m not confident that this will happen.”

Other thinkers have proposed counter-measures that don’t literally depend on the kindness (or enlightenment) of strangers. But they hold no more potential to put either the U.S. economy or its beleaguered workers on a sounder financial footing. An especially noteworthy example was former Obama administration official Steven Rattner’s New York Times column last week asking “What’s Our Duty to the People Globalization Leaves Behind?”

Rattner, a former Times reporter, Wall Street-er, and an architect of the Obama administration’s auto industry rescue plan, not only rejected the notion that automation and other efficiencies are the main causes of job destruction and wage lag in the trade-centric manufacturing sector. He actually blamed specific trade deals like the North American Free Trade Agreement (NAFTA).

Also to his credit, Rattner didn’t dredge up failed recommendations for better training and re-education programs as the cure for what ails America’s workers. But his apparent first choice – “huge tax redistribution, both as a moral matter and as a mechanism for ensuring political support for free trade” – is entirely conventional. It’s just a variation of the classic “compensate the losers” option that enjoys widespread support in the economics profession, but that dangerously pretends government transfer payments can adequately substitute for earned income. As one former colleague of mine cracked years ago, “It’s work-to-welfare.”

The upcoming Iowa Caucus results – and other early primary season contests – will reveal much about whether Americans favor candidates who stand for incremental changes in the policy frameworks long established by the two major parties, or politicians who favor breaking the mold. If the latter prevail, surely one reason will be a trade policy consensus that keeps offering the working public either more of the same debilitating results, dispairing shrugs, or bigger handouts.

(What’s Left of) Our Economy: Flint’s Water Crisis is Also a De-industrialization Story

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automotive, Detroit, Flint, General Motors, healthcare services, Jobs, manufacturing, Mexico, municipal finance, poverty, Rust Belt, services, taxes, third world, wages, water pollution, {What's Left of) Our Economy

When I began reading about the water crisis in Flint, Michigan, my first thoughts were of the Mexican factory towns near the U.S. border, where rapid and unregulated industrialization driven by manufacturing for the American market had produced pollution nightmares – including dangerously poisoned drinking water.

The shameful situation in Flint has many causes, but one that’s been neglected has been a development that makes the city a depressing mirror image of much of northern Mexico – rapid de-industrialization, stemming from the plight of the U.S. automobile industry, that has robbed Flint of the ability to pay for the kinds of public services Americans for decades have come to expect in a financially sustainable way.

According to Flint’s auditors, the city has long provided its citizens with “ a full range of services, including police and fire protection, the construction and maintenance of streets and other infrastructures, recreational activities and cultural events, water and sewer services, and sanitation/garbage pickup services.” The water crisis has made sadly clear that this standard agenda was in fact unaffordable for Flint. But the gap between the city’s first-world ambitions and resources that are markedly below that level has been evident for years from its chronic budget deficits and its heavy reliance on state and federal aid.

The earliest Flint budget figures on-line are from 2002, and show a $7.4 million deficit on $457.7 million in expenses and $445.3 million in receipts. Only 10.13 percent of those receipts came from combined income and property taxes. More than three fourths of the city’s take was generated by the Hurley Medical Center’s revenues. Last year’s figures make the city’s finances and tax base look stronger. The city ran a $568 million surplus on spending of $147.3 million and revenues of $147.9 million. And taxes represented 22.85 percent of those total receipts.

Those overall numbers, however, should tell you that something’s a little fishy. In fact, in 2011, the hospital was in effect taken off the municipal budget – despite its profitability. For that last year it was on those books, Flint’s government spent $567.3 million and took in $523.2 million, for a $44.1 million shortfall that was much larger proportionately than 2002’s. And taxes were a mere 6.15 percent of city revenue.

Even more disturbing, that 2015 Flint budget also removed all of 2014’s $24 million worth of sewer expenses and some $23 million of that year’s $44.2 million in water expenses. So even these necessities had revealed themselves as completely beyond Flint’s means.

Why is Flint is such a fix? Bad government is surely a big part of the answer. But so is dramatic economic deterioration. As has been widely noted, the city’s population is disproportionately poor and African American. But it’s also crucial to understand that over the last decade alone, Flint has steadily lost much of the material wherewithal that any municipality needs to be functional by recent American standards. Let’s start with the broadest economic indicators and then examine the trends in greater detail.

It’s tough for any country or community to succeed without economic growth, and Flint is a long-time laggard. According to Commerce Department figures (available at this interactive data base), from 2001 (the year before those earliest on-line financial reports date from) through 2014, Flint’s economy actually shrank in inflation-adjusted terms – by 8.67 percent. By contrast, America’s urban areas as a whole grew by 24.30 percent.

Census Bureau data show that the city’s population actually dropped more steeply from – 124,943 in 2000 to just over 99,000 in 2014. So in theory, there was more wealth to share in Flint. But in practice, it hasn’t worked out that way. Between 2000 and the Census Bureau’s estimated 2010-2014 average, median household income in the city fell by nearly 12 percent – and that’s before adjusting for inflation. No doubt a veritable and ongoing employment depression deserves much blame. During this period, the number of employed Flint residents cratered by 37.63 percent – from 45,885 to 28,618. And the poverty rate surged from 26.4 percent to 41.6 percent. That’s nearly triple the national rate in 2014 (14.8 percent).

Leading the way down in Flint has been manufacturing. Its real output (as also shown in that Commerce data base) plunged by 29.10 percent during this period, compared with 26.67 percent real manufacturing growth for all of the nation’s metropolitan economies. As a result, this sector shrank from more than 22 percent of the city’s economy after inflation to just over 17 percent. In U.S. metro areas as a whole, manufacturing stayed at somewhat over 11 percent of real gross product.

Flint’s manufacturing’s woes, in turn, overwhelmingly stem from the troubles of the American automobile industry. Flint is nothing less than the birthplace of General Motors, and has long been known as “Vehicle City.” Back in 1978, GM employed more than 80,000 Flint-area residents. Production figures are harder to come by – the Commerce Department doesn’t break out automotive output for Flint for most years precisely because it has been so GM-dominated, and therefore publishing the numbers would release proprietary data. But as of 2013, the automotive sector is recorded as representing nearly 71 percent of the Flint metropolitan area’s inflation-adjusted manufacturing production.

The GM employment footprint, however, had shrunk to some 8,000 by 2006, and as this time-line makes clear, the company has closed down many more and larger facilities in the area since the 1980s than its opened or expanded. Just as important, the rest of Flint’s economy didn’t fill in nearly enough of the resulting gap.

The entire private sector service providing complex in the city grew in real terms by only 5.71 percent – versus 30.31 percent for American metro areas as a whole. Flint’s hospital apparently couldn’t the city’s economy, either. In Flint, health care services expanded their output by only 16.76 percent after inflation between 2001 and 2014 – much less than half the nation-wide rate in cities (42 percent). And where services growth in Flint was strong – as in the information sector – it remained far too small to make a major difference.

Flint’s de-industrialization of course changed the city’s job mix, too – and not for the better. In 2000, according Census figures, manufacturing accounted for 23.2 percent of the jobs held by city residents. During the 2010-2014 period, this share sank to 14.1 percent. The rest of Flint’s major employing sectors fared much better relatively speaking – especially, it seems, the healthcare industry. Its supersector – what I’ve called the government-subsidized private sector – boosted its share of Flint employment from 23.5 percent to 27.9 percent during this period. But Flint’s biggest job loser – manufacturing – pays better than average wages. Except for that subsidized private sector, most of Flint’s biggest job winners pay below average wages.

As a result of the growth and job-related setbacks, Flint’s tax base shriveled. And the damage was hardly limited to individual taxpayers. According to the city’s 2015 financial report, “Property values within the City are believed to have hit the bottom, declining from $1.804 billion in 2002 to $1.192 in 2011 and further declining to $969.13 million in 2012.” Only “slight increases are projected over the next few years.”

Because de-industrialization isn’t responsible for all of Flint’s predicament, it’s way too early to say that the city is doomed to third world status. Other so-called Rust Belt municipalities have fared considerably better, no doubt in part because they weren’t so heavily invested in a single industry like Flint – and its much larger, also wheezing neighbor, Detroit. But because of manufacturing’s matchless record of creating middle class jobs for working class Americans, and because so many former manufacturing centers continue to struggle, expect de-industrialization’s impact to keep threatening Flint’s ability to deliver first world-level services, and its claim to first world status, for years to come.

(What’s Left of) Our Economy: How Not to Rate the States’ Economies – & Their Prospects

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California, demographics, domestic migrants, entitlement programs, Florida, Forbes, government workers, immigrants, inflation-adjusted growth, innovation, Medicare, Missouri, New York, New York City, Pennsylvania, population, private sector, productivity, retirees, seniors, Social Security, taxes, William Baldwin, {What's Left of) Our Economy

Thanks to Forbes magazine, it’s possible today to teach a useful lesson about the limits of statistics and the studies they’re based on – especially if those studies seem to be intended to prove a point rather than seek the truth.

The post in question, by former Forbes editor William Baldwin, looks like it makes a claim that’s not only important but irrefutable: U.S. states whose numbers of “takers” (government workers plus recipients of government transfer – welfare – and entitlements payments) greatly exceed the “makers” (private sector workers) are in “death spirals.” But states in the opposite situation have promising economic futures. In particular, employers are much likelier to create the private sector jobs crucial to continued healthy growth in the “maker” states.

It’s easy to understand Baldwin’s reasoning. The private sector undeniably is more innovative and productive than the public sector – two of the main ingredients of that healthy growth. And states with big populations of entitlements recipients (e.g., Medicare and Social Security) are almost by definition states with older populations – raising the question of who’s going to pay for all those benefits for non-working or even only semi-retired seniors. Case closed? Not exactly.

Interestingly, doubts start arising as soon as you eyeball the author’s chart. For example, he places California in the “death spiral” category. Since the Golden State represented 13.40 percent of the entire national economy as of 2014, it’s clearly a crucial example. But U.S. government figures also make clear that California enjoyed inflation-adjusted growth last year (2.80 percent) that was considerably faster than the national average (2.20 percent). That doesn’t sound like much of a death spiral to me. And in case you’re wondering whether 2014 was an outlier, California also out-grew the nation as a whole from 2011 to 2014 – by 7.81 percent to 6.26 percent.

Demographics don’t support Baldwin’s portrait of California, either. According to the U.S. Census Bureau (click here for the various relevant spreadsheets), between mid-2010 and mid-2015, the United States population as a whole as a whole grew by 12.661 million. Nearly 58 percent of the increase came from more babies being born than legal residents passing away, and the rest came from net migration from abroad.

California was responsible for nearly 15 percent of this increase – which means that the state punched above its weight demographically. In 2010, its share of the national population was only 12.07 percent. So it looks like there will be plenty of new Californians to pay for public services and retirement costs. And although many of the nearly 835,000 immigrants to come to the state during this period were illegals, many obviously were not.

The situation in another one of Baldwin’s death spiral states – New York – doesn’t look nearly so dire, either, on closer inspection. New York’s after-inflation economic growth between 2011 and 2014 wasn’t as fast as California’s. But at 6.79 percent, it still beat the national average.

New York also lost a little population from 2010 to 2015 (22,308 residents moved away). But births outnumbered deaths by 1.59 to 1, which is a bit better than the national average. And although just over 653,000 New Yorkers moved out of the state during that period, nearly 631,000 immigrants arrived. Of course, many have been illegal and low-wage. But many others have been foreign oligarchs who have rocketed the New York City real estate market into the stratosphere. In fact, the city’s property and income tax receipts for the fiscal year ending June 30 are so immense that its budget surplus is likely to approach $1 billion. So there’s no revenue shortage there.

Now let’s move to one of Baldwin’s more promising states: Florida. The Sunshine State has handily beaten the national average on 2011-2014 growth (7.07 percent) – although its performance has been affected by the depth of its housing-bust-fueled recession. On the surface, its population trends look good, too – as has historically been the case. In 2010, Floridians represented 6.09 percent of all Americans, but over the next give years, the state’s increase came to 11.58 percent of the national total.

Less good, however, were the internals – especially for Baldwin’s “death spiral” thesis. Florida’s population growth has been powered by immigrants and Americans from other states to a roughly equal extent. Surely wealthy foreigners have been well represented in immigrant ranks along with poorly paid illegals. But anyone who knows Florida knows that many of the domestic migrants have been retirees. That can’t bode well for the tax base.

Florida’s neighbor, Georgia, is another odd Baldwin success story. Its 2011-2014 growth trailed the U.S. average (at 5.32 percent). Yet its population growth (4.16 percent of the nation’s total) was greater than its 2010 share of the overall population (3.14 percent). It’s true that Georgia’s subpar population increase may eventually translate into stronger-than-average growth. But should that be considered a solid bet? Stranger still is the author’s positive assessments of Missouri and Pennsylvania, which have been under-performing both in terms of economic and population growth.

Of course, Baldwin has pegged many states right. But misses that are this big, especially for places like New York and California, make clear that the sources of healthy growth and bright economic futures are much more varied than entitlement spending, government workforce sizes, and even generational demographics. Lifestyle clearly plays a major role – what else explains California consistently defying predictions of economic doom triggered by alarm over high taxes, burdensome regulations, and the like? Along with New York and Washington state (another one of Baldwin’s losers, despite the attractions of Seattle), it’s long likely to remain a magnet for talent, as well as wealth (whether ill-gotten or not).

Although I’ve never met Baldwin, I do know that Forbes has long been one of the media world’s strongest champions of Darwinian free market thinking – and of course an equally ardent opponent to Big Government. So it looks reasonable to me that this ideology overwhelmed a more holistic view of economics and business – which his successors at Forbes might have realized just by looking out the windows of their Manhattan offices.